Stablecoin Decoupling Risks: From Mechanisms to Market Impact

The core design logic of stablecoins is to provide a price-stable trading medium for the crypto market by anchoring to the US dollar or other stable assets. However, when the market price of a stablecoin deviates significantly from its underlying asset, a depeg (decoupling) phenomenon occurs. This deviation not only undermines the fundamental promise of stability but may also trigger market chain reactions, severely damaging investor confidence.

The Nature and Market Performance of the Depeg Phenomenon

Stablecoin depegging refers to a significant deviation of its trading price from the preset peg (usually $1). This deviation can manifest as a price decline (negative depeg) or an increase (positive depeg), both of which weaken the reliability of stablecoins as a store of value.

When a depeg event occurs, markets often experience intense volatility. Traders react quickly to price signals—some choose to sell assets to avoid risks, while others attempt to restore price balance through arbitrage mechanisms. This multi-directional fluctuation leads to on-chain trading congestion, widened slippage, and further increases market uncertainty. The occurrence of depegging often signals liquidity shortages or issues with the underlying assets.

Systemic Risks Behind Depegging

The factors triggering stablecoin depegging are numerous and interconnected. Liquidity shortages are common triggers—when market demand suddenly surges or concentrated selling pressure appears, if counterparties or market makers lack sufficient liquidity, prices will quickly diverge from the peg.

Insufficient or poor-quality reserve assets are also critical risks. If the collateral supporting the stablecoin’s value has flaws, limited liquidity, or increased credit risk, market participants may lose confidence, leading to concentrated redemptions and triggering depegging. Additionally, sudden regulatory changes, technical vulnerabilities in smart contracts, network congestion, and other issues can become overwhelming factors, causing market panic.

Lessons from History: Major Depegging Cases

USD Coin (USDC) depegging in March 2023 is a recent typical case. After the Silicon Valley Bank (SVB) bankruptcy, the market realized that some of USDC’s reserves were locked in that bank’s accounts. This information sparked concerns, and USDC’s price rapidly declined, dropping to around $0.88. Although subsequent emergency liquidity support from Coinbase and Circle helped recover the peg, this incident exposed the risks of centralized reserves.

TerraUSD (UST)’s significant depegging in 2023 is an even more extreme case. UST used an algorithmic mechanism, maintaining its $1 peg through the minting and burning of LUNA tokens. When market liquidity dried up and demand collapsed suddenly, this mechanism completely failed. UST ultimately fell over 97%, dropping from $1 to near zero. This disaster affected millions of investors and shook confidence in algorithmic stablecoins.

These two cases reflect two vulnerabilities within the stablecoin ecosystem: traditional banking risk transmission (USDC) and algorithmic mechanism failure (UST). Both demonstrate that the security of stablecoins depends on their reserve mechanisms, sufficient liquidity, and the fragile balance of market confidence.

Conclusion: Enhancing Risk Awareness

The persistent occurrence of depeg phenomena indicates that crypto market participants must deepen their understanding of how stablecoins operate. Investors should regularly review the reserve composition, reliability of issuing institutions, and their response capabilities under extreme market conditions. Meanwhile, stablecoin projects need to establish more resilient liquidity buffers and contingency plans to prevent depegging risks from evolving into systemic crises.