Five Years of Stablecoin Pegging Crises: When Trust, Mechanism, and Regulation Failed

Over the past five years, the cryptocurrency industry has witnessed a sobering reality: the promise of stablecoins maintaining their pegging to real-world assets has been tested repeatedly—and has failed spectacularly in multiple scenarios. From algorithmic designs collapsing under their own weight to centralized reserves proving vulnerable to traditional financial shocks, these pegging failures have exposed fundamental weaknesses in how we’ve built this critical financial infrastructure. This comprehensive review examines the major de-pegging events from 2021 through 2025, revealing patterns that transcend individual failures and instead point to systemic fragilities that the entire industry must now address.

Understanding Pegging Mechanisms: From Algorithms to Centralized Reserve Systems

Before analyzing specific failures, it’s essential to understand that stablecoins operate on fundamentally different mechanisms to maintain their pegging to the US dollar or other reference assets. The core challenge remains constant: how do you ensure a digital token’s value stays anchored to a real-world benchmark?

Algorithmic stablecoins rely on dynamic minting and burning mechanisms, where governance tokens serve as collateral and market mechanisms theoretically maintain the peg. Fully-reserved stablecoins like USDC and USDT maintain one dollar in actual reserves for every token issued, placing their pegging confidence in centralized custody and redemption promises. Yield-generating stablecoins layer additional complexity by integrating earning strategies into the pegging structure itself—amplifying returns but also multiplying potential failure points. Each approach represents a different bet on how pegging can be maintained when market conditions become extreme.

The Algorithmic Pegging Dream: IRON Finance and Terra’s Fatal Flaw

The first major pegging collapse that shook the industry occurred in summer 2021 when IRON Finance’s mechanism failed catastrophically on Polygon. IRON was a partially collateralized stablecoin: theoretically, its pegging was supported by both USDC reserves and the value of its governance token TITAN. In theory, this hybrid approach could maintain stability. In practice, it created a “death spiral.”

When large TITAN holders began selling—driven by market volatility—the price pressure triggered a cascade of forced redemptions. Users rushed to exit their positions, which meant redeeming IRON for USDC and TITAN. But with TITAN price collapsing, the stablecoin’s reserve base eroded rapidly. The more IRON needed redemption, the more TITAN had to be minted and sold to cover those redemptions, which further crashed TITAN’s price, which made IRON’s pegging mechanism even more fragile. Within days, IRON lost its pegging entirely, eventually trading near zero. The aftermath claimed significant losses for investors, including public figures like Mark Cuban.

But IRON was merely prologue. In May 2022, the cryptocurrency industry witnessed the most catastrophic stablecoin pegging failure in history. Terra’s UST—then the third-largest stablecoin by market capitalization at $18 billion—embodied the optimistic thesis that algorithmic pegging could scale. UST maintained its pegging through a complex mechanism: it was redeemable for $1 worth of LUNA tokens through the protocol. As long as LUNA held value, the theory went, UST’s pegging to the dollar was assured.

The initial trigger was a large sell-off on Curve and Anchor Protocol. UST briefly fell below $1, creating an immediate arbitrage opportunity: buy UST at $0.99, redeem it for $1 worth of LUNA, profit. Rationally, this should have brought UST back to its peg. Instead, the opposite happened. As sell pressure accelerated, it became clear that the market had lost confidence not just in UST but in LUNA’s ability to cover redemptions. LUNA price started falling, which meant UST was increasingly backed by a depreciating asset, which eroded confidence further.

The pegging collapse accelerated into a full-blown implosion. UST fell from near-parity with the dollar to $0.30 in a matter of days. LUNA, attempting to cover the redemptions, was minted in massive quantities, causing its price to plummet from $119 to near zero. Within a week, $40 billion in market value evaporated. The Terra ecosystem simply ceased to exist as a functioning system.

These algorithmic pegging failures taught the industry a harsh lesson: mechanisms cannot create value where none exists. They can only allocate risk. Once that fundamental reality becomes apparent to market participants, no mechanism design can prevent the cascade. Investor confidence isn’t just one variable in the pegging equation—it’s the entire equation.

