What Happens When a Stablecoin Loses Its Peg? UST's $40 Billion Collapse — and USDC's 87-Cent Weekend
Have you ever held a coin that was supposed to be worth exactly one dollar — and watched it trade for 87 cents?
A stablecoin depeg is a redemption problem, not a price problem — and whether you lose money depends on three questions you can answer before you sell.
Stablecoins are the quiet plumbing of crypto. As of November 14, 2026, total stablecoin supply stood at $284.84 billion, according to DefiLlama — down from a $311 billion peak in May. Tether (USDT) holds about $175.22 billion, roughly 61% of the market, and USD Coin (USDC) holds about $69.2 billion, roughly 24%. Together, two coins control about 86% of all stablecoin value. So when one of them slips off its peg, it is not a niche event. This post walks through the two most famous depegs, works out in dollars what selling versus waiting actually cost, and gives you a four-question check to run the next time a stablecoin wobbles.
The Promise and the Price Are Two Different Things
A stablecoin's $1 price is a promise the issuer makes. The market price is what buyers will pay for that promise.
Every stablecoin keeps its peg with one of three designs. Fiat-backed coins like USDT and USDC hold reserves of cash and short-term government debt and promise to hand you a dollar for each token you return. Crypto-backed coins like DAI hold a vault of other tokens, over-collateralized so the vault is worth more than the coins issued against it. Algorithmic coins hold no hard reserves at all — they defend the peg with a mint-and-burn rule tied to a second, volatile token.
The peg itself is held up by arbitrage. If a coin backed by real reserves trades at $0.98, a trader can buy it cheap on an exchange and redeem it with the issuer for a full dollar, pocketing two cents. That buying pressure pushes the price back toward $1. The same works in reverse above the peg.
That means the peg holds only as long as redemption works — fast, at par, for anyone who wants it. Small wobbles of a fraction of a cent happen all day and mean nothing. A depeg is a meaningful, sustained deviation, and it almost always traces back to the redemption channel breaking, not to the price chart. For the basics of each design, see our stablecoins explainer.
Three Depegs, Three Different Endings
The same 13-cent drop can mean a total loss or a two-day inconvenience — the design behind the coin decides which.
UST, May 2022 — the algorithmic death spiral. UST had $18.77 billion in circulation on May 7, 2022, backed by nothing but a mint-and-burn link to its sister token LUNA. A large withdrawal from a Curve liquidity pool made UST briefly illiquid on May 7, and by the evening of May 9 the arbitrage mechanism had stopped absorbing sellers. The protocol minted LUNA to defend the peg, and LUNA's supply exploded from under 1 billion tokens to more than 5.89 trillion by May 13, while its price fell from about $80 to a fraction of a cent. The Luna Foundation Guard spent roughly $2.5 billion of its 80,394-bitcoin reserve in three days trying to stop it. UST fell below $0.10 within a week and never came back. The U.S. Securities and Exchange Commission later said the collapse wiped out more than $40 billion in market value. The Terra blockchain was halted on May 13, and in December 2025 co-founder Do Kwon was sentenced to 15 years in prison. The 19.5% fixed yield on Anchor Protocol, which had pulled in much of UST's supply, was never covered by the protocol's own lending revenue.
USDC, March 2023 — the peg that broke while the reserves were fine. Silicon Valley Bank was closed by regulators on Friday, March 10, 2023. At 10 p.m. that evening, Circle disclosed that $3.3 billion of USDC's reserves — about 8% of roughly $40 billion — was stuck at the failed bank. USDC fell to about $0.87 on Saturday, March 11, and trading volume in the USDC/USDT pair surged 828% to $6.1 billion that day as holders rushed for the exit. On Sunday evening, the Treasury, the Federal Reserve, and the FDIC announced that all depositors at the bank would be made whole. Circle resumed redemptions on Monday, March 13, processing $3.8 billion that day, and USDC was back at a dollar. The Federal Reserve's own account of the episode, published in December 2025, confirms the sequence: the reserves were intact the whole time, but the redemption channel was closed for a weekend — and that was enough to knock 13% off the price.
DAI, March 2023 — the collateral that was someone else's coin. DAI fell to about $0.90 the same weekend, not because of anything wrong with DAI itself, but because a large share of its backing sat in USDC through its peg stability module. When USDC fell, DAI's collateral fell with it. DAI recovered as soon as USDC did, and Maker later changed the collateral mix to reduce that dependence. The lesson is blunt: a crypto-backed coin is only as steady as its collateral, and if the collateral is another stablecoin, you own two pegs, not one.
The $10,000 Test: What Selling vs. Waiting Actually Cost
The same decision — sell now or wait — cost $1,300 in one depeg and $9,000 in the other.
Take $10,000 held in USDC on Saturday, March 11, 2023. Selling at the $0.87 low turned it into $8,700 and locked in a $1,300 loss. Waiting until Monday and redeeming at $1.00 returned the full $10,000. The difference between panic and patience was $1,300 — on a coin whose backing never actually fell short.
Now take the same $10,000 held in UST in May 2022. Selling at $0.10 returned $1,000. Waiting returned almost nothing, because the coin never came back. Here the same decision cost $9,000, and waiting was the expensive choice.
