Article Summary
- Analysis of stablecoin depegging events from 2021 to 2025.
- Understanding the root causes and impacts of these events.
- Extracting lessons learned to enhance the stability of stablecoins in the future.
Introduction
Over the past five years, we have witnessed multiple instances of stablecoins depegging in various scenarios. From algorithms to high-leverage designs, and the cascading effects of traditional bank failures, stablecoins are undergoing a continuous process of trust rebuilding. In this article, we attempt to connect the significant stablecoin depegging events from 2021 to 2025, analyze the underlying causes and impacts, and explore the lessons learned from these crises.
The First Avalanche: The Collapse of Algorithmic Stablecoins
If there was one collapse that shook the narrative of “algorithmic stablecoins” for the first time, it would be the IRON Finance incident in the summer of 2021. At that time, the IRON/TITAN model on Polygon was widely popular. IRON was a partially collateralized stablecoin: part of it was supported by USDC, and another part relied on the value of the governance token TITAN through an algorithm. As a result, when some large TITAN sell orders destabilized the price, major investors began to sell, triggering a chain reaction of bank runs: IRON redemption → minting and selling more TITAN → TITAN collapse → the IRON stablecoin further lost its ability to peg. This was a classic “death spiral”: once the price of the internal asset supporting the peg plummeted, it was very difficult for the mechanism to have room for repair, leading to depegging and going to zero. On the day of the TITAN collapse, even the renowned American investor Mark Cuban was not spared. More importantly, it made the market realize for the first time that algorithmic stablecoins heavily rely on market confidence and their internal mechanisms, and once confidence collapses, it becomes difficult to prevent the “death spiral.”
Collective Disillusionment: LUNA Goes to Zero
In May 2022, the crypto world experienced the largest stablecoin collapse in history, with the implosion of both the Terra ecosystem’s algorithmic stablecoin UST and its sister token LUNA. As the third-largest stablecoin by market capitalization at the time, with a value of $18 billion USD, UST was once considered a successful example of algorithmic stablecoins. However, in early May, massive amounts of UST were sold in Curve/Anchor, gradually breaking the $1 USD mark, triggering continuous bank runs. UST quickly lost its 1:1 peg to the US dollar, and the price plummeted from nearly $1 to less than $0.3 in a matter of days. To maintain the peg, the protocol minted large amounts of LUNA to exchange for UST, causing the price of LUNA to collapse. In just a few days, LUNA dropped from $119 to almost zero, the total market value evaporated by nearly $40 billion USD, UST fell to a few cents, and the entire Terra ecosystem disappeared within a week. It can be said that the demise of LUNA made the entire industry realize for the first time that the algorithm itself cannot create value, but can only distribute risk; the mechanism is prone to entering an irreversible spiral structure under extreme market conditions; investor confidence is the only trump card, and this trump card is the easiest to fail. This time, global regulatory agencies also included “stablecoin risks” in the scope of compliance for the first time. Countries such as the United States, South Korea, and the European Union have imposed strict restrictions on algorithmic stablecoins.
Not Only Algorithms Are Unstable: Chain Reactions Between USDC and Traditional Finance
Algorithmic models are fraught with problems, so are centralized, 100% reserve-backed stablecoins risk-free? In 2023, the Silicon Valley Bank (SVB) crisis erupted, and Circle admitted that it had $3.3 billion USD of USDC reserves in SVB. Under market panic, USDC temporarily depegged to $0.87 USD. This event was entirely a “price depegging”: short-term payment ability was questioned, leading to a market stampede. Fortunately, this depegging was just a temporary panic. The company quickly issued a transparent announcement, promising to compensate for the potential difference with its own funds. Finally, after the announcement of the Federal Reserve’s decision to guarantee deposits, USDC was able to restore its peg. It can be seen that the “peg” of stablecoins is not just reserves, but also confidence in the liquidity of reserves. This storm also reminds us that even the most traditional stablecoins are difficult to completely isolate from traditional financial risks. Once the pegged assets rely on the real-world banking system, their vulnerability becomes inevitable.
A False Alarm “Depegging”: The USDe Circular Lending Storm
Recently, the crypto market experienced an unprecedented 10·11 plunge panic, and the stablecoin USDe was caught in the eye of the storm. Fortunately, the final depegging was just a temporary deviation from the price, and there was no problem with the inherent mechanism. USDe, issued by Ethena Labs, once ranked among the top three globally in market capitalization. Unlike USDT, USDC, etc., which have equivalent reserves, USDe relies on an on-chain Delta-neutral strategy to maintain the peg. In theory, this “spot long + perpetual short” structure can resist fluctuations. Facts have also proven that when the market is stable, this design is stable and supports users to obtain a basic annualized yield of 12%. Based on a mechanism that originally worked well, users have also spontaneously created a “circular lending” strategy: pledging USDe to borrow other stablecoins, then exchanging them back for more USDe to continue pledging, increasing leverage in layers, and stacking lending protocol incentives to increase the annualized yield. Until October 11, there was a sudden piece of bad news from the U.S. macroeconomy. Trump announced high tariffs on China, triggering market panic and selling. In this process, the USDe stable peg mechanism itself did not suffer any systemic damage, but under the superposition of multiple factors, there was a temporary deviation from the price: on the one hand, some users used USDe as margin for derivatives. Since extreme conditions triggered contract liquidation, there was a lot of selling pressure in the market; at the same time, the “circular lending” structure stacked on some lending platforms was also facing liquidation, further increasing the selling pressure of stablecoins; on the other hand, gas issues on the chain in the exchange withdrawal process caused the arbitrage coin channels to be blocked, and the selling pressure of stablecoins after the price, gas issues on the chain in the exchange withdrawal process caused the arbitrage coin channels to be blocked, and the selling pressure of stablecoins after the price, gas issues on the chain in the exchange withdrawal process caused the arbitrage coin channels to be blocked, and the selling pressure of stablecoins after the price, gas issues on the chain in the exchange withdrawal process. Finally, multiple mechanisms were pressed down at the same time, and market panic appeared in a short period of time. USDe temporarily dropped from $1 to around $0.6, and then it was repaired. Unlike some “asset failure” type depegging, the assets in this round of events did not disappear, but were limited by macro liquidity, liquidation paths, and other reasons, resulting in a temporary imbalance. After the incident, the Ethena team issued a statement clarifying that the system functions were normal and the collateral was sufficient. Subsequently, the team announced that it would strengthen monitoring and increase the collateral ratio to enhance the buffer capacity of the funding pools.
