Depeg Risk
The risk that a token designed to hold a steady value, usually one dollar, trades away from that value.
Depegs arise from three distinct mechanisms. Reserve-backed tokens depeg when the market doubts the reserves or when redemption becomes slow, restricted, or unavailable to ordinary holders, including when the bank holding the reserves is itself disrupted. Over-collateralized tokens depeg when the collateral falls faster than liquidations can process. Algorithmic designs that mint and burn a second token to defend the price can enter a reflexive spiral, as Terra's UST did in May 2022, where defending the peg increases supply of the absorbing token and accelerates the fall. A separate detail confuses many readers: the secondary market price and the redemption right are different things, and a token can trade below a dollar while remaining redeemable at par for those with direct access.
In practice
Fiat-backed tokens have traded below par during banking disruptions affecting their reserve accounts, and returned toward par once redemption channels reopened.
The common misunderstanding
That a stablecoin trading at one dollar proves it is fully backed, when the market price reflects belief about redemption and can hold at par right up until that belief changes.