The reserve math explains why the two weekends were different. Circle had $3.3 billion of about $40 billion stuck at Silicon Valley Bank — 8.25% of reserves. Even if that money had vanished entirely, each USDC still had about 92 cents of backing behind it. The market printed 87 cents, five cents below even the worst case. Those five cents were the price of a closed redemption channel on a weekend, not of missing money. UST had no such floor: there were no reserves to divide, so the worst case was zero, and the market eventually agreed.
If you sold during a depeg, the sale may be a taxable event — a loss can offset other gains, but only if your records prove what you paid. Your exchange's 1099-DA reports proceeds, not basis, so your own records are what fill the gap. See our guide to crypto tax records worth keeping before tax season.
Estimate your crypto tax with the ENS Crypto Tax Calculator
Four Questions to Ask Before You Sell During a Depeg
Don't ask "will it recover?" Ask four questions that have checkable answers.
1. Can I redeem directly with the issuer?
Most holders cannot — they can only sell on an exchange. If redemption is open and at par, arbitrage puts a floor under the price. If redemptions are paused, gated behind large minimums, or limited to institutional partners, the market price is free to drift below the value of the reserves.
2. What is actually behind the coin?
Cash and short-term Treasuries have a floor you can calculate. Over-collateralized crypto has a floor that moves with the collateral. A sister token whose value is falling at the same time as the stablecoin has no floor at all — that was UST's design, and it is why the spiral had no bottom.
3. How big is the gap versus the worst case?
Do the reserve math before you trade on the price. If the market price is below the worst-case backing, you are pricing panic, not insolvency — but only if the reserve numbers are trustworthy. An attestation is a snapshot, not an audit, and a coin that will not show its reserves cannot be checked at all.
4. Is the problem the coin or the plumbing?
USDC's problem was plumbing: a bank failed on a Friday, and redemption runs through banks, which are closed on weekends. Plumbing problems have deadlines — a Monday, a regulator's statement, a reopened redemption window. Missing reserves have no deadline. Telling the two apart is the whole decision.
None of this is investment advice, and no checklist can promise a recovery. If the honest answer to all four questions is "I don't know," that itself is an answer — it means you are holding a promise you cannot verify.
What the GENIUS Act Changes — and What It Doesn't
From January 18, 2027, U.S. stablecoins get bank-style reserve rules — but no law can promise the price stays at $1.
The Guiding and Establishing National Innovation for U.S. Stablecoins Act (P.L. 119-27), signed on July 18, 2025, is the first U.S. federal law for payment stablecoins. From its effective date, January 18, 2027, permitted issuers must back every coin at least 1:1 with cash, insured bank deposits, Treasury bills with 93 days or less remaining, overnight Treasury-backed repos, or government money market funds. Issuers must publish the composition of their reserves every month, have the report examined by a registered public accounting firm, and cannot pay interest or yield to holders just for holding the coin. Issuers above $50 billion face annual audits, and holders get first claim on reserves if an issuer fails. The OCC's final rule, issued October 21, 2026, adds that covered issuers must generally redeem within two business days and keep at least 5% of reserves in demand deposits or Federal Reserve balances.
What the law does not do matters just as much. It does not stop depegs: USDC's reserves were fine in March 2023, and the coin still fell 13%, because the law governs reserves, not weekend bank closures. It does not cover foreign issuers like Tether, which fall under a separate pathway requiring a Treasury reciprocity determination. And it does not make stablecoins FDIC-insured — a stablecoin is still a private company's promise, not a bank deposit. Regulators also missed the July 18, 2026 deadline to finish writing the implementing rules, so some details are still being written as of November 2026.
Key Takeaway
A stablecoin depeg is not one event. UST's peg broke because there was nothing behind it, USDC's broke because the door to the reserves was locked for a weekend, and DAI's broke because its backing was someone else's coin. The price on an exchange tells you what sellers will take right now. The redemption channel, the reserve math, and the collateral tell you whether that price is a bargain, a warning, or a trap.
Before you sell into the next depeg, run the four questions — can you redeem, what backs the coin, how far is the price from the worst case, and is the problem the coin or the plumbing — and write the answers down before you trade on them.
A stablecoin is only as stable as its redemption channel. Check that before you trust the $1.
Estimate your crypto tax with the ENS Crypto Tax Calculator
Sources
- Federal Reserve, FEDS Notes — "In the Shadow of Bank Runs: Lessons from the Silicon Valley Bank Failure and Its Impact on Stablecoins" (Dec. 17, 2025) — federalreserve.gov
- U.S. Securities and Exchange Commission v. Terraform Labs, S.D.N.Y. complaint (Feb. 2023) — collapse wiped out more than $40 billion in market value
- DefiLlama — Stablecoin market data, accessed Nov. 14, 2026 — defillama.com/stablecoins
- Congressional Research Service — "Stablecoin Legislation: An Overview of the GENIUS Act of 2025" (P.L. 119-27)
- Circle — "An Update on USDC and Silicon Valley Bank" (Mar. 10, 2023) — archived at web.archive.org
- OCC Bulletin 2026-50 — GENIUS Act final rule (Oct. 21, 2026)
All figures are as of November 14, 2026, unless stated otherwise.
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