Stablecoin
|6 min ReadHow Stablecoins Lost Their Peg and What Comes Next
Tariq Al-Saidi
Senior Analyst
Published
Jan 16, 2026
Stablecoins were built to be the calm in crypto’s storms. Instead, the past five years turned them into the center of some of the industry’s most violent shocks. From algorithmic spirals to bank failures, from leveraged yield schemes to cross-protocol contagion, every major peg break revealed the same truth. Stability only works when the assumptions behind it hold. When they crack, the market moves fast and the damage spreads even faster.
Algorithmic Designs Face Their First Collapse
The earliest warning shot came in the summer of 2021 with IRON Finance. The IRON and TITAN model surged across Polygon, promising a partially collateralized stablecoin backed by USDC and the governance token TITAN. When large TITAN sell orders shook confidence, redemptions kicked off a chain reaction. IRON was redeemed. More TITAN was minted and dumped. TITAN collapsed. IRON lost its peg.
It was the classic death spiral. Once the internal asset meant to sustain the peg breaks down, there is little room for recovery. Even Mark Cuban was caught in the wipeout. The lesson hit hard. Algorithmic stability depended on faith, liquidity and the price of a volatile governance token. When belief breaks, the mechanism follows.
The LUNA Meltdown Ends an Era
Then came May 2022. Terra’s UST and LUNA fell apart in one of the largest collapses in crypto history. UST was the third-largest stablecoin at the time, worth eighteen billion dollars. Many saw it as proof that algorithmic stability could scale.
The illusion ended quickly. Massive withdrawals from Curve and Anchor pushed UST below one dollar. Redemptions ballooned. LUNA was minted in huge amounts to defend the peg. Its price crashed. From 119 dollars to nearly zero in days. UST followed. Forty billion dollars evaporated. Terra’s ecosystem vanished within a week.
Regulators in the United States, Korea and Europe responded by placing algorithmic stablecoins under much stricter scrutiny. The market learned a brutal but simple rule. Algorithms do not create value. They redistribute risk. And when conditions turn extreme, the spiral takes over.
Centralized Stablecoins Face Real-World Contagion
Even fully reserved stablecoins are not immune. In March 2023, Silicon Valley Bank collapsed. Circle disclosed that three point three billion dollars of USDC reserves sat inside the failed institution. Panic hit immediately. USDC slipped to eighty seven cents.
This was not a failure of collateral but a failure of confidence in liquidity. Circle promised to cover any shortfall, and the peg recovered once U.S. authorities guaranteed SVB deposits. Still, the episode showed how deeply centralized stablecoins depend on the traditional banking system. Their pegs can be shaken by risks far outside crypto.
A Frightening but Temporary Break: The USDe Shock
A more recent scare struck during the October 11 market crash. Ethena’s USDe, one of the fastest-growing stablecoins, briefly slipped to sixty cents before recovering. Unlike USDT or USDC, USDe relies on a delta-neutral strategy that pairs spot longs with perpetual shorts. The design held up during normal conditions, helped by attractive yields around twelve percent.
But users built leveraged “looping” strategies on top of it. They borrowed against USDe, bought more USDe and repeated the cycle to amplify yield. When the U.S. announced steep tariffs on China, a wave of risk-off selling hit crypto. USDe was used as collateral and as derivatives margin. Liquidations surged. Loop positions unwound. Heavy selling pressure hit the market.
Gas congestion slowed arbitrage. Redemption paths clogged. Prices slipped. Yet unlike past disasters, the underlying assets never disappeared. The peg broke because liquidity jammed under stress. Ethena later confirmed reserves were intact and raised collateral levels to reinforce the system.
Aftershocks Hit xUSD, deUSD and USDX
The fallout did not stop with USDe. In early November, another chain of failures swept through yield-based stablecoins.
xUSD, issued by Stream, suddenly collapsed after one of its external fund managers reported a ninety three million dollar loss. Withdrawals paused. Panic selling dragged xUSD from one dollar to twenty three cents.
That collapse spread to Elixir and its stablecoin deUSD. Elixir had lent sixty eight million USDC to Stream with xUSD as collateral. Once xUSD fell more than sixty five percent, deUSD’s backing evaporated. A massive run followed.
The shock then reached USDX, a regulated eurozone-compliant stablecoin. Its peg broke and plunged to thirty cents. Within days, over two billion dollars in stablecoin value vanished. One protocol’s failure ignited a chain reaction across interconnected DeFi systems. The tightly coupled structure turned a single spark into a sector-wide fire.
Stability Depends on Mechanisms, Trust and Regulation
Five years of crises reveal a simple truth. Stablecoins fail for two reasons. Their design breaks or the trust behind them collapses. Often both.
Algorithmic models rely on governance tokens and redemption mechanics. When liquidity is thin and sentiment flips, the downward spiral is unstoppable. Centralized fiat-backed coins depend on banks, custodians and the broader financial system. When those pillars weaken, the peg wobbles. Yield-based and composite stablecoins hide risks inside external strategies, leverage and off-chain exposure.
DeFi accelerates contagion. Stablecoins serve as collateral, trading pairs and clearing assets. One break quickly ripples through every protocol connected to them.
Regulation is catching up. Europe’s MiCA framework rejects algorithmic models. The United States is pushing reserve and redemption standards. But challenges remain. Stablecoins are global. Their structures are complex. The boundary between crypto and traditional finance grows blurrier each year.
Crisis Pushes the Industry Toward Reinvention
Every depeg came with losses, fear and anger. But each crisis also forced the system to mature. Ethena is raising collateral buffers. On-chain audits are becoming the default. Users are paying more attention to backing, liquidity and risk exposure.
The focus is shifting from “how fast can we grow” to “how reliably can we survive.” A stablecoin is not just a token. It is a layered trust mechanism. And only the mechanisms that withstand real stress will support the next cycle.
Crypto’s future will be built on stronger foundations. The industry now knows how fragile stability can be. The next generation of stablecoins will need to prove their resilience, not just their narrative.
Disclaimer: This document is intended for informational and entertainment purposes only. The views expressed in this document are not, and should not be taken as, investment advice or recommendations. Recipients should do their own due diligence, taking into account their specific financial circumstances, investment objectives and risk tolerance, which are not considered here, before investing. This document is not an offer, or the solicitation of an offer, to buy or sell any of the assets mentioned.