Stablecoin Stability Explained: Key Risks, Rewards and Depeg Events

This article was first published on Deythere.

Stablecoins are crypto tokens that are designed to maintain a stable value (usually $1). However, stablecoin stability is not guaranteed under stress. In 2025 alone, stablecoins processed around $28 trillion in real economic volume, which put them rivaling with traditional payment networks. 

History shows us that even the best stablecoins can still take a hit and lose their peg. For example, Tether’s USDT briefly dropped to $0.90 in Oct 2018 and Circle’s USDC dipped to $0.87 in March 2023.

How Stablecoins Try to Keep Their Value Stable

Stablecoins manage to keep their value level by using different mechanisms. Most stablecoins end up relying on some form of reserves or algorithm to peg the value of one coin to another asset (like the US dollar). There are different types of stablecoin systems.

The Fiat-backed stablecoins ( USDC, USDT) hold cash or other cash equivalents in reserve and let users swap coins for $1 each. The Crypto-collateralized stablecoins (like MakerDAO’s DAI) which are backed by crypto assets that are over-collateralized, and they work by using smart contracts to issue or burn tokens against the collateral held in reserve.

The Algorithmic stablecoins (e.g. the old TerraUSD or newer ones like USDe) which try to keep a peg using a supply adjustment algorithm, but don’t have any explicit collateral. As a rule, the more transparent and high-quality the reserves, the stronger the peg tends to be.

Expert voices note that the quality of reserves really does matter. The U.S. GENIUS Act (2025) for example made it mandatory for stablecoins to back each coin with liquid assets and to get audited every month to check on stablecoin stability. Yet, stablecoins can still be seen as a kind of “run-able liabilities”, where a loss of investor confidence can trigger a run on the coin.

As the Federal Reserve put it, even the well-backed coins may still be fragile when things get tough, which means that when a peg does break,  there could still be far-reaching consequences. 

Here’s the breakdown on the major stablecoin types, their peg mechanisms and associated risks.

Historical De-Peg Events: Case studies

Stablecoins have suffered from some de-pegging episodes, which have put their stability to the test. Below are some major incidents:

October 2018 (USDT depeg): Tether’s USDT briefly fell to ~$0.90 amid technical issues on Bitfinex. Investors were quick to pull their funds faster than expected, which shows that even the biggest fiat-backed coins can get shaky when they’re under pressure.

May 2022 (TerraUSD collapse): Terra’s UST crashed to near zero, losing its $1 peg and wiping out almost $45 billion in value for both UST and LUNA. The whole “burn-mint equilibrium” that Terra was using didn’t work out, and it ended up destroying confidence in algorithmic stablecoins altogether.

Mar 2023 (USDC run): After Silicon Valley Bank’s failure, Circle disclosed that $3.3 billion of USDC reserves were locked up at SVB. A sudden run pushed USDC down to $0.87. The Fed later noted that SVB’s collapse triggered a huge run on USDC redemptions. Luckily, US regulators stepped in and guaranteed SVB deposits, which helped USDC recover.

Oct 2025 (USDe volatility): Another one of these incidents was when Ethena Labs’ USDe, a supposed Ethereum-based stablecoin that offered high yields, traded at $0.65 on Binance, following global market turnoil.  

These case studies really drive home the point that stablecoin stability can break down in crises. As the Bank Policy Institute puts it, stablecoins can (and do) lose value, which undermines their visibility as means of payment.

Each of these episodes was triggered by market panic and liquidity constraints, not because of fundamental price movement in the backing asset. What can Go Wrong with Stablecoin Stability

Stablecoins, just like any other financial product, come with a host of risks:

Reserve/Credit Risk: If a stablecoin’s reserve assets lose value or face default, the whole peg can fail. USDC’s SVB exposure was a perfect example of this. Even high quality bank deposits can turn into a problem in a crisis.

Liquidity Risk (Run Risk): Stablecoins can suffer “bank run” risks. If many holders try to redeem at once, issuers might need to sell off assets at a loss or even stop redemptions. The Fed note calls stablecoins “run-able liabilities” just like bank deposits in a crisis. In 2023, the inability to get instant redemptions on exchanges meant USDC lost its peg even though Circle still had $1 in reserves.

Market Risk: Changes in interest rates or asset prices can affect the value of reserve assets. So if a coin’s reserves are mostly US Treasuries, for example, rising interest rates could lower their value, which could undercut the peg in a panic sell-off. Algorithmic coins are especially vulnerable to market risk, and the TerraUSD collapse during a crypto downturn is proof of how that can work out.

