Who moved the stablecoin's peg?

Written by: Biteye Core Contributor Viee

Editor: Biteye Core Contributor Denise

In five years, we have witnessed stablecoins de-pegging in multiple scenarios.

From algorithms to high-leverage design, and then to the chain reaction of real-world bank failures, stablecoins are undergoing repeated trust rebuilding.

In this article, we attempt to connect several significant stablecoin de-pegging events in the cryptocurrency industry between 2021 and 2025, analyze the underlying causes and impacts, and discuss the lessons these crises have left us.

The First Avalanche: The Collapse of Algorithmic Stablecoins

If there is a collapse that first shook the narrative of “algorithmic stablecoins,” it should be the IRON Finance incident in the summer of 2021.

At that time, the IRON/TITAN model on Polygon was all the rage online. IRON is a partially collateralized stablecoin: part of it is backed by USDC, while the other part relies on the value of the governance token TITAN through an algorithm. As a result, when some large TITAN sell orders made the price unstable, big holders began to sell off, triggering a chain reaction: IRON redemption → minting and selling more TITAN → TITAN crash → IRON stablecoin further lost its peg.

This is a classic “death spiral”:

Once the price of the internally anchored assets drops sharply, it becomes difficult for the mechanism to have room for repair, leading to a decoupling to zero.

On the day of the TITAN collapse, even the well-known American investor Mark Cuban was not spared. More importantly, it made the market realize for the first time that algorithmic stablecoins are highly dependent on market confidence and internal mechanisms. Once confidence collapses, it is difficult to stop the “death spiral.”

Collective Disillusionment: LUNA Zeroes Out

In May 2022, the cryptocurrency market experienced the largest stablecoin collapse in history, with the algorithmic stablecoin UST and its sister coin LUNA from the Terra ecosystem both plummeting. At that time, UST, which had a market capitalization of up to $18 billion, was once regarded as a successful example of algorithmic stablecoins.

However, in early May, UST was heavily sold off on Curve/Anchor, gradually falling below $1, triggering a continuous run on the bank. UST quickly lost its 1:1 peg to the dollar, with the price plummeting from nearly $1 to less than $0.3 within a few days. In order to maintain the peg, the protocol massively minted LUNA for the purpose of redeeming UST, resulting in a subsequent avalanche in the price of LUNA.

In just a few days, LUNA fell from $119 to nearly zero, with a total market value evaporating by nearly $40 billion, UST dropping to a few cents, and the entire Terra ecosystem vanishing within a week. It can be said that the collapse of LUNA made the entire industry truly realize for the first time:

Algorithms themselves cannot create value, they can only distribute risk;

The mechanism can easily enter an irreversible spiral structure under extreme market conditions.

Investor confidence is the only trump card, and this trump card is the easiest to lose its effectiveness.

This time, global regulators have also for the first time included “stablecoin risks” in their compliance vision. The United States, South Korea, the European Union, and other countries have successively imposed strict restrictions on algorithmic stablecoins.

It's not just algorithm instability: USDC and the chain reaction with traditional finance.

The algorithmic model is fraught with problems; does that mean centralized, 100% reserve stablecoins carry no risks?

In 2023, the Silicon Valley Bank (SVB) incident broke out, and Circle acknowledged that there were 3.3 billion USDC reserves in SVB. Amid market panic, USDC once de-pegged to 0.87 dollars. This incident was entirely a “price decoupling”: the short-term payment ability was questioned, triggering a market run.

Fortunately, this decoupling was only a brief panic. The company quickly issued a transparent announcement, promising to use its own funds to cover any potential shortfall. Ultimately, it was only after the Federal Reserve's announcement to guarantee deposits that USDC was able to regain its peg.

It can be seen that the “anchor” of stablecoins is not just the reserves, but also the confidence in the liquidity of those reserves.

This turmoil also reminds us that even the most traditional stablecoins cannot completely isolate themselves from traditional financial risks. Once the anchored assets rely on the real-world banking system, their vulnerabilities become inevitable.

A False Alarm of “Unanchoring”: The USDE Circular Loan Turmoil

Recently, the cryptocurrency market experienced an unprecedented panic sell-off on October 11, with the stablecoin USDe caught in the eye of the storm. Fortunately, the eventual decoupling was only a temporary price deviation and not a failure of the underlying mechanism.

USDe issued by Ethena Labs once ranked among the top three in the world by market capitalization. Unlike USDT and USDC, which have equivalent reserves, USDe uses an on-chain Delta neutral strategy to maintain its peg. Theoretically, this structure of “spot long + perpetual short” can withstand volatility. In fact, it has been proven that this design performs stably during calm market conditions, and supports users in obtaining a base annual yield of 12%.

On top of the originally well-functioning mechanism, users have also spontaneously developed a “circular loan” strategy: collateralizing USDe to borrow other stablecoins, then exchanging them back for more USDe to continue staking, layering leverage, and stacking lending protocol incentives to increase annualized returns.

Until October 11, the U.S. experienced sudden macroeconomic headwinds, with Trump announcing high tariffs on China, triggering panic selling in the market. During this process, the stable anchoring mechanism of USDe itself did not encounter systemic damage, but under the accumulation of various factors, a temporary price dislocation occurred:

On one hand, some users use USDe as collateral for derivatives. Due to extreme market conditions triggering contract liquidations, there has been significant selling pressure in the market. At the same time, the leveraged “circular loan” structures on some lending platforms are also facing liquidation, further exacerbating the selling pressure on stablecoins. On the other hand, during the withdrawal process on exchanges, issues with on-chain gas have led to a blockage in arbitrage channels, and the price deviations of stablecoins after de-pegging have not been timely corrected.