When Traditional Finance Threatens Pegging: The SVB and USDC Episode

With algorithmic stablecoins proven fatally fragile, attention turned to the supposedly safer alternative: fully-centralized, fully-reserved stablecoins. USDC, issued by Circle, held dollar-for-dollar reserves and promised simple, straightforward pegging. The mechanism was transparent: for every USDC token, there existed one dollar in actual assets.

Then, in March 2023, Silicon Valley Bank collapsed. Circle, which held $3.3 billion of USDC reserves with SVB, faced a sudden crisis of confidence. If the bank went under, would those reserves be frozen or lost? The market didn’t wait to find out.

USDC’s pegging broke. The token fell to $0.87 as panicked users rushed to exit. Here was a stablecoin with actual dollar reserves, yet its pegging was failing. The crisis revealed a critical insight: pegging stability depends not just on having reserves, but on having liquid reserves that can be accessed and deployed quickly when confidence falters. A dollar locked in a failing bank is not the same as a dollar in an accessible account.

Circle responded with decisive action: the company publicly stated it would cover any potential shortfall from its own balance sheet, fully backing USDC holders. The announcement, combined with the Federal Reserve’s extraordinary support measures, restored confidence. USDC returned to its dollar peg within days.

Yet the SVB episode fundamentally altered how the industry should think about pegging mechanisms. It proved that even the most traditional, most “proven” stablecoin designs remain vulnerable to real-world financial system risks. The pegging anchor itself depends on assumptions about banking system stability that cannot always hold true.

Complex Pegging Structures and Leverage: The USDe “Revolving Loan” Test

By 2024, the stablecoin ecosystem had grown vastly more complex. New projects attempted to solve previous problems with novel designs. Ethena Labs introduced USDe, which maintained its pegging through a delta-neutral strategy: long spot positions paired with short perpetual derivatives. Theoretically, this approach hedged away directional risk and allowed users to earn yield while maintaining a stable peg.

For much of 2024, the strategy worked remarkably well. USDe attracted significant capital and briefly ranked among the top three stablecoins by market capitalization. Users earned substantial yields—as much as 12% annualized—without appearing to take on commensurate risk.

This is where leverage entered the system. Sophisticated users developed what became known as the “revolving loan” strategy: deposit USDe to borrow other stablecoins, swap those borrowed stablecoins back into USDe, deposit that USDe to borrow again, and repeat. Each iteration amplified leverage. The lending platform incentives made this profitable even after accounting for borrow costs. Users stacked leverage on top of a yield-generating mechanism.

On October 11, 2024, a macroeconomic shock hit the market. The announcement of tariff policies triggered broad panic selling. During this event, multiple pegging pressure points converged simultaneously:

Derivatives traders using USDe as margin faced liquidation cascades. As their positions forcibly closed, massive selling pressure hit stablecoin markets. The “revolving loan” structures, already leveraged, faced liquidations of their own, compounding the selling. Meanwhile, blockchain network congestion—high gas fees—made arbitrage inefficient. Users who wanted to restore USDe’s pegging by minting more tokens couldn’t do so profitably. The pegging anchor held, but price deviations were severe. USDe fell to approximately $0.60 before recovering.

Critically, USDe’s underlying mechanism didn’t break. The delta-neutral structure still functioned. Reserves remained intact. But the pegging suffered from a “perfect storm”: macro shock + leverage unwinding + liquidity constraints + network congestion. Ethena responded by transparently explaining the situation, announcing plans to increase collateral ratios, and strengthening monitoring systems.

The USDe event demonstrated that modern stablecoin pegging depends not only on the core mechanism but on the entire ecosystem surrounding it—lending protocol incentives, leverage available through derivatives, network capacity, and macro conditions. A flawed design in any adjacent system can impair pegging for a stablecoin with a sound core mechanism.

Contagion Beyond Pegging: How One Stablecoin’s Collapse Triggered a Cascade

The fragility of interconnected stablecoin systems became visceral in November 2024 when the failures of xUSD and deUSD set off a chain reaction that threatened multiple stablecoins’ pegging simultaneously.

Stream, the project behind xUSD, suffered approximately $93 million in asset losses through its external fund management operations. The losses forced Stream to suspend withdrawals. With xUSD unable to process redemptions and external confidence collapsing, the stablecoin’s pegging failed catastrophically. xUSD fell from $1 to $0.23 in a matter of days.

