Explainer: what happens when a stablecoin loses its peg

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A stablecoin is designed to hold a steady value, usually one US dollar. That target is called the peg. The mechanism that keeps the peg depends on the design: fiat-backed stablecoins hold reserves and let approved users redeem tokens for dollars; crypto-backed stablecoins lock more collateral than they issue; algorithmic designs adjust supply.

A depeg happens when the market price moves meaningfully away from the target. Common triggers include doubts about reserves, a pause in redemptions, a sharp fall in the value of collateral or a rush of holders selling at once.

When a depeg starts, arbitrage traders matter. If a token trades below one dollar and can be redeemed for one dollar, buying and redeeming it earns a profit and pushes the price back up. If redemptions are slow or restricted, that correction weakens.

For readers, the useful questions are simple: what backs the stablecoin, who can redeem it, how often reserves are reported, and what happened in previous periods of market stress.