Five Years of Stablecoin Crises: What Does Pegging Really Mean When the Market Panics?

From algorithmic experiments to yield-generating innovations, stablecoins have collapsed in almost every imaginable way. Between 2021 and 2025, we’ve witnessed billions wiped out not once, but repeatedly. The common thread? A fundamental misunderstanding of what pegging actually means—and what happens when it breaks.

The Death Spiral Nobody Saw Coming: IRON and TITAN (Summer 2021)

Before the industry learned to fear algorithmic stablecoins, IRON Finance on Polygon seemed like a genius idea. The model was deceptively simple: IRON would maintain its 1:1 peg through a hybrid mechanism combining USDC reserves with algorithmic support from the governance token TITAN.

Here’s where the logic collapsed: once large TITAN holders began selling, the price of TITAN tanked. This triggered a cascading event—IRON holders rushed to redeem their stablecoins, which forced the protocol to mint and dump even more TITAN to cover redemptions. The more TITAN flooded the market, the faster its price fell. The faster TITAN fell, the weaker IRON’s algorithmic anchor became. This wasn’t just a price decline; it was a mechanical death spiral where the pegging mechanism itself became the accelerant.

IRON didn’t just lose its peg. It collapsed from $1 to near-zero, taking even prominent investors like Mark Cuban down with it. The lesson was brutal: pegging mechanisms built entirely on internal tokens have no circuit breaker when confidence evaporates.

The $40 Billion Question: Why LUNA’s Collapse Changed Everything (May 2022)

If IRON taught the market to distrust algorithmic stablecoins, LUNA’s implosion burned that lesson into the industry’s collective consciousness. UST was the third-largest stablecoin at the time, commanding an $18 billion market cap and positioned as the gold standard of algorithmic pegging solutions.

Then, in early May 2022, the foundation cracked. A massive sell-off on Curve and Anchor protocol started the unraveling. UST’s peg to the dollar wavered, then shattered. The protocol’s emergency response—minting enormous quantities of LUNA to redeem UST and restore the peg—became a death sentence. LUNA, which had been trading at $119, plummeted toward zero. Within days, nearly $40 billion in market value evaporated.

The LUNA/UST collapse wasn’t just a financial disaster; it was a paradigm shift. The industry finally accepted three uncomfortable truths:

• Algorithms don’t create value; they only move risk around. When confidence collapses, there’s nowhere left for that risk to go.
• Pegging mechanisms are fragile under extreme stress. The very structures designed to maintain the peg often accelerate its failure.
• Investor confidence is everything—and it’s remarkably easy to lose. Once it goes, no algorithmic adjustment can bring it back.

Global regulators took notice. The US, European Union, South Korea, and others began imposing restrictions on algorithmic stablecoins almost immediately after.

When the Bank Fails: USDC and the SVB Wake-up Call (March 2023)

If algorithmic stablecoins were the first red flag, the USDC crisis was a brutal reminder that centralized, reserve-backed stablecoins aren’t immune to systemic risks either. Circle had positioned USDC as the safe harbor in crypto—fully reserved, transparent, regulated.

Then, amid banking system stress, Circle revealed it held $3.3 billion in USDC reserves with a particular financial institution that faced deposit concerns. Market panic ensued. USDC briefly de-pegged to $0.87, a shocking 13-cent discount that shook faith in the industry’s most trusted stablecoin.

But here’s the critical detail: this wasn’t a pegging failure caused by the stablecoin mechanism itself. It was a liquidity panic. When holders questioned whether their USDC could actually be redeemed for dollars, the selling pressure spiked. The peg broke not because reserves were insufficient, but because redemption capability was temporarily in doubt.

Circle’s transparent communication and the Federal Reserve’s decisive action helped restore trust, and USDC re-pegged. The episode revealed a crucial vulnerability: even the most traditional stablecoins carry embedded risk from the real-world financial system they depend on. A pegging mechanism is only as strong as the real-world infrastructure supporting it.

The Leverage Trap: USDe’s October Crisis (October 2024)

Enter Ethena Labs and USDe, a stablecoin that promised to break the mold. Instead of simple reserve backing, USDe uses an on-chain delta-neutral strategy—essentially a “long spot, short perpetual” hedge. Theoretically elegant. In practice, it worked fine… until it didn’t.

