A stablecoin depeg happens when its secondary-market price separates from its $1.00 reference and the arbitrage channel that would normally close the gap – buying the discount and redeeming it with the issuer at par – stops working. Whether the peg comes back depends entirely on whether that channel reopens: it did within days for USDC and DAI in 2023, within weeks for USDT in 2022, and never did for UST.
The mechanism: arbitrage, and what happens when it jams
Chainlink’s explainer describes three broad stablecoin designs – fiat-backed, crypto-backed, and algorithmic – and says that across all three, price stability depends on arbitrageurs constantly realigning the market price with the peg. In normal conditions this happens in minutes: Eco’s guide notes that USDT routinely drifts to $0.997 or $1.003 during volatile hours and snaps back, and Chainlink separately describes $0.998 or $1.002 as the kind of momentary imbalance that resolves on its own, in an article last updated April 15, 2026. A depeg, by contrast, is what Eco calls a sustained deviation that traders cannot arbitrage away because something structural has broken.
The structural break is always the same shape: the primary-market exit (redemption with the issuer, or the on-chain equivalent) becomes slow, capped, expensive, or absent, while secondary-market selling continues. CryptDaily frames this as “part mechanics, part psychology” – the mechanics have to hand an arbitrageur a low-risk way to buy the discount, or the discount persists regardless of whether the underlying backing is sound.
Fiat-backed coins: redemption is the release valve
For a fiat-collateralized stablecoin, Chainlink explains that if the token trades below $1, an institutional holder can buy it at the discount and redeem it with the issuer for $1 of the underlying reserve, capturing the spread – and that buying pressure is what restores the price. This only works if redemption is actually open and fast. USDT’s May 2022 episode shows the mechanism working slowly rather than failing: Eco reports the token traded to roughly $0.95 on May 12, 2022 during the Terra/3AC contagion, that Tether processed more than $10B in redemptions over two weeks, and that the discount persisted while that queue cleared before recovering over roughly two weeks, per Eco’s event table.
USDC’s episode in March 2023 shows a different failure point: not the redemption queue, but the reserves themselves. Circle disclosed that $3.3B of USDC reserves were held at Silicon Valley Bank, according to Eco, after the FDIC took the bank into receivership; Eco dates the failure itself to March 10-13, 2023, without specifying the exact day of the receivership action. USDC traded down to roughly $0.87 on Coinbase and Curve, per Eco; Chainlink separately reports the token dropped below $0.88 on secondary markets, in its article last updated April 15, 2026. Once the US Treasury, Federal Reserve and FDIC said on March 12 that SVB depositors would be made whole, Eco reports USDC recovered to $0.99-plus within 48 hours, and Eco’s summary table gives a full recovery window of roughly three days.
Crypto-collateralized coins: the CDP and the Peg Stability Module
MakerDAO’s original 2017 whitepaper frames the whole category’s purpose around volatility: it notes that an asset like bitcoin can move by as much as 25% in a day and over 300% in a month, which is why a dollar-stable instrument built on top of collateral was needed. Dai is generated through a Collateralized Debt Position (CDP), a smart contract into which a user locks collateral and against which they mint Dai as debt, per the whitepaper; the collateral stays locked until the debt is repaid.
A later addition to the Maker system, the Peg Stability Module, lets holders swap Dai for a limited amount of USDC at a fixed 1:1 rate, according to a 2024 paper on arXiv by Conclave researcher Yuval Boneh, which the paper says exists to tighten arbitrage around the peg. That same USDC link became a liability during the SVB weekend: Eco’s event table attributes DAI’s own dip to roughly $0.89 on March 11, 2023 directly to USDC contagion flowing through the PSM’s collateral, with a recovery window of about three days – Dai’s arbitrage mechanism worked, but only because USDC’s did.
A different crypto-collateralized design, Liquity’s LUSD, sets a redemption floor rather than a fixed-rate swap. The Conclave/arXiv paper, dated 18 July 2024, explains that LUSD carries a minimum redemption fee of 0.5%, which means redeeming against the protocol only turns profitable once LUSD trades below $0.995 – the fee itself is what stops constant redemption pressure when the price sits at or near $1.
Algorithmic coins: arbitrage without an anchor
UST’s design relied on a dual-token arbitrage rather than a dollar reserve. To mint 1 UST, a user bought $1 of Luna and burned it into the Terra protocol; if UST traded below $1, an arbitrageur could buy the discount, redeem it for $1 of Luna, and sell the Luna for a profit – the same buying-and-burning that was meant to push the price back to $1, according to the April 2023 paper by EPFL researchers Gleb Kurovskiy and Natalia Rostova. The paper states that in May 2022, before the collapse, UST had an $18.7B circulating supply against Luna’s $20B backing, with Luna trading near $80.
