Depeg
When a stablecoin's market price drops significantly below (or rises above) its target peg, typically $1.00.
A depeg is every stablecoin holder's worst fear. It happens when market confidence falters and the token trades below $1. Minor deviations ($0.998-$1.002) are normal and get corrected by arbitrageurs. A real depeg means sustained trading well below $1.
USDC experienced a notable depeg in March 2023 when Silicon Valley Bank collapsed. Circle had $3.3 billion in reserves at SVB. USDC dropped to around $0.87 before recovering to $1 within days after the government guaranteed SVB depositors. The key lesson: USDC's depeg was temporary because the underlying reserves were intact.
Algorithmic stablecoins face far worse depeg risk. Terra's UST collapsed from $1 to near zero in May 2022 because it had no real reserves backing it.
Related Terms
Peg
The target price a stablecoin is designed to maintain, typically $1.00 for dollar-pegged stablecoins.
Stablecoin
A cryptocurrency designed to maintain a stable value, usually pegged 1:1 to a fiat currency like the U.S. dollar.
Reserves
The pool of real-world assets (U.S. Treasuries, cash) held to back each USDC token at a 1:1 ratio.
Algorithmic Stablecoin
A stablecoin that maintains its peg through automated smart contract mechanisms rather than holding real-world reserves.
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This definition is provided for educational purposes. USDC.org is an independent resource and is not affiliated with Circle Internet Financial.