The mechanism was stable in calm markets, and users loved earning 12% annualized returns. But some users got creative. They developed a “revolving loan” strategy: borrow stablecoins using USDe as collateral, swap those stablecoins back for USDe, re-collateralize, repeat. Layered leverage on top of a pegging mechanism that was never designed to handle it.

On October 11th, a macroeconomic shock hit—new trade policy announcements triggered panic selling. Multiple systems failed simultaneously:

1. Derivatives liquidation: USDe holders using the stablecoin as margin for perpetual contracts faced forced liquidations as volatility spiked.
2. Leverage unwind: The revolving loan structures on various lending platforms faced cascading liquidations, dumping massive sell pressure on USDe.
3. Arbitrage breakdown: Exchange withdrawal delays and on-chain congestion meant price deviations couldn’t be corrected through normal arbitrage channels.

USDe plummeted from $1 to $0.60 before recovering. But here’s the critical distinction: unlike LUNA or UST, this wasn’t a pegging mechanism failure. The collateral remained intact. The issue was liquidity friction combined with extreme leverage in the ecosystem around the stablecoin.

Ethena responded by increasing collateral ratios and implementing stricter monitoring. The system functioned normally; the problem was structural fragility in how the ecosystem had built leverage on top of it.

Contagion: When One Collapse Triggers Dominoes (November 2024)

If USDe showed how leverage breaks pegging mechanisms, the November cascade of xUSD, deUSD, and USDX failures demonstrated how interconnected stablecoin risk has become.

Stream Finance’s xUSD imploded first when its fund manager reported approximately $93 million in asset losses. The protocol froze deposits and withdrawals. xUSD, which was supposed to be pegged to the dollar, collapsed to $0.23—a 77% loss.

The contagion spread with terrifying speed. Elixir Finance had lent 68 million USDC to Stream, representing 65% of its deUSD reserves. When xUSD fell past 65% of parity, deUSD’s entire collateral base was wiped out. Another yield-generating stablecoin, another supposed innovation in pegging mechanisms, suddenly became insolvent. Massive runs followed.

Then USDX, another yield-generating stablecoin, caught the panic. Over just a few days, the stablecoin market shed over $2 billion in total value.

The real revelation wasn’t that individual stablecoins failed—it was that modern DeFi structures mean stablecoin risks are never isolated. When protocols lend to each other, collateralize with each other’s stablecoins, and participate in shared arbitrage pools, a single failure point triggers systemic collapse.

The Three Pillars That Keep Getting Tested

Looking across five years of de-pegging events, three things keep failing: the mechanism, the trust, and the regulation.

On Mechanism: Pegging isn’t a single solution—it’s a series of assumptions. Algorithmic stablecoins assume governance tokens won’t crash. Reserve-backed stablecoins assume custodians and banks won’t fail. Yield-based stablecoins assume external strategies will remain profitable. Each model has failed exactly when its core assumption broke.

On Trust: Every de-pegging event is fundamentally a confidence collapse. Whether LUNA crashing 98% or USDC briefly losing 13 cents, the trigger is always the same: users stop believing the peg will hold. Once that belief shatters, no amount of technical justification brings it back.

On Regulation: Regulators are finally moving. The EU’s MiCA explicitly forbids algorithmic stablecoins. The US GENIUS Act attempts to mandate reserve requirements and redemption guarantees. But regulatory gaps remain massive. How do you regulate stablecoins that operate across borders? How do you monitor cross-chain leverage? How do you prevent contagion when DeFi protocols are interconnected?

What Comes Next

The stablecoin industry is slowly learning. Projects like Ethena are adjusting collateral requirements and monitoring systems. On-chain transparency is improving. Users are finally asking intelligent questions about how their stablecoins maintain their peg, what backs them, and what happens if that backing fails.

The era of “move fast and break things” in stablecoin design is ending. The next generation will be defined not by innovation speed but by stability resilience. Because ultimately, a stablecoin that maintains its peg only in bull markets isn’t stable at all—it’s just a levered bet that failed its most important test.

The real question isn’t whether stablecoins will survive these crises. It’s whether the industry will finally build them to withstand the next one.