Key takeaways
Stablecoins are approaching a market cap of $300 billion, yet adoption remains limited due to concerns regarding depegging, collateral, and trust.
Instances of stablecoins depegging, like NuBits (2018), TerraUSD (2022), and USDC (2023), have highlighted vulnerabilities in both algorithmic and fiat-backed models.
The fall of TerraUSD resulted in approximately $50 billion in value being lost, highlighting the systemic weaknesses inherent in algorithmic designs.
Yala’s Bitcoin-backed YU lost its peg in 2025 due to an exploit, emphasizing challenges related to thin liquidity and cross-chain security.
Stablecoins have just surpassed a significant milestone, with their total market capitalization exceeding $300 billion. As of October 6, 2025, CoinMarketCap reports approximately $312 billion.
Despite significant growth, stablecoins have yet to attain widespread adoption. A key reason for this is the recurring instances of these tokens losing their peg to their underlying assets, whether fiat currencies like the US dollar, commodities like gold, or even other cryptocurrencies.
This article explores real-world examples of stablecoin depegging, the reasons behind it, the associated risks, and what issuers can do to mitigate these occurrences.
Historical overview of stablecoin depeggings
Instances of stablecoin depegging have frequently revealed flaws in the design of these assets. Early incidents, such as the collapse of NuBits in 2018, demonstrated how fragile unbacked algorithmic models can be. Even Tether’s USDt (USDT) momentarily dipped below $1 in both 2018 and 2022, spurred by market panic and liquidity issues, which intensified concerns over its reserves.
A major collapse occurred in May 2022, when TerraUSD — an algorithmic stablecoin — disintegrated after a surge in redemptions caused a bank-run-like scenario. Its companion token, LUNA, entered hyperinflation, erasing nearly $50 billion in market value and reverberating through the larger crypto market.
Fiat-backed stablecoins have also experienced depegging. USDT briefly fell to $0.80 in 2018 due to fears over solvency, while USDC (USDC) lost its peg in 2023 following the collapse of Silicon Valley Bank, illustrating that even fiat reserves are not immune to traditional banking risks. Dai (DAI) and Frax (FRAX), both partially backed by USDC, also dipped during this time, heightening concerns about reserve interconnections within the market.
These events showcase liquidity deficiencies, diminishing trust, and systemic risks that continue to pose challenges for stablecoins, even as the market approaches the $300 billion milestone.
Did you know? Most depegging events occur when liquidity pools are insufficient. Large sell-offs can drain available liquidity, complicating recovery efforts. The imbalance in Terra’s Curve pool in 2022 and Yala’s limited Ether (ETH) pool in 2025 demonstrated how restricted depth can amplify market shocks.
Case study: The TerraUSD collapse
The May 2022 collapse of TerraUSD (UST) served as a significant setback for the crypto market, initiating a ripple effect across the industry and highlighting the vulnerabilities of algorithmic stablecoins. Unlike traditional fiat-backed counterparts, UST attempted to sustain its $1 peg through an arbitrage mechanism involving its sister token, LUNA.
The adoption of TerraUSD was bolstered by the Anchor protocol, which provided unsustainable, subsidized yields of nearly 20% for UST depositors. As concerns surrounding this model escalated and the crypto markets weakened, confidence dwindled, triggering a bank-run-like spiral. Large, institutional investors were the first to exit, exacerbating UST’s depeg. The initial signs appeared on May 7, 2022, when two significant wallets withdrew approximately 375 million UST from Anchor.
This initiated a substantial wave of conversions from UST to LUNA. Within three days, LUNA’s supply surged from about 1 billion to nearly 6 trillion, while its price plummeted from roughly $80 to almost negligible, completely severing UST’s peg. The crash exposed significant flaws in decentralized finance (DeFi), from unrealistic yield models to the detrimental effects on smaller investors who often lacked timely information.
Did you know? Stablecoin depeggings tend to spiral in panic situations. During the UST collapse, social media activity and forum discussions likely accelerated a rush of withdrawals. The speed at which confidence dissipated illustrated how rapidly fear can circulate in crypto, much faster than in traditional financial systems.