Operational/Technical Risk: When stablecoins are built on blockchains, they can be vulnerable to all sorts of technical issues: smart contract bugs, oracle failures, or hacking.  Past incidents (such as exchange outages delaying redemptions) have shown operational glitches can force depegging even without a reserve problem.

Regulatory & Legal Risk: The stability of stablecoins can be seriously impacted by changes in laws and enforcement in various countries. A country could  freeze or severely limit crypto transactions, leaving holders stuck. The ever-changing regulatory space like the US’ GENIUS Act, is trying to ensure stablecoin stability by mandating transparency and capital requirements but conflicting rules across different countries, only creates more  uncertainty.

Rewards and Use Cases of Stablecoins

Despite all these risks, stablecoins still offer a whole range of rewards and new innovations in finance

Speed of Payment: Stablecoins settle instantly (in seconds) on blockchain rails and operate 24/7 across borders. That is a huge reduction in costs and delays compared to bank transfers. Chainalysis says stablecoins can lower transaction fees and enable round the clock settlement. By the 2030s, stablecoin volumes are likely to rival Visa and Mastercard, which goes to show how efficient they are.

Store of Value and Liquidity: For traders and institutions, holding a stablecoin allows them to park value in dollars without leaving the blockchain. Tether (USDT) serves as the default reserve asset of crypto trading due to its liquidity. USDC’s transparent reserves make it a favorite among banks and hedge funds. With high liquidity, users can easily convert between crypto and fiat, and this makes trading a lot smoother.

Yield Opportunities: Some stablecoins can even offer yield as interest. Algorithmic or DeFi-oriented stablecoins may pay interest to users who hold the token. For example, Ethena USDe was designed to provide yield (though at a higher risk level). More conservatively, institutions can earn interest on the reserve assets backing a stablecoin and share that with users. This lets users earn risk free-like returns on what would otherwise be just sitting idle.

Programmability and Innovation: Stablecoins are programmable money, which means they can be embedded in smart contracts for automated payments, remittances, and financial products (loans, derivatives etc). This programmable nature is driving new use cases in DeFi and corporate treasury. Reports point out that stablecoins are being trialed for remittances and tokenized asset settlements on a large scale.

Regulatory Transition: Now that clear regulation is coming up (U.S. GENIUS Act, EU MiCA etc), regulated stablecoins can help bridge the gap between crypto and traditional finance. Circle’s USDC is being used in some bank settlement systems and partnerships (Stripe, Mastercard) indicate growth as “on-chain rail” for fiat. For compliant businesses, stablecoins offer faster, programmable payments under known rules.

In short, the rewards of stablecoins are about combining crypto’s speed with dollar-like stability and yield. Institutions can now see lower transaction costs, faster finality and programmable money that can be directly embedded into software. 

Regulation and Transparency

A big factor in stablecoin stability is having the right kind of regulatory oversight in place. As of 2025 and 2026, regulators all over the world had started to line up strict rules. For example, the US passed the GENIUS Act in 2025 which says that stablecoin issuers need to have the right kind of licence, and also that they have to keep enough cash in reserve to cover issues, and bans uncollateralized models. 

Additionally, the EU’s MiCA laws make sure that stablecoins are properly backed and that investors can get their money back when they ask for it. Globally, most of the big economies now treat stablecoins as a regulated form of payment. The aim is to strengthen stablecoin stability by making sure there’s proper transparency (audited reserves) and consumer protection.

However, there are still gaps in the regulation that are causing problems. The average retail investor often can’t redeem directly because only “qualified” institutions typically can.

This means that when things get a bit tough, the prices can end up being different from $1. Greater transparency (real-time reserve reporting) is expected in 2026, which should boost confidence. Until then, holders must rely on third-party attestations and on-chain data. Strong regulation is widely considered important for stablecoin stability and trust.

Current Market Landscape (2026)

As of mid-2026, the stablecoin market is dominated by a few players. 

Tether’s USDT still leads by far (about 60% of the market and a market cap of $187 billion), with USDC coming in second (about 24% of the market and a market cap of $75 billion).

Together,  they account for about 85-90% of the whole stablecoin market. Other coins (like PayPal’s PYUSD or Paxos’s USD, Global Dollar, etc.) are much smaller but growing in niche use-cases. Table below summarizes major fiat-backed stablecoins:

Despite the fact that a handful of stablecoins dominate the scene , the diversity of stablecoin models continues to grow (asset-backed gold stablecoins, tokenized money market funds, etc are popping up). 

