Stablecoin Stability Tested: A History of De-Pegging Events

• Stablecoins face challenges maintaining their $1 peg during periods of market volatility.
• USDT and USDC have shown resilience but can still experience brief de-pegging in crises.
• Newer algorithmic stablecoins like USDD and FRAX struggle more with maintaining peg stability.

Recent market upheavals have highlighted the ongoing struggle for stablecoins to maintain their $1 peg during periods of instability. Major events like the Terra collapse and the US banking crisis exposed vulnerabilities in the stablecoin market.

Even established stablecoins like USDT and USDC experienced temporary de-pegging during these volatile times. Newer and algorithmic stablecoins face even greater challenges in maintaining stability.

Terra and FTX Collapse Trigger Stablecoin De-Pegging

The Terra ecosystem’s collapse in May 2022 sent shockwaves across the crypto market. Many algorithmic stablecoins , including USDD and FRAX, experienced sharp declines, eroding trust in this type of stablecoin and causing widespread panic. Other stablecoins, while affected, managed to remain relatively stable during this turbulent period.

The FTX collapse in November 2022 further shook stablecoin markets. Though most regained their peg quickly, the incident exposed their vulnerability. Liquidity shortages and panic selling led to brief moments where even stablecoins like DAI and TUSD dipped below $1.

U.S. Banking Crisis and Binance’s Influence on Stablecoins

The 2023 US banking crisis exposed the weaknesses of even fiat-backed stablecoins. USDC temporarily lost its peg due to uncertainty surrounding its reserves held at Silvergate and Signature Bank. Investor concerns about the impact of the banking crisis on stablecoin reserves were widespread, but swift action by institutions helped restore market confidence.

Read also: Stablecoins Hit Record $177B Market Cap, Tether Leads Surge

Binance’s removal of TrueUSD (TUSD) from its Launchpool in May 2023 marked another de-pegging event. This decision impacted the token’s stability, highlighting how a single exchange’s actions can influence the market.

More recently, the 2024 launch of Blast token caused heightened volatility among certain stablecoins. Stablecoins like USDD and PYUSD experienced significant price swings. This volatility underscored the challenges faced by newer stablecoins in maintaining their peg.

Traditional vs. Algorithmic Stablecoins

Stablecoins backed by traditional assets, like USDT and USDC, have generally shown greater resilience during these market crises. They tend to recover quickly, particularly with community and institutional support. However, newer, partially algorithmic stablecoins like USDD and FRAX continue to grapple with maintaining stability.