Ultimately, multiple mechanisms were simultaneously breached, resulting in market panic in a short period of time. USDe briefly fell from $1 to around $0.6, and then recovered. Unlike some “asset failure” type decouplings, the assets in this round of events did not disappear; they were merely constrained by macro negative liquidity, liquidation paths, and other reasons, leading to a temporary imbalance in anchoring.

After the incident, the Ethena team issued a statement clarifying that the system was functioning normally and that the collateral was sufficient. Subsequently, the team announced plans to strengthen monitoring and increase the collateralization rate to enhance the buffer capacity of the fund pool.

Aftershocks continue: the chain reaction of xUSD, deUSD, and USDX

The aftershocks of the USDe event have not dissipated, and another crisis has erupted in November.

USDX is a compliant stablecoin launched by Stable Labs, adhering to EU MiCA regulatory requirements, and pegged to the US dollar at a 1:1 ratio.

However, around November 6, the price of USDX rapidly fell below $1 on the blockchain, plunging to around $0.3 at one point, losing nearly 70% of its value in an instant. The trigger for this event was the decoupling of the yield-bearing stablecoin xUSD issued by Stream, due to its external fund manager reporting an asset loss of approximately $93 million. Stream then urgently suspended deposits and withdrawals on the platform, and xUSD quickly fell below its peg in a panic sell-off, dropping from $1 to $0.23.

After the collapse of xUSD, the chain reaction quickly spread to Elixir and its issued stablecoin deUSD. Elixir had previously borrowed 68 million USDC from Stream, accounting for 65% of its stablecoin deUSD reserve, while Stream used xUSD as collateral. When xUSD fell by more than 65%, the asset support for deUSD instantly collapsed, triggering a massive run on the bank, and the price subsequently plummeted.

The run on the bank did not stop there. Subsequently, market sell-off panic spread to other yield-bearing stablecoins with similar models, such as USDX.

In just a few days, the overall market value of stablecoins evaporated by over 2 billion dollars. A protocol crisis ultimately evolved into a liquidation of the entire sector, which not only revealed issues in mechanism design but also proved the high-frequency coupling between the internal structures of DeFi, indicating that risks are never isolated.

The Triple Test of Mechanism, Trust, and Regulation

When we look back at the decoupling cases of the past five years, we find an eye-catching fact: the biggest risk of stablecoins is that everyone thinks they are “stable.”

From algorithmic models to centralized custody, from yield-bearing innovations to composite cross-chain stablecoins, these anchoring mechanisms can experience a crash or become worthless overnight, often due to design issues or a collapse of trust. We must acknowledge that stablecoins are not just a product, but a mechanism of credit structure built on a series of “assumptions that will not be broken.”

1. Not all pegged assets are reliable.

Algorithmic stablecoins often rely on governance token buyback and burn mechanisms. Once liquidity is insufficient, expectations collapse, and governance tokens plummet, the price will collapse like a house of cards.

Fiat-backed stablecoins (centralized): They emphasize “dollar reserves”, but their stability is not completely independent of the traditional financial system. Banking risks, custodian risks, liquidity freeze, and policy fluctuations can all erode the “commitment” behind them. When reserves are sufficient but redemption capabilities are limited, the risk of de-pegging still exists.

Yield-bearing stablecoins: These products integrate yield mechanisms, leverage strategies, or a combination of multiple assets into the stablecoin structure, offering higher returns while also introducing hidden risks. Their operation relies not only on arbitrage paths but also on external custody, investment returns, and strategy execution.

2. The risk transmission of stablecoins is much faster than we imagine.

The collapse of xUSD is the most typical example of the “contagion effect”: one protocol has issues, another that used its stablecoin as collateral, and a third that designed a stablecoin with a similar mechanism, all get dragged down.

Especially in the DeFi ecosystem, stablecoins serve as collateral assets, trading counterparts, and liquidation tools. Once the “anchor” loosens, the entire chain, the whole DEX system, and even the entire strategy ecosystem will be affected.

3. Weak regulation: Institutional gaps are still being addressed.

Currently, Europe and the United States have successively introduced various regulatory draft classifications: MiCA explicitly denies the legal status of algorithmic stablecoins, and the U.S. GENIUS Act attempts to regulate reserve mechanisms and redemption requirements. This is a positive trend; however, regulation still faces the following challenges:

The characteristics of stablecoins in cross-border transactions make it difficult for a single country to fully regulate them.

The model is complex, with a high degree of interconnection between on-chain and real-world assets, and regulatory agencies have yet to reach a conclusion on its financial and clearing attributes.

Information disclosure has not yet been fully standardized. Although on-chain transparency is high, the responsibilities of issuers, custodians, and others are still relatively vague.

Conclusion: The crisis brings opportunities for industry restructuring.

The de-pegging crisis of stablecoins not only reminds us that mechanisms have risks, but also forces the entire industry to move towards a healthier evolutionary path.

On one hand, the technical aspect is actively addressing past vulnerabilities. For example, Ethena is also adjusting collateral rates, enhancing monitoring, and trying to hedge against volatility risks through proactive management.

On the other hand, the transparency of the industry is also continuously strengthening. On-chain audits and regulatory requirements are gradually becoming the foundation of the new generation of stablecoins, which is beneficial for increasing trust.

More importantly, users' understanding is also upgrading. An increasing number of users are starting to pay attention to the underlying details such as the mechanisms behind stablecoins, collateral structures, and risk exposure.

The focus of the stablecoin industry is shifting from “how to grow quickly” to “how to operate steadily.”

After all, only by truly enhancing risk resistance can we create financial instruments that can support the next cycle.