The past teaches risk · Not every depeg is the same
When a “Stable” Coin Loses Its Stability
The word stablecoin describes a target, not a proven condition. A token may aim to track an external monetary unit, but a blockchain does not create bank reserves or guarantee redemption. USDC and TerraUSD show two deviations that looked similar on a chart and came from fundamentally different causes.
Market price and redemption are different
An exchange price comes from buyers and sellers. Redemption happens under a contract: an eligible customer delivers tokens and receives the reference monetary unit from reserves.
Arbitrage normally connects the two. If a token trades below par, a participant can buy and redeem it. But that mechanism works only when redemption is open, reserves are liquid, banks are settling, and the participant meets the issuer’s conditions.
USDC in March 2023: reserves existed, access was uncertain
After Silicon Valley Bank closed, Circle disclosed that about 8% of USDC reserves sat as a deposit there. The market did not know when or how fully those funds would become available. During the weekend, USDC moved away from its peg.
After U.S. authorities moved to protect depositors, Circle said the deposit would be fully available and declared the depeg closed. Over the following days it added banking channels and cleared a backlog of minting and redemption operations.
What actually broke in that episode
The USDC smart contract continued accounting for tokens and public networks continued confirming transfers. The break sat between the token and the banking side of its reserve: the market doubted access to part of the backing and the speed of redemption.
The episode showed that liquid assets and public reports do not eliminate operational risk. A reserve may exist yet temporarily sit behind a closed bank, settlement window, or missing partner.
TerraUSD in May 2022: the promise relied on another token
TerraUSD did not hold a comparable portfolio of monetary reserves. Its peg relied on an exchange mechanism between UST and the freely traded LUNA token, while demand was reinforced by high yields in the Anchor application.
When confidence and liquidity disappeared, holders tried to leave together. More LUNA was issued to absorb UST, LUNA’s price fell, and the mechanism’s ability to restore the peg weakened. The Federal Reserve described the result as a complete collapse within days.
The same chart can hide a different diagnosis
A backed token may briefly diverge because its round-the-clock market is open while banks are closed. It may also signal insufficient or poor-quality reserves. Without documents, those cases cannot be distinguished.
In an algorithmic design, a falling support token can destroy the stabilizing mechanism itself. Depeg therefore names only the symptom. Diagnosis begins with a question: what can be presented for redemption, and who must honor it?
Not everyone reaches the exit first
A retail holder often has no direct issuer account. The holder sells on a secondary market where panic may already have pushed the price below par. Direct redemption is available to a limited class of customers and may involve minimums, checks, and operating procedures.
The IMF notes that this structure can reward early exit: when liquidity vanishes, a legal claim on reserves and the immediate practical ability to receive them are not the same thing.
A reserve report does not answer every question
Reserve composition, maturity, custody location, and independent assurance all matter. So do the redemption terms: who has direct access, whether the issuer can suspend an operation, and which addresses it can block.
Even full backing does not prevent a smart-contract bug, a halt on the chosen blockchain, a bridge failure, or a mistaken address. Reserves cover one risk family, not the token’s whole architecture.
A short checklist before use
First: what backs the token and who verifies it. Second: who has a legal redemption right. Third: how many intermediaries stand between your wallet and the issuer. Fourth: which networks issue the token and whether a bridge is involved.
Fifth: what happens when banks are closed, markets are falling, and everyone wants out together. “It always trades at par” is not a plan; it is the claim that stress is about to test.
What this history says about Bitcoin
BTC promises no fixed price against an external currency and has no issuer redemption window. Its volatility is visible, while a stablecoin’s risk can hide behind a flat line until something fails.
That does not make either tool universally superior. A stablecoin may be useful for settlement, but its stability is a service delivered by an entire system of reserves, banks, contracts, and markets. That system is what must be evaluated.
A peg is held not by the word “stable,” but by the ability to redeem under the promised rule during the panic itself.
Sources and verification
Historical educational material, not an assessment of any issuer’s current solvency. Reserve composition and redemption terms change; consult current reports and contracts before use.
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