# An Analysis of Stablecoins and Depeg Events By [0xDoki](https://paragraph.com/@0xdok) · 2024-08-12 blockchain, defi, stablecoins, depeg --- **1\. Introduction** -------------------- ### **1.1 What is Stablecoin and Depeg** Stablecoins are the epitome of financial stability in the cryptocurrency world. Unlike volatile crypto assets such as BTC and ETH, which can fluctuate by 20% within a day, stablecoins maintain their stable value by staying pegged to an asset, typically fiat currencies like the USD or commodities like gold. Stablecoins can be categorized into fiat-collateralized, crypto-collateralized, and algorithmic types: * **Fiat-collateralized stablecoins**, like USDT, work by holding a dollar in reserve for every coin issued. They dominate the market, especially on centralized exchanges. * **Crypto-collateralized stablecoins** use cryptocurrencies like ETH as collateral, often requiring over-collateralization to account for the volatility of the underlying assets. * **Algorithmic stablecoins** maintain their peg through smart contracts that adjust the coin supply based on demand, minting new coins when prices rise and burning them when prices fall, thus keeping the value stable without large reserves. A stablecoin works well when it maintains its 1:1 peg. However, stablecoins are not risk-free. If the ratio deviates from this stable value and the stablecoin no longer trades at its predetermined peg value, a depeg event occurs. Depeg events can lead to market panic, undermine user trust, cause substantial financial losses, making the financial ecosystem very unstable. In this regard, stablecoin investors should be aware of the risks and the peg mechanics, while stablecoin providers should maintain the peg to ensure reliability and sustain user confidence. ### **1.2 Why Depeg Happens** Stablecoins can depeg for several reasons. The most common cause is market volatility. If a sudden event occurs and the demand for a stablecoin suddenly spikes or drops while there isn’t enough liquidity to handle the purchase or redemption, the coin depegs. Another common cause is inadequate collateralization. Many stablecoins aim to keep a 1:1 ratio with their collateralized assets. If a stablecoin isn’t properly backed, it’s more vulnerable to depeg during tough market times. Other depeg causes include technical issues, algorithmic failures, network congestion, and operational failures. However, not every stablecoin will depeg. Stablecoins with strong collateralization, robust algorithms, and effective risk management strategies are better equipped to maintain their pegs. **2\. Overview and Selected Case Study** ---------------------------------------- ### **2.1 Major Stablecoins and Historical Instances of Stablecoin Depeg** This section examines the performance of major stablecoins. The graph below shows the top 4 stablecoins (DAI, BUSD, USDT, USDC) by market cap and market adoption, and their prices over time from January 1, 2022 to the present.  ![](https://storage.googleapis.com/papyrus_images/99a93dfb67cdad43f90794f5d4ebe52d.png) Stablecoins' (DAI, BUSD, USDT, USDC) Price over Time It can be observed that BUSD, USDC, and DAI occasionally experience fluctuations, while USDT remains relatively stable with minor changes.  Here are some of the **most influential incidents of stablecoin depeg** events: * **May 2022 - TerraUSD (UST)**: UST, an algorithmic stablecoin without reserves, lost its peg after large-scale withdrawals and massive selling. The price of its sister coin, Luna, plummeted from nearly $90 to below $0.00015 within a few days. The failure of these previously highly valued coins led to massive financial losses for users. The founder, Do Kwon, was later arrested on charges related to fraud and financial misconduct in connection with the collapse of the Terra ecosystem. * **March 2023 - USDC, DAI & USDT**: USDC and DAI temporarily lost their pegs due to the bankruptcy of Silicon Valley Bank (SVB) and two other US banks. USDC dropped over 12% after revealing $3.3 billion of its reserves were at SVB, and DAI’s value also dropped due to its reliance on USDC. Later, the Federal Reserve’s intervention helped both stablecoins regain their pegs. During this period, demand for USDT surged, causing its price to rise. (The event is represented by the lowest point of the chart shown above.) * **March & July 2024 - BUSD**: In March 2024, BUSD experienced a price spike after the U.S. Securities and Exchange Commission (SEC) claimed that the issuance of BUSD violated U.S. securities laws and restricted its issuer Paxos from minting new tokens. In July 2024, Binance announced it would gradually end support for minting new BUSD tokens in response to ongoing regulatory pressures. Due to the inability to issue new BUSD, the market demand for existing BUSD increased, leading to a temporary price surge. (These two events correspond to the two peaks shown in the chart.) ### **2.2 Case Study: ezETH’s Depeg** **Background** While the stablecoins discussed earlier are among the top in terms of market cap and adoption, less widely used stablecoins are often easier to experience a depeg event. These coins can be vulnerable due to factors such as insufficient liquidity and operational mishandling. One such example is ezETH. ezETH is a stablecoin pegged 1:1 to WETH and issued by Renzo, the second-largest liquid restaking protocol by TVL. On April 23-24, 2024, Renzo’s liquid restaking token ezETH lost its peg. The chart below shows the price trend and price discount percentage of ezETH on that day. The price from DEXes dropped to around 0.8 at 2:45AM and the discount rate went to more than 15%, clearly indicating a depeg started around 2:45AM. According to the chart,  the price was not fully recovering to the 1:1 by the end of the day.  ![](https://storage.googleapis.com/papyrus_images/053d059060d2134128d06faaf6dad2c8.png) ezETH's Price over Time ![](https://storage.googleapis.com/papyrus_images/e4f3094f06c833e8ffb164f6374dc3ab.png) ezETH's Dsicount Percentage over Time Several reasons for the public anger, massive withdrawals, and subsequent depeg of ezETH: 1. **Pie Chart Error**: Renzo’s official token distribution pie chart had serious mistakes, causing investors to doubt the token's safety and Renzo’s professionalism. 2. **Binance Launchpool Issues**: Users of Binance Launchpool staked BNB for 6 days and received a 2.5% share of ezETH on April 30, while Renzo's native users, who staked for over two months, only got their tokens on May 2, with just a 5% share. Native users of Renzo were very upset. They believed they deserved more earlier token distribution as long-term supporters, rather than seeing short-term participants benefit first. 3. **No Unstaking Option**: At that time, Renzo didn't have a way for users to unstake their ETH. ezETH holders had to use DEXs to swap for ETH. Renzo introduced an unstaking mechanism a month later, but the delay had already caused significant loss. **Impact of the Announcement: Rush to Sell and Depeg** After the airdrop and Binance Launchpool announcement details were announced, market panic started and many people rushed to sell their ezETH. The price of ezETH began to depeg from WETH. As observed from the chart below, massive selling caused the proportion of ezETH in several DEX liquidity pools to largely exceed the normal proportion. Within 15 minutes after the start of the depeg, liquidity pools on Ethereum and L2 chains like Arbitrum were drained, hitting a WETH/ezETH ratio of 3%, meaning that ezETH dominated the pool and WETH was about to run out. This depeg situation lasted about an hour. ![](https://storage.googleapis.com/papyrus_images/729be5f3093f82332bf0d01433976a6b.png) Pool Composition (Percentage of ezETH and ETH) in Balancer ezETH/WETH Pool on Ethereum ![](https://storage.googleapis.com/papyrus_images/cbdcefb1313eafd48a07c0c315783a8e.png) Pool Composition (Percentage of ezETH and ETH) in Balancer ezETH/ETH Pool on Arbitrum **Worsen the Scenario: Leverage and Liquidations** The depeg of ezETH triggered widespread liquidations across multiple lending platforms and leveraged platforms, such as Gearbox and Morpho Labs, where users used ezETH as collateral for borrowing ETH.  ![](https://storage.googleapis.com/papyrus_images/41949883ba1b11ed978cebac52207c63.png) ezETH sold in Liquidations over Time on Morpho and Gearbox The chart on the right indicates that during the peak period of the depeg crisis, lots of liquidations occurred on Morpho between 2:30 AM and 2:50 AM, and on Gearbox between 2:45 AM and 3:05 AM. The chart below shows that Morpho had lots of liquidations happened right at the beginning of the depeg. At this point, the depeg was at its worst, and the liquidation price was around 0.85. On the other hand, substantial liquidations in Gearbox did not occur until about 20 minutes into the depeg. By then, the worst of the depeg was over, and the liquidation price was around 0.9. ![](https://storage.googleapis.com/papyrus_images/e6c54c07fb429bceb9bd3088222ce633.png) Volume/Price of Liquidations over Time on Morpho and Gearbox The chart below shows that on that day, the liquidation of ezETH on Gearbox led to serious PnL losses for users. In less than an hour, it caused users around 5 million dollars loss in total. ![](https://storage.googleapis.com/papyrus_images/ac349c6719347d77788a62b0e9fc4e3d.png) ezETH Liquidation PnL over Time on Gearbox Users who had used ezETH as collateral, especially those with high leverage, experienced substantial losses during the depeg period. The instability of ezETH combined with leverage significantly amplified their financial risk, leading to severe liquidations. **Capitalize on Market Turmoil: Arbitrage Opportunities** Some traders took advantage of the chaos to make profits by seizing arbitrage opportunities. The chart below shows that massive selling and liquidations was met with corresponding buying of ezETH by speculators. Speculators bought ezETH at low prices during the depeg and sold it when prices recovered, which brought them large amount of profit. LookOnChain reported that a whale purchased 2,499 ezETH with 2,400 ETH (approximately $6.98 million), netting 99 ETH in profit. Another speculator bought 4,221 ezETH with 4,099 ETH and realized a profit of 121.65 ETH (approximately $395,400) within about two hours. ![](https://storage.googleapis.com/papyrus_images/e8f0b45f3431be99d490856db52bb0d5.png) Buy and Sell Volume of ezETH over Time **3\. Conclusion** ------------------ Stablecoins are designed to provide stability in the volatile cryptocurrency market, acting as a safe haven for investors. However, as demonstrated by past events like the TerraUSD (UST) collapse and recent issues with USDC and BUSD, stablecoins are not immune to risks and challenges. These depeg events reveal vulnerabilities due to market volatility, design flaws, and liquidity issues. The ezETH case study highlights that stablecoins with less market adoption also face severe depeg issues. Factors such as insufficient liquidity and operational mishandling can trigger significant depeg events, and leverage can amplify these risks, leading to broader financial damage. However, risks sometimes bring opportunities. In conclusion, while stablecoins offer significant advantages in the cryptocurrency market, their stability is not absolute. Understanding these risks and monitoring the stability of stablecoins are essential for navigating the digital asset landscape effectively. As the cryptocurrency market continues to evolve, both issuers and investors must work together to mitigate risks and maintain trust in these essential financial instruments. --- *Originally published on [0xDoki](https://paragraph.com/@0xdok/stablecoinsanddepeg)*