Stablecoin Depegs Explained: What Really Happens When a Digital Dollar Breaks the Buck
Stablecoins promise a constant $1, yet USDC has traded at 0.87, Tether’s USDT at 0.88, and Terra’s UST collapsed to virtually zero in a crash that erased roughly 40 billion. As recently as November 2025, a DeFi stablecoin called xUSD lost more than half its value in a single day.
✅USDC fell to 0.87 in March 2023 after 3.3B of Circle’s reserves froze at Silicon Valley Bank.
✅Stream Finance’s xUSD crashed to 0.43 in November 2025 after a 93M fund manager loss.
✅Total stablecoin supply fell 14.6B from its May 2026 peak of 322B (as of early August).
Nothing in a stablecoin’s code holds its price at $1, meaning that the peg is simply an economic promise where the issuer says every token can be redeemed for one real dollar, and arbitrage does the rest.
If USDT trades at 0.99, professional traders buy it at a discount and redeem it with Tether for 1.00, pocketing the difference and pushing the market price back up.
Conversely, if it trades above $1, they mint new tokens for exactly $1 and sell them. The market price stays pinned only because that redemption machine is believed to work.
In practice, the redemption machine has a narrow doorway. Tether, for instance, requires verified customers and a $100,000 minimum to redeem directly, while Circle (USDC’s issuer) works through institutional accounts.
Everyone else (be it the retail holder, the DeFi protocol, the offshore exchange) depends on a chain of arbitrageurs having both the access and the nerve to keep buying discounted tokens during a panic.
That structure is why depegs happen on exchange screens even when the issuer never misses a redemption, i.e. the peg’s first line of defense is other people’s confidence, not the reserves themselves.
$USDC $USDT
Stablecoins promise a constant $1, yet USDC has traded at 0.87, Tether’s USDT at 0.88, and Terra’s UST collapsed to virtually zero in a crash that erased roughly 40 billion. As recently as November 2025, a DeFi stablecoin called xUSD lost more than half its value in a single day.
✅USDC fell to 0.87 in March 2023 after 3.3B of Circle’s reserves froze at Silicon Valley Bank.
✅Stream Finance’s xUSD crashed to 0.43 in November 2025 after a 93M fund manager loss.
✅Total stablecoin supply fell 14.6B from its May 2026 peak of 322B (as of early August).
Nothing in a stablecoin’s code holds its price at $1, meaning that the peg is simply an economic promise where the issuer says every token can be redeemed for one real dollar, and arbitrage does the rest.
If USDT trades at 0.99, professional traders buy it at a discount and redeem it with Tether for 1.00, pocketing the difference and pushing the market price back up.
Conversely, if it trades above $1, they mint new tokens for exactly $1 and sell them. The market price stays pinned only because that redemption machine is believed to work.
In practice, the redemption machine has a narrow doorway. Tether, for instance, requires verified customers and a $100,000 minimum to redeem directly, while Circle (USDC’s issuer) works through institutional accounts.
Everyone else (be it the retail holder, the DeFi protocol, the offshore exchange) depends on a chain of arbitrageurs having both the access and the nerve to keep buying discounted tokens during a panic.
That structure is why depegs happen on exchange screens even when the issuer never misses a redemption, i.e. the peg’s first line of defense is other people’s confidence, not the reserves themselves.
$USDC $USDT
