What is a depeg?

Think of a voucher that a store promises to redeem for one euro. As long as everyone trusts that promise and can redeem it, its value stays close to one euro. But if doubts arise about the store, or redemptions stop, someone may agree to sell it for less.

That’s roughly how the link to a reference value (peg) works for stablecoins. Maintaining it may rely on reserves, on collateral in other crypto or on algorithmic mechanisms. Where redemption is possible, those with access to it can exploit price differences through arbitrage, helping the price move back toward its target.

This mechanism can come under pressure from mass selling, limited liquidity, problems with the collateral or doubts about the reserves. A depeg may be temporary or turn into a permanent loss of value. It isn’t only about falling prices, nor only about the dollar: the deviation can be upward, and the reference value can be something else.

Why it matters

If you hypothetically hold 1,000 stablecoins targeting one dollar and their price falls to $0.90, their market value becomes $900, before fees. The balance in your wallet is still 1,000 tokens, but its value has changed.

In decentralized finance (DeFi), a depeg can also reduce the value of collateral and trigger forced liquidations of loans. We consider it a key distinction that a stable price target is not a guarantee.

What to watch out for

A small, momentary deviation from the reference price doesn’t necessarily mean a serious depeg. We look at the size and duration of the deviation, and also whether it appears across many markets or only on one exchange with little trading.

Also, having reserves doesn’t mean every holder can redeem their tokens immediately. Access terms, delays and the quality of the collateral affect whether the recovery mechanism works. A return to the reference price is not a given.