A situation in which a stablecoin loses its peg to the underlying asset and begins trading away from its target price. Stablecoins are typically pegged to the U.S. dollar at a 1:1 ratio, so a depeg means the coin is trading noticeably above or below that mark. Common causes include:
insufficient reserves;
a mass withdrawal of funds;
a failure of the algorithmic peg mechanism;
a sharp collapse in issuer confidence.
The most prominent example is the depeg of the algorithmic stablecoin UST in 2022.
As panic selling set in and UST began to slide, the system attempted to defend the peg by minting LUNA tokens and exchanging them for UST. But the more LUNA was issued, the further its price fell — eroding confidence further and dragging UST down with it. UST ultimately lost its dollar peg almost entirely, and tens of billions of dollars in market capitalization were effectively wiped out.