Stablecoin depeg
The fixed value was a promise, not a law of nature
What can happen
A depeg rarely starts with a bang. It starts with somebody doubting.
The price slips a little. Whoever notices swaps out as a precaution. That makes it slip further. Whether it stops there or recovers is decided by what carries the value - and that differs from one stablecoin to the next.
| Carried by money in an account | Here the doubt is not about the mechanism but about the bank or the provider. The price falls as long as the doubt lasts - and returns once it is cleared up. |
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| Carried by deposited crypto assets | If the deposit falls fast enough, it is no longer sufficient. The doubt becomes justified as it arises. |
| Carried by a mechanism | Here there is nothing behind it. If enough holders want out at once, there is nothing to catch them. Such cases have not come back in the past. |
How that turns into a financial loss
In two ways at once, and the second also hits people who never held the token.
Directly: whoever holds a hundred tokens that should be worth a dollar and are still worth ninety cents has lost ten dollars. Immediately, without doing anything.
Indirectly: because almost every protocol builds on stablecoins, everything collateralised with them gets into trouble at the same time. Loans are liquidated because the collateral loses value. Swap venues fall out of balance. The loss spreads without a single contract having a flaw.
A documented case
DOCUMENTED CASEThe collapse of TerraUSD, May 2022
In March 2023 a stablecoin carried by bank deposits also fell below its target: after the announcement that around 3.3 billion US dollars of the reserves sat at a closed bank, USDC fell temporarily to about 0.87 US dollars - and returned to its target within a few days once the deposits were guaranteed.
The same phenomenon, two entirely different courses. That is why the question of what backs the token comes before the question of its price.
Can this be the subject of a cover?
In principle yes, and there are products that address exactly this case.
What is unusual here is that the event has no clear beginning. A contract is exploited or it is not. A price, by contrast, slips, recovers, slips further. A wording therefore has to define the case itself - by threshold, measurement source and duration.
What the wording has to answer
| From what distance to the target? | Five per cent? Ten? Without a figure there is no event, only a judgement. |
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| Measured against what? | At which venue, by what method? When it matters, different sources show different prices. |
| Over what period? | An hour below the threshold or a week? Without a duration, every brief spike counts - or none does. |
| What on recovery? | If the price recovers after the determination: does the payment stand or fall away? |
| Which token exactly? | Stablecoins exist on several blockchains and in variants. What is covered is one of them, not the name. |
| What is the payment denominated in? | The same token that is losing value, or a different one? |
Terms used here
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Three ways of holding the same price - and why they differ under pressure.
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How a protocol knows what the token is worth in the first place.
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Why a depeg hits everything built on it at the same time.