What happens when a stablecoin depegs?
A stablecoin depeg can create discounts, panic selling, redemption pressure, liquidity gaps, and stress across DeFi markets.
The short version
A stablecoin depegs when it trades away from its target price, usually $1. A small discount can close quickly if redemptions and liquidity work. A persistent discount can become a confidence crisis as users rush to exit.
First-order effects
Traders may sell the stablecoin for dollars, other stablecoins, or crypto. Market makers may step back if they are unsure about redemption. DeFi pools can become imbalanced as users remove stronger assets and leave the weaker stablecoin behind.
Redemptions matter
If holders can redeem directly and quickly for full value, arbitrage can help restore the peg. If redemptions are delayed, limited, unclear, or dependent on stressed banking rails, the market may price in more risk.
Contagion risk
Stablecoins sit inside trading pairs, lending markets, collateral systems, and treasury balances. A serious depeg can trigger liquidations, frozen withdrawals, governance actions, and losses for protocols that treated the asset as cash-equivalent.
What to check
Look at the size and duration of the discount, redemption status, reserve disclosures, largest liquidity pools, exchange order books, chain exposure, and whether other stablecoins are also under stress.