Depegs: how they start, how they resolve, and what is normal

A depeg is a gap between a stablecoin's market price and the value it is designed to hold. Small gaps are constant and expected, because the market price is set by whoever is trading right now while the redemption price is set by a mechanism that operates with friction, in business hours, for a restricted set of counterparties. The interesting question is never whether a deviation exists but how large it is, how long it lasts, and whether it reflects a liquidity constraint or a doubt about the backing.

Why a small deviation is the normal state

A stablecoin sits in an order book or a liquidity pool like any other asset. Buying or selling moves it against the size of the resting liquidity, so any order large relative to available market depth creates price impact. There is also a bid-ask spread, so a token can quote a fraction below par on one side and above it on the other at the same instant.

The arbitrage that closes these gaps has costs of its own: redemption minimums and fees, network fees, the capital tied up while a bank wire settles, and the risk carried during the days the round trip takes. An arbitrageur will not act until the deviation exceeds all of that. The result is a no-trade band around par, and the width of that band is a property of the token's redemption plumbing rather than a signal of anything wrong. Bands widen predictably at weekends, on banking holidays, and during hours when the issuer's redemption desk is closed.

This is why peg deviation is reported in basis points rather than as a yes-or-no state. A deviation of a few basis points on a venue with thin books describes the venue. A deviation of hundreds of basis points that persists through a full business day, across venues, with heavy volume, describes the token.

Three ways depegs start

The first pattern is doubt about the backing. Something becomes known — an exposure to a failing bank, a disclosure about reserve composition, an enforcement action, a delayed report — and holders sell before waiting for clarification. The clearest example is March 2023, when a large fiat-backed stablecoin traded materially below par over a weekend after it was disclosed that part of its cash reserve sat at a United States bank that had just failed. The mechanics were instructive: banks were closed, so redemption was unavailable precisely while the market needed it, and the token returned to par once the deposits were confirmed accessible and redemptions reopened. The impairment was a fraction of the reserve; the price move was much larger, because it was pricing uncertainty and the temporary loss of the redemption channel, not the expected loss.

The second pattern is a liquidity or venue event with no change in backing at all. A large forced seller, a pool that becomes lopsided, a withdrawal halt at an exchange, or a bridge that stops processing can all move the price of one representation of a token while the issuer's reserve is untouched. A bridged or wrapped version can depeg from the canonical token while the canonical token holds par, because they are different instruments with different risks.

The third pattern is collateral or mechanism failure, which applies to collateralized and algorithmic designs. Collateral falls faster than liquidation can process, an oracle misprices an input, or a mechanism that is supposed to add supply cannot. This is the pattern with the worst outcomes, because the correcting force is impaired rather than merely delayed.

How depegs resolve, and the shapes to recognize

Arbitrage resolves a discount by removing supply: someone buys below par and either redeems with the issuer or repays debt at face value. Resolution therefore requires the correcting channel to be open, funded, and worth using. Reopening a redemption desk, restoring an oracle, or a large holder committing capital are the events that turn a depeg around.

• Sharp down, quick recovery. A liquidity shock absorbed once the correcting flow arrives, often within hours.
• Gap that holds through a closure and closes on reopening. A redemption channel that was unavailable, not a reserve that was missing.
• Slow grind, small and persistent. Redemption friction or an arbitrage that does not cover its costs, common when interest rates make holding a non-yielding claim costly.
• Deviation that widens while supply also falls. Redemptions are working and the market is still selling, which points at doubt rather than plumbing.
• Deviation that widens while the mechanism issues more of a paired token. The reflexive pattern described in the article on algorithmic designs.

What a depeg does downstream

Stablecoins are collateral and quote currency across much of the market, so a deviation does not stay in one place. Lending systems price collateral through an oracle, so a stablecoin marked below a dollar can push borrowers toward their liquidation threshold, and one marked at a hard-coded dollar when the market disagrees creates the opposite problem of positions that should be liquidated and are not. Both errors have caused losses.

In an automated market maker pool of two supposedly equal stablecoins, a depeg drains the sound asset and leaves liquidity providers holding the impaired one, which is impermanent loss in its least reversible form. Trading venues quoting pairs against the affected token see spreads widen across everything, which is why unrelated assets appear to move during a stablecoin event.

Reading the numbers here

Peg deviation is the direct measure, best read together with 24-hour volume and on-chain venue volume, since a deviation on trivial volume and one on heavy volume are different events. Circulating supply shows whether redemption is actually processing, and turnover shows how much of the outstanding stock changed hands. None of these figures forecasts anything; they describe a state, and the same state has been followed by both full recovery and permanent failure in different cases.

The next article moves from stability to use: how stablecoins function as a payment rail and how that compares with card networks and correspondent banking. The stablecoins page tracks deviation across tokens, and incidents records past depeg events with their sequence and resolution.