Aftershocks Still Lingering: The Chain Reaction of xUSD, deUSD, and USDX
Before the aftershocks of the USDe incident subsided, another crisis erupted in November. USDX is a compliant stablecoin issued by Stable Labs, which meets the EU MiCA regulatory requirements and is pegged to the US dollar at a 1:1 ratio. However, around November 6, the price of USDX quickly fell below $1 on the chain, once plummeting to only about $0.3, instantly losing nearly 70% of its value. The spark that ignited the incident was the depegging of xUSD, a yield-bearing stablecoin issued by Stream, due to an external fund manager reporting a loss of assets of about $93 million USD. Stream immediately suspended deposit and withdrawal operations from the platform urgently, and xUSD quickly fell below the peg in a panic sell-off, from $1 to $0.23. After the collapse of xUSD, the chain reactions quickly spread to Elixir and its stablecoin deUSD. Elixir had previously lent $68 million USD to Stream, accounting for 65% of the total reserves of its stablecoin deUSD, while Stream had xUSD as collateral. When the decline of xUSD exceeded 65%, the asset support of deUSD collapsed instantly, triggering large-scale bank runs and a sharp drop in prices. These bank runs did not stop there. Subsequently, market panic spread to other similar income-generating stablecoins such as USDX. In just a few days, the total market value of stablecoins evaporated by more than $2 billion USD. A single protocol crisis eventually turned into a liquidation of the entire board, which not only reveals problems in the mechanism design, but also proves the high-frequency coupling between the internal structures of DeFi, and risks are never isolated.
The Triple Test of Mechanism, Trust, and Supervision
When we look back at the depegging cases of the past five years, we will find a glaring fact: the biggest risk of stablecoins is that everyone thinks they are “stable.” From algorithmic models to centralized custody, from yield-generating innovations to composite cross-chain stablecoins, these fixed mechanisms often do not result from design problems or trust collapses. We must admit that a stablecoin is not just a product, but a mechanism credit structure, which is built on a series of “assumptions that will not be broken.”
- Not all pegs are trustworthy
Algorithmic stablecoins often rely on the governance token repurchase and destruction mechanism. Once the liquidity is not enough, or there is an expected collapse, or the governance token plummets, the price will collapse like dominoes. Fiat-backed stablecoins (centralized): They emphasize “USD reserves,” but their stability is not completely separate from the traditional financial system. Banking risks, custody risks, liquidity freezes, and policy fluctuations may erode the “promise” behind them. Even when the reserves are sufficient but the ability to cash out is limited, the risk of depegging still exists. Yield-generating stablecoins: These products integrate income mechanisms, leverage strategies, or multiple asset portfolios into the stablecoin structure, bringing higher returns with hidden risks. Their operation relies not only on arbitrage paths, but also on external custody, investment returns, and strategy execution.
- The transmission of stablecoin risks is much faster than we think
The collapse of xUSD is the most typical example of the “transmission effect”: one protocol has a problem, another uses its stablecoin as collateral, and a third uses a similar mechanism design for the stablecoin, and all are affected. Especially in the DeFi ecosystem, stablecoins are both collateral assets, counterparties, and liquidation tools. Once the “peg” loosens, it will affect the entire chain, the entire DEX system, and even the entire strategy ecosystem.
- Regulation is weak: Institutional loopholes are still being filled
At present, Europe and North America have successively launched various classification regulatory drafts: MiCA explicitly rejects the legal status of algorithmic stablecoins, and the American GENIUS Act attempts to regulate reserve mechanisms and redemption requirements. This is a good trend; however, regulation still faces the following challenges:
The transnational nature of stablecoins makes it difficult for any single country to fully regulate them.
The models are complex and the interconnection between on-chain assets and the real world is high, and no conclusion has been reached on the financial attributes and liquidation attributes by regulatory agencies.
Information disclosure has not been fully standardized, and although transparency on the chain is high, the definition of responsibility for issuers, custodians, etc. is still ambiguous.
Conclusion: Crisis Brings an Opportunity for Industry Restructuring
The stablecoin depegging crisis not only reminds us that the mechanism involves risks, but also forces the entire industry to take a healthier evolutionary path. On the one hand, the technical level is taking the initiative to respond to past vulnerabilities. For example, Ethena is also adjusting collateral ratios, strengthening monitoring, etc., in an attempt to use active management to hedge volatility risks. On the other hand, the transparency of the industry is constantly increasing. On-chain audits and regulatory requirements are gradually becoming the cornerstone of the new generation of stablecoins, which helps increase trust. More importantly, users’ awareness is also evolving. More and more users are beginning to pay attention to the underlying mechanisms, collateral structures, risk exposures, and other fundamental details of stablecoins. The focus of the stablecoin industry is shifting from “how to grow quickly” to “how to operate steadily.” After all, only by truly ensuring the ability to resist risks can we create financial tools that can truly support the next cycle.
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