What happens if a stablecoin depegs?
Most depegs are liquidity events, not solvency events, and recover within days. The ones that never recover share three signals: circulating supply falls while the discount persists, the issuer stops or gates redemptions, and on-chain liquidity is withdrawn rather than arbitraged.
Liquidity depeg vs solvency depeg
A liquidity depeg happens when sellers outpace the arbitrage capital available on a given venue. Price recovers as soon as redemption capacity catches up. A solvency depeg happens when the assets behind the token are worth less than the tokens outstanding. Price never fully recovers, and supply collapses.
The distinguishing test is redemption. If verified redemptions are still clearing at par, you are looking at a liquidity event.
The three signals that matter
Watch these in order. The first two are on this site's depeg tracker.
- Discount persistence: a deviation past 24 hours is materially worse than one past 2 hours
- Supply direction: shrinking supply with a persistent discount means redemptions are working; flat supply with a discount means they are not
- Liquidity depth: pools being withdrawn rather than filled is the terminal signal
What to actually do
Selling into a liquidity depeg realises the discount as a permanent loss. Holding through a solvency depeg realises the whole thing. Institutions should pre-write the decision rule — a specific deviation threshold, a specific persistence window, and a specific pre-approved exit venue — before the event, not during it.
Frequently asked
- How far can a fully backed stablecoin fall?
- USDC reached about $0.88 in 2023 while fully backed. A deep discount alone does not prove insolvency.
- Do algorithmic stablecoins recover?
- Uncollateralised algorithmic designs historically have not. Overcollateralised and delta-neutral designs have, but with materially higher variance than fiat-backed tokens.