Why Stablecoins Keep Losing Their $1 Peg
Stablecoins often lose their $1 peg due to liquidity gaps, flawed algorithms, and trust issues. Here's why it happens.
- Stablecoins like TerraUSD and YU have struggled to maintain peg
- Algorithm flaws and poor liquidity fuel instability
- Investor trust is key to stablecoin success
Stablecoins are designed to maintain a constant value—typically $1. They promise stability in a volatile crypto market. But history has shown us that this promise is not always kept. From TerraUSD (UST) to the more recent YU coin, several stablecoins have slipped from their $1 peg, sometimes with disastrous consequences.
The idea is simple: each stablecoin should always be worth $1. Yet in practice, this peg can be fragile. The reasons range from low liquidity and algorithmic flaws to sudden losses in investor trust.
The Role of Liquidity and Algorithms
When investors rush to redeem stablecoins, there must be enough liquidity to meet the demand. If not, the price starts to fall. This was a key issue with TerraUSD, which relied on a complex algorithm tied to its sister token, LUNA. When panic set in, the system collapsed under the pressure.
YU faced similar issues. Although smaller in scale, it revealed how even newer stablecoins are not immune to the same structural weaknesses. Algorithmic stablecoins, in particular, have proven to be vulnerable in extreme market conditions.
Trust Is the Ultimate Anchor
Stablecoins live and die by trust. Once users start doubting that a stablecoin can maintain its peg, they rush to exit—often making the situation worse. It’s a self-fulfilling prophecy: fear drives redemptions, which crashes the price, which fuels more fear.
This cycle has been seen repeatedly, and it’s a reminder that no matter how “stable” a coin claims to be, its value ultimately depends on how much people believe in it.
