Over the past five years, we have witnessed numerous instances of stablecoins losing their peg across various scenarios.

From algorithmic models to high-leverage designs, and even chain reactions triggered by traditional bank failures, stablecoins are undergoing repeated cycles of trust restoration and crisis.

This article aims to link key incidents of stablecoin de-anchoring from 2021 to 2025, analyze their causes and impacts, and extract lessons learned for the industry.

The First Avalanche: Collapse of Algorithmic Stablecoins

The event that first challenged the narrative of "algorithmic stablecoins" was the summer 2021 crash of IRON Finance.

At that time, the IRON/TITAN model on Polygon gained widespread attention. IRON was a partially collateralized stablecoin: some backing in USDC, and some value maintained through an algorithm relying on a governance token, TITAN. When large sell-offs of TITAN caused its price instability, major holders began dumping, triggering a chain reaction: IRON redemption → more TITAN minted and sold → TITAN collapse → IRON lost its peg further.

This created a classic "death spiral":

Once the value of the supporting assets jumped off the peg, the mechanism had little room for recovery, leading to insolvency.

On the day TITAN collapsed, even well-known investors like Mark Cuban were affected. More importantly, this incident made the market realize that algorithmic stablecoins highly depend on market confidence and internal mechanisms; once confidence falters, a "death spiral" becomes almost inevitable.

Collective Disillusionment: LUNA's Zero Valuation

In May 2022, the crypto industry experienced its largest-ever stablecoin collapse, with Terra’s algorithmic stablecoin UST and its sister token LUNA both crashing simultaneously. At the time, UST was valued at around $18 billion, making it the third-largest stablecoin, and was considered an example of success.

However, in early May, large-scale selling on Curve and Anchor caused UST to break below the $1 peg, leading to ongoing withdrawals and de-pegging. UST lost its 1:1 dollar peg within days, dropping below $0.3. In a bid to re-anchor, the protocol minted大量LUNA to redeem UST, but this led to a rapid decline in LUNA's price.

In just a few days, LUNA plummeted from $119 to near zero, wiping out close to $40 billion in market value. UST's value fell to mere cents, collapsing the entire Terra ecosystem within a week. This collapse highlighted key lessons:

• Algorithmic mechanisms cannot generate intrinsic value, only risk distribution;

• Extreme market conditions can push mechanisms into irreversible death spirals;

• Investor confidence is the vital trust layer, and it is the most fragile of all.

This crisis also prompted global regulators—such as in the US, South Korea, and the EU—to begin implementing stricter controls on algorithmic stablecoins.

Not Just Algorithmic Instability: Risks in USDC and Traditional Finance Chain Reactions

While the issues with algorithmic stablecoins are evident, does that mean centralized, fully-reserved stablecoins like USDC are risk-free?

In 2023, the Silicon Valley Bank (SVB) collapse prompted Circle to admit that $3.3 billion of USDC reserves were held at SVB. Under market panic, USDC briefly de-pegged to $0.87, as doubts arose about its short-term payment capacity. This was essentially a price de-peg caused by panic, not inherent mechanism failure.

Fortunately, the swift response included transparency and assurances that funds would be replenished, and after the Federal Reserve’s deposit guarantee, USDC recovered its peg. This incident underscores that stablecoins’ “pegging” relies not only on reserves but also on confidence in liquidity.

It also shows that even the most traditional stablecoins are vulnerable to risks in the traditional financial sector. If their reserve assets depend on the banking system, their fragility is unavoidable.

A False Alarm: USDe Loop Borrowing Shock

Recently, the crypto market faced a historic crash on October 11, with stablecoin USDe caught in the chaos. Luckily, its de-pegging was temporary, not a sign of systemic failure.

USDe by Ethena Labs maintained its peg using an on-chain delta-neutral strategy, combining spot holdings and perpetual shorts, supporting a 12% annual yield. This design proved stable in calm markets.

