Review of major depegging events of stablecoins in the past five years: a triple test of mechanism, trust, and regulation.

Author: Biteye Core Contributor Viee

*The full text is about 5000 words, with an estimated reading time of 13 minutes.

Over the past five years, we have witnessed stablecoins becoming unpegged in multiple scenarios.

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

In this article, we attempt to link several landmark stablecoin decoupling events in the cryptocurrency industry from 2021 to 2025, analyze the underlying reasons and impacts, and explore the lessons these crises leave us.

The First Avalanche: The Collapse of Algorithmic Stablecoins

If there was a crash 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, and part relies on the value of the governance token TITAN through an algorithm. As a result, when some large TITAN sell orders caused the price to become unstable, major holders began to sell off, triggering a chain reaction of bank runs: 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 plunges, it becomes difficult for the mechanism to have any room for recovery, resulting in a decoupling to zero.

On the day of the TITAN crash, even the famous 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 prevent the “death spiral.”

Collective Disillusionment: LUNA Returns to Zero

In May 2022, the cryptocurrency market experienced the largest stablecoin collapse in history, with the algorithmic stablecoin UST from the Terra ecosystem and its sister coin LUNA both crashing. At that time, UST, which had a market value 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 sustained run on the bank. UST quickly lost its 1:1 peg to the dollar, with the price collapsing from nearly $1 to less than $0.3 in a few days. In order to maintain the peg, the protocol massively increased the issuance of LUNA for the redemption of UST, resulting in a crash in the price of LUNA.

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

• The algorithm itself cannot create value, it can only allocate 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 regulatory agencies have also for the first time included “stablecoin risks” in their compliance perspective. The United States, South Korea, the European Union, and others have successively imposed strict restrictions on algorithmic stablecoins.

is not only about algorithm instability: the chain reaction of USDC and traditional finance

The algorithmic model has numerous issues; is it true that centralized, 100% backed stablecoins have no risks?

In 2023, the Silicon Valley Bank (SVB) incident broke out, and Circle admitted that there were 3.3 billion USDC reserves at SVB. Amid market panic, USDC once depegged to 0.87 dollars. This incident was entirely a “price depegging”: short-term payment ability was questioned, triggering a market sell-off.

Fortunately, this de-pegging was only a brief panic. The company quickly issued a transparent announcement, promising to use its own funds to cover any potential shortfall. Ultimately, USDC was able to regain its peg only after the Federal Reserve announced its decision to guarantee deposits.

It can be seen that the “anchor” of stablecoins is not only the reserves but also the confidence in the liquidity of the 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 fragility becomes inevitable.

A false alarm of “unmooring”: The USDE circular loan storm

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 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 global market capitalization. Unlike USDT and USDC, which have equivalent reserves, USDe employs an on-chain Delta neutral strategy to maintain its peg. Theoretically, this “spot long + perpetual short” structure can withstand volatility. In practice, it has also proven to perform stably during market stability, supporting users in obtaining a 12% base annual yield.

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

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

On one hand, some users use USDe as margin for derivatives, and the extreme market conditions triggered contract liquidations, leading to significant selling pressure in the market; at the same time, the “circular loan” structure with leveraged borrowing on some lending platforms is also facing liquidation, further intensifying the selling pressure on stablecoins; on the other hand, during the withdrawal process on exchanges, gas issues on the blockchain have caused arbitrage channels to be obstructed, and the price deviation after the stablecoin's de-pegging has not been promptly corrected.

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

After the incident, the Ethena team released a statement clarifying that the system was functioning normally and that the collateral was sufficient. Subsequently, the team announced that it would enhance monitoring and increase the collateral ratio to strengthen 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 the EU MiCA regulatory requirements, and pegged to the US dollar at a 1:1 ratio.

However, around November 6, the price of USDX quickly fell below $1 on-chain, plunging to about $0.3 at one point, losing nearly 70% of its value in an instant. The catalyst for the event was the de-pegging of the yield-generating stablecoin xUSD issued by Stream, caused by its external fund manager reporting approximately $93 million in asset losses. Stream then urgently suspended deposits and withdrawals on the platform, and xUSD rapidly 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 total stablecoin deUSD reserves, while Stream used xUSD as collateral. When xUSD fell more than 65%, the asset support for deUSD instantly collapsed, triggering a large-scale run, and the price subsequently plummeted.

The run on the bank did not stop there. Subsequently, the 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 has evaporated by over $2 billion. A single protocol crisis has ultimately evolved into the liquidation of the entire sector, revealing not only issues in mechanism design but also proving the high-frequency coupling between the internal structures of DeFi, where risks do not exist in isolation.

The Triple Challenge of Mechanism, Trust, and Regulation

When we look back at the cases of de-pegging over the past five years, we find a striking 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 run or go to zero overnight, often not due to design flaws, but rather due to 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 fall like a row of dominoes.

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

Yield-bearing stablecoins: These products integrate yield mechanisms, leverage strategies, or a combination of multiple assets into the structure of stablecoins, 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 a classic example of the “contagion effect”: one protocol encounters issues, another uses its stablecoin as collateral, and a third designs a stablecoin based on a similar mechanism, all getting 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 proposals: MiCA explicitly denies the legal status of algorithmic stablecoins, while 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 cross-border characteristics of stablecoins make it difficult for a single country to fully regulate them.

The model is complex, with a high degree of interconnection between on-chain assets and real-world assets, and regulatory agencies have not yet reached a conclusion regarding its financial attributes and settlement properties.

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

Conclusion: Crises bring opportunities for industry restructuring

The crisis of stablecoin depegging not only reminds us that mechanisms carry risks, but also forces the entire industry to move towards a healthier evolutionary path.

On one hand, the technical level is actively addressing past vulnerabilities. For example, Ethena is also adjusting collateral rates and strengthening monitoring, attempting to hedge against volatility risks through active 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 conducive to increasing trust.

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

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

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