Depeg

A stablecoin’s price is set by trading, like any other token’s. What usually holds it at a dollar is the issuer’s promise to pay one for each token: its direct customers can trade on any gap between that dollar and the market’s price, which pulls the price back. When the issuer stops paying, or people doubt it can, the pull weakens and the price can slide.

How a depeg ends depends on what’s behind the token:

• Reserves that hold. In March 2023, Circle disclosed that 3.3 billion dollars of USDC’s reserves, about 8%, were stuck at Silicon Valley Bank, which had just failed, and it stopped paying out for the weekend. USDC traded as low as 86 cents, according to the Federal Reserve. On Sunday, US authorities said the bank’s depositors would have access to all their money; on Monday, Circle resumed payouts and USDC was back at a dollar. Whoever sold that weekend sold for less; whoever waited lost nothing.
• A peg held up by another token. TerraUSD was an “algorithmic stablecoin”, in the SEC’s words, meant to keep its dollar value by being exchangeable for another token from the same company. In May 2022 it lost its peg, and it and its sister tokens “plummeted to close to zero”, wiping out 40 billion dollars in market value, according to the SEC.
• A copy without its backing. A bridged token can depeg on its own. After Multichain’s bridges were drained in July 2023, the bridged USDC on Fantom traded at about 50 cents, according to DL News.

A depeg is counterparty risk showing in the price: a stablecoin is worth what stands behind it, and only while it can be paid out. The guide on digital dollars tells the March 2023 weekend in full.