Depegs and Reserve Risk

A stablecoin trading at $0.998 instead of $1.00 isn't automatically a crisis — small wobbles happen constantly and usually self-correct within minutes as arbitrageurs step in. A stablecoin trading at $0.60 is a depeg, and the difference between the two isn't the size of the initial gap, it's whether the mechanism that's supposed to restore $1.00 still actually works under stress.

Why some wobbles heal and others don't

For a fiat-backed stablecoin (like one backed by cash and short-term Treasuries), the arbitrage is simple: if the token trades below $1, buy it cheap and redeem it for $1 from the issuer, pushing price back up as buying pressure hits; if it trades above $1, mint new tokens for $1 and sell them above par. This works only if redemption is actually open, actually fast enough, and the reserves are actually worth what's claimed.

The mechanism breaks down when any of three things happen: reserves are impaired (backing assets are worth less than the tokens outstanding), redemption is gated (paused, size-limited, or slow enough that arbitrage can't close the gap before panic spreads), or the design is reflexive — an algorithmic stablecoin backed by its own sister token has no external asset to redeem into at all, so a loss of confidence in the peg and a loss of confidence in the backing asset can spiral together rather than one correcting the other.

Drag the mean-reversion strength in the explorer above toward zero and watch a path stop returning to its center — that's the qualitative picture of a peg: strong reversion is a healthy stablecoin arbitraged back to $1 within minutes, and reversion collapsing to nothing is a depeg that free-falls instead of snapping back.

Worked example

A stablecoin's reserves are audited: $900 million in claimed backing against $1 billion in tokens outstanding — a $100 million shortfall, a 90% reserve ratio.

1. Rational floor. If holders believe only $900m is real and redeemable, a rational floor for the token's price is roughly $0.90, not $1.00, once this becomes public knowledge.
2. Panic dynamic. But if redemptions are first-come-first-served, the first 90% of holders who redeem get $1.00 each, and the last 10% get nothing — which makes everyone want to redeem immediately rather than hold and see, turning a 10% shortfall into a full run.
3. Outcome. The token can trade well below the $0.90 "fair value" floor during the run itself, purely on the fear of being last in line, before eventually settling near the true reserve-backed value once redemptions stop or a backstop is announced.

What this means in practice

TerraUSD's 2022 collapse (an algorithmic design with no external reserves at all) and USDC's brief 2023 dip to $0.87 (a fully-reserved token that wobbled only because some reserves were temporarily stuck at a failed bank) are the two reference cases, and they show reserve quality and accessibility matter more than the headline reserve ratio. A 100%-reserved stablecoin can still depeg temporarily if the reserves aren't liquid exactly when redemption demand spikes.