Case study: Yala’s YU stablecoin
In September 2025, Yala’s Bitcoin-backed stablecoin, YU, experienced a depegging incident following an attempted attack. Blockchain company Lookonchain reported that an attacker exploited the Yala protocol by minting 120 million YU tokens on the Polygon network. The attacker subsequently bridged and sold 7.71 million YU tokens for 7.7 million USDC across the Ethereum and Solana networks.
By September 14, 2025, the attacker had converted the USDC into 1,501 ETH and distributed the assets across multiple wallets. As reported by Lookonchain, the attacker continued to hold 22.29 million YU tokens on Ethereum and Solana, with an additional 90 million YU remaining on the Polygon network, which had yet to be bridged.
The Yala team assured that all Bitcoin (BTC) collateral was secure, yet YU still failed to regain its peg. They disabled the Convert and Bridge functions and commenced an investigation alongside security partners.
This incident illuminated a critical vulnerability. Despite possessing a market cap of $119 million, YU had exceptionally low on-chain liquidity, rendering it vulnerable to such exploits. By September 18, 2025, YU had regained its peg on DEXScreener.
Why stablecoins fail to hold their $1 peg
Stablecoins strive to maintain stable prices, but historical events demonstrate that they can lose their $1 peg under stress. Failures often stem from design flaws, market sentiment shifts, and external pressures that expose vulnerabilities in even the most robust systems. Key reasons for depegging include:
Liquidity shortages: When trading pools are underfunded, large sell orders can trigger significant price declines. Yala’s limited Ether pool and Terra’s Curve swaps illustrate how inadequate liquidity can drive instability.
Loss of trust and runs: Panic can instigate bank-run scenarios. Once confidence wavers, massive withdrawals can drive prices downward, and social sentiment or volatile market reactions may intensify the spiral.
Algorithmic flaws: Mechanisms employing mint-burn strategies, like Terra’s UST, can collapse when redemptions exceed control measures. Exploits or market shocks can destabilize these fragile structures.
External pressures: Broader crises, including bank failures, hacks, or economic downturns, can strain pegs across the marketplace, increasing volatility and systemic risks.
Did you know? To avert future depegs, projects are trialing proof-of-reserves, over-collateralization, and real-time audits. These innovations signal a shift from algorithmic theories to transparent, trust-enhancing mechanisms, although investors understand that $1 stability is never fully guaranteed in crypto.
The risks investors can’t ignore
Stablecoins aim to provide safety, yet when they lose their peg, they pose significant risks to investors and the broader crypto ecosystem. Here are some crucial risks investors should recognize:
Financial losses: Depegging can result in irreversible value loss. In the case of stablecoins, the annual risk rate is higher than that of conventional banks, escalating the potential for financial losses for investors.
Security flaws: Attacks, such as the one on Yala that resulted in unauthorized token minting, can disperse assets across blockchains, often leaving investors with minimal recourse.
Regulatory and reputational concerns: The stablecoin market is nearing $300 billion, with key players like USDT, USDC, and USDe leading. Increasing regulatory scrutiny has raised alarms about the financial stability of issuers, emphasizing how limited mainstream adoption continues to be.
Systemic impacts: The failure of a single stablecoin can instigate widespread market disruptions. For example, Terra’s collapse erased billions and destabilized interconnected DeFi systems, highlighting how interrelated risks can magnify harm across the crypto landscape.
Lessons learned from stablecoin collapses
Frequent stablecoin failures have showcased both the potential and vulnerabilities of dollar-pegged digital assets. Each downfall has revealed how liquidity gaps, weak collateral, and overreliance on algorithms can swiftly undermine trust.
To mitigate these risks, issuers should emphasize stronger collateral – adopting over-collateralized models and utilizing high-quality, liquid assets. Transparency is equally essential. Proof-of-reserves, independent audits, and clear disclosures regarding reserves and redemption policies can help reestablish confidence. Backstop funds may also absorb sudden sell-offs and stabilize the peg.
From a technical standpoint, extensive contract audits, multi-signature controls, and limited cross-chain exposure can reduce security vulnerabilities. Effective governance and regulatory alignment — under frameworks like Markets in Crypto-Assets (MiCA) regulation or US stablecoin legislation — alongside insurance coverage, can provide additional safeguards and reinforce investor trust.
This article does not offer investment advice or recommendations. Every investment and trading action carries risks, and readers should conduct their own research before making decisions.