Demand remains high. A 2025 Chainalysis report forecasts stablecoins could reach $719 trillion in annual volume by 2035, indicating their growing role. However, analysis shows that achieving these rewards depends critically on maintaining the peg under stress.

Expert Commentary and Analysis

Experts emphasize that no stablecoin is completely risk free. The Federal Reserve has looked at this and concluded that even stablecoins with supposedly good backing aren’t immune to risks. The Bank Policy Institute warns retail users that they might lose money if they treat stablecoins as if they were risk free or if they lend them out without realizing the risks involved. 

On the other hand, the proponents of stablecoins stress on the efficiency gains. Report notes that “excitement around growth is warranted,” due to stablecoins’ role in faster global settlement.

Industry leaders are also advising caution and due diligence. For example, Stripe notes that users tend to go for stablecoins that have clearly demonstrated they’re fully backed and can be redeemed. Regular audits and attestations do help build trust as a lot of businesses are also diversifying their holdings (only using the top-tier stablecoins). 

Yield-generating stablecoins must be evaluated carefully: the Oct 2025 USDe issue showed that high promised yields can come with a very real risk of the peg breaking.

From an investment perspective, stablecoins reward liquidity and stability (they typically don’t appreciate like other crypto). 

But the risk-reward tradeoff lies in the backbone quality: coins with transparent, high-quality backing (and regulated issuers) offer lower risk of depeg, at the cost of lower yields. Unbacked or high-yield stablecoins may offer returns but carry a high risk of losing the peg, as history confirms.

Conclusion

Stablecoin stability isn’t absolute, it is conditional. They do help reduce volatility in comparison to most other crypto and can make cross border payments a lot faster. However, they remain vulnerable to runs, reserve problems, and market stress. 

So, investors and users need to weigh the rewards (fast payments, liquidity, yields) against the risks of depegging and regulatory changes. In short, stablecoins can be relatively stable when properly managed, but they’re not immune to instability during crises. Understanding how they work, what they’re backed by and what their track record is, is key to using them safely.

Glossary

Stablecoin: A crypto that is pegged to a stable asset like the US dollar to try to minimize its price swings.

Peg: The fixed exchange value of a stablecoin (one token is usually worth about $1).

Depeg: When a stablecoin starts trading for way less than its peg (e.g. if it drops to $0.90).

Fiat backed: Stablecoins that have dollar or euro reserves held in a bank account or treasury.

Crypto backed: Stablecoins backed by volatile cryptocurrencies as collateral, often over-collateralized to maintain the peg.

Algorithmic stablecoin: A coin that uses custom math rules to try to keep its value steady, rather than holding onto actual reserves.

Reserves: Assets (cash, bonds, crypto) held by the issuer to back the stablecoin and allow redemption.

Redeem: The process of converting a stablecoin back to whatever asset it is pegged to (e.g., get $1 for one coin).

Sell-off: A situation where many holders attempt to redeem or sell a stablecoin at once, risking a depeg.

Frequently Asked Questions About Stablecoin Stability 

What is a stablecoin? 

A stablecoin is essentially a cryptocurrency that is designed to keep a steady value that usually gets pegged to a traditional currency like the US dollar. 

Why do stablecoins sometimes lose the $1 peg?

Pegs can break down quickly when there is panic in the market or if asset/liquidity issues.  If too many owners try to cash in their coins all at once (and the issuer’s reserves can’t meet demand (or if reserves lose value), then the market price can fall below $1. 

Are algorithmic stablecoins really safe to use? 

Before now, purely algorithmic stablecoins that didn’t have a full backing have consistently failed when times got tough (for example: the collapse of TerraUSD). That is because their value is based on people trusting that the math behind it is correct, which doesn’t always work out. These days, a lot of people are requiring extra collateral or just giving up on that model altogether.

How are stablecoins regulated in the first place? 

As of 2025-2026, different regions have started putting in place rules that said stablecoins have to have enough liquid assets on hand to back their value, and that they need to be able to let users cash in their coins whenever they want. There are regulations in the works, like the U.S. GENIUS Act and the EU’s MiCA rules, which aim to help keep stablecoins stable and protect people who use them.

References

Circle

Tether

Reuters

Eco

Arxiv

Disclaimer: This article is just for general info and doesn’t make any claims about what you should or shouldn’t do with your money. Investing in crypto or stablecoins can be a wild ride, so do your own research before jumping in, and be aware that regulations are always changing, and market conditions are always shifting.