However, traders introduced a “loop borrowing” strategy—pledging USDe as collateral to borrow other stablecoins, then converting back to USDe to increase leverage. During market turmoil triggered by US macroeconomic shocks (like the US-China trade tension escalation), multiple stress points activated:

• Participants faced forced liquidation due to margin calls;
• The layered leverage and collateralization intensified sell pressure;
• Gas fees and blockchain throughput issues hindered arbitrage and stabilization.

Consequently, USDe’s price briefly dropped from $1 to around $0.6 before rebounding. Ethena responded by clarifying liquidity positions and raising collateral ratios, enhancing system resilience.

Aftershocks: Chain Reactions in xUSD, deUSD, and USDX

The USDe incident was followed by further crises, including in November with USDX, a regulated euro-pegged stablecoin from Stable Labs, which briefly tumbled from $1 to about $0.3 after a loss of approximately $93 million reported by its external fund manager. The panic led to a suspension of withdrawals, and similar de-pegging events spread to other yield-bearing stablecoins like xUSD and deUSD.

Within days, the stablecoin sector lost over $2 billion in market value, exposing high interconnectivity and systemic vulnerabilities within DeFi. These incidents demonstrated that design flaws and interconnected risks can quickly cascade through the ecosystem.

Mechanisms, Trust, and Regulation: The Triple Challenge

Reviewing these five years of de-pegging incidents reveals a stark truth: the greatest risk of stablecoins is the false sense of security — “people think they’re stable.”

From algorithmic models to centralized reserves, to yield-enhanced or cross-chain stablecoins, mechanisms can break down or plunge to zero, often due to flawed design or collapsing trust. Stablecoins are not just products but complex trust structures built on untested assumptions.

1. Not All Pegs Are Reliable

• Algorithmic stablecoins rely heavily on governance token buybacks and destruction mechanisms. When liquidity dries up, expectations collapse, or governance tokens plummet, cascading failures occur.

• Centralized, fiat-backed stablecoins emphasize “US dollar reserves,” but their stability remains linked to traditional banking risks, custody vulnerabilities, or liquidity freezes. Even with full reserves, delivery capacity issues pose threats.

• Yield-based stablecoins: These incorporate profit mechanisms, leverage, or multi-asset pools, promising higher returns but carrying embedded risks like leverage, external fund dependencies, and management quality.

2. Rapid Risk Propagation in Stablecoins

The collapse of xUSD exemplifies how issues snowball: a problem in one protocol can cause collateral liquidation, impacting other stablecoins used as collateral or in interconnected systems, quickly spreading through DeFi.

In DeFi, stablecoins serve as collateral, trading pairs, and liquidation tools. Once peg stability falters, entire chains, decentralized exchanges, and strategy ecosystems are threatened.

3. Insufficient Regulation: The Path Forward

Current regulatory efforts in Europe and the US, such as MiCA and the US GENIUS Act, aim to address stablecoin risks. Yet, significant challenges remain:

• Cross-border nature complicates comprehensive oversight;

• The complex models and integration with real-world assets create ambiguities around financial and settlement classifications;

• Disclosure standards and responsibility delineation are still evolving, despite high transparency on-chain.

Conclusion: Crises Are Opportunities for Evolution

These de-pegging crises serve not only as warnings but also as catalysts for industry evolution towards more resilient and transparent mechanisms.

Technological improvements—such as Ethena’s ongoing adjustments to collateral ratios and monitoring tools—are enhancing stability.

Industry transparency—via on-chain audits and clearer regulatory standards—is gaining ground and fostering trust.

Moreover, user awareness is rising—more investors now scrutinize underlying mechanisms, collateral structures, and risk exposures.

The industry’s focus is shifting from rapid growth to operational stability. Only by truly improving resilience can stablecoins support the next financial cycle’s infrastructure.

Recommended reading: Post-MiCA approval, Aave plans to launch a zero-fee stablecoin platform in Europe.