The arbitrage broke down for two compounding reasons the paper identifies. First, a built-in limit on UST redemptions meant that during the panic the effective redemption fee – normally around 0.5% – rose as high as 60%, meaning a trader redeeming UST received as little as 40 cents on the dollar; the paper shows the price of UST was mathematically capped at 1 minus that fee, so as the fee rose the price had to fall. Second, even after Terra removed the redemption limit on May 12, 2022, the price did not recover, which the paper attributes to rising Luna volatility, a lagging price oracle, and the absence of any way to convert UST directly into dollars or an asset outside the Terra system. Arbitrage profits reached 200-400% in the collapse’s final days, the paper notes – a sign that the arbitrage trade itself was still open, but that closing it required destroying so much Luna value that it accelerated the spiral rather than stopping it. Eco’s account puts numbers on the outcome: UST fell to about $0.30 by May 11, 2022 and to effectively $0 by May 13, 2022, while Luna’s market capitalization collapsed from $40B to under $100M, per Eco.
Six depegs, side by side
Eco’s event table, compiled from CoinGecko historical price data and event coverage the article attributes to Bloomberg, CoinDesk and Reuters, lays out lows and recovery windows for the largest documented cases since 2022:
Stablecoin Date Low Recovery Root cause (per Eco) UST May 2022 ~$0.00 Never recovered Algorithmic failure USDT May 12, 2022 ~$0.95 ~2 weeks Mass redemption during Luna contagion USDN (Neutrino) April 2022 ~$0.78 Never fully recovered Algorithmic design plus Waves token collapse USDC March 10-13, 2023 ~$0.87 ~3 days SVB reserve exposure ($3.3B) DAI March 11, 2023 ~$0.89 ~3 days USDC contagion via PSM collateral BUSD Feb 2023 onward ~$0.995 Slow-bleed wind-down NYDFS halt order on Paxos minting
BUSD is the odd one out: the New York Department of Financial Services ordered Paxos to stop minting the token on February 13, 2023, per Eco, but reserves stayed intact and redemptions stayed open, so the token itself barely moved off par – Eco reports discounts of only 0.3-0.5% on Curve and Binance over the following weeks. The real effect showed up in supply, which Eco says fell from $16B to under $50M by the fourth quarter of 2024, as holders rotated into USDT and USDC rather than being forced out by price.
The common misreading
Reading every depeg as evidence the reserves are gone treats UST as the template when it is the exception. In the cases above with a working redemption path – USDT, USDC, DAI – the discount closed once that path reopened, because the underlying claim on a dollar (or on USDC) was never actually destroyed. UST is different: the paper by Kurovskiy and Rostova argues its redemption mechanism itself broke under load, not merely that confidence collapsed, which is why the price never came back even after the redemption limit was removed on May 12, 2022. Eco separately notes that Ethena’s USDe, which holds spot ETH and BTC hedged with perpetual futures shorts rather than relying purely on a paired token, has not depegged through three market cycles as of the first quarter of 2026 – that is Eco’s own characterization of an ongoing track record, not a claim that the design is immune to the same failure mode.
What this page does not tell you
The lows and recovery windows above come from Eco’s summary table, which the article says is built on CoinGecko price history and secondary reporting from Bloomberg, CoinDesk and Reuters – not from raw exchange order books checked directly for this page. Where sources disagree, this page reports both figures rather than picking one: Eco puts USDC’s SVB-weekend low at roughly $0.87, Chainlink puts it below $0.88, and the two are not the same number. The transaction-level detail on why arbitrage broke down is available for only one case in this evidence, UST, via the Kurovskiy and Rostova paper; no equivalent primary study of the USDC, DAI or BUSD episodes is in the record here, so this page cannot describe their mechanics with the same precision. Bitcoin’s 25%-daily and 300%-monthly volatility figures come from MakerDAO’s December 2017 whitepaper and are now years out of date; they illustrate why the Dai system was built, not current market conditions. Finally, none of this evidence supports a forecast about whether any specific stablecoin circulating today will depeg, or how fast a peg would be restored next time – that depends on redemption capacity, counterparty exposure and market panic, all of which vary event to event and none of which can be read off a historical table.
Sources
Every fact above is attributed to one of these reports. Where they disagree, the article says so.
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