But the impact didn’t end there. Elixir, another protocol, had lent 68 million USDC to Stream—representing 65% of deUSD’s total reserve base. Elixir had accepted xUSD as collateral on this loan. When xUSD’s value collapsed by more than 65%, deUSD’s reserve backing evaporated instantly. The protocol faced an immediate reserve shortfall, triggering a run as users rushed to withdraw deUSD. The stablecoin’s pegging broke, its price plummeting as redemptions accelerated.

Panic then spread to USDX, another yield-generating stablecoin with similar mechanisms to deUSD. Market participants couldn’t distinguish between which yield-generating stablecoins would prove resilient and which harbored similar vulnerabilities. In just a few days, over $2 billion in stablecoin market capitalization evaporated.

This cascade revealed a fundamental truth about modern stablecoin pegging: isolation is an illusion. Stablecoins are used as collateral in other protocols. They’re deployed as reserve assets in other stablecoins. They’re integrated into cross-chain bridges. A single protocol’s pegging failure, under the right conditions, becomes a sector-wide contagion event. Risk transmission occurs at speeds far faster than participants anticipated.

The Triple Test: Redesigning Pegging Mechanisms, Rebuilding Trust, and Closing Regulatory Gaps

These five years of crises have subjected stablecoin pegging to three simultaneous tests: the mechanism test, the trust test, and the regulatory test. Few designs have passed all three.

The Mechanism Test: Understanding Which Pegging Designs Actually Work

Algorithmic pegging designs have demonstrably failed. The core problem isn’t that algorithms are inherently bad—it’s that algorithms cannot add value to a system. They can only allocate risk and enforce rules. If the underlying assets lack sufficient value to absorb volatility, no algorithm can maintain a peg against reality. IRON and Terra proved this conclusively.

Fully-reserved fiat stablecoins seemed safer until SVB revealed that reserve assets themselves can be vulnerable to real-world financial system shocks. The pegging anchor proves only as stable as the financial infrastructure backing it.

Yield-generating stablecoins layer additional complexity onto pegging mechanisms, creating more potential failure points. The returns users earn represent real economic output—but only if the underlying strategy succeeds. If it doesn’t, the yields evaporate and losses appear. The USDe incident showed that yield-generating designs can amplify leverage risks if adjacent ecosystems enable it.

The Trust Test: Confidence as a Pegging Foundation

Every stablecoin mechanism ultimately rests on an assumption: that participants will continue to believe the pegging will hold. This belief is the actual foundation supporting the peg.

SVB demonstrated that trust in pegging requires tangible evidence of redemption capacity. Transparent communication of reserves, rapid demonstration of backup plans, and clear custody arrangements matter enormously. Circle’s decisive communication restored USDC’s pegging within days because the market believed the backing was real.

Conversely, when trust erodes, no mechanism can hold a peg. Terra’s death spiral occurred because market participants lost confidence that LUNA could back UST redemptions—a rational assessment that no mechanism could override.

The Regulatory Test: Building a Framework for Sustainable Pegging

Global regulators have begun treating stablecoin pegging as a systemic risk requiring oversight. The EU’s MiCA framework explicitly prohibits certain algorithmic stablecoin designs, requiring “reserve-backed” stablecoins with specific capital and liquidity requirements. US regulators, through draft legislation like the GENIUS Act, are attempting to establish similar requirements: minimum reserve levels, rapid redemption guarantees, and regular audits.

These regulatory approaches represent significant progress toward stabilizing stablecoin pegging frameworks. However, gaps remain. Cross-border nature means no single nation’s regulation fully addresses the issue. Complex pegging mechanisms still outpace regulatory understanding. Disclosure standards remain inconsistent. The allocation of responsibility between issuers, custodians, and redemption agents remains ambiguous.

The Path Forward: Technology, Transparency, and Stronger Pegging Frameworks

The five-year period from 2021 to 2025 has forged a new understanding of what maintaining stablecoin pegging actually requires.

On the technology front, projects are strengthening pegging mechanisms proactively. Ethena has increased its collateral ratios and implemented enhanced monitoring to absorb volatility. Projects are developing multi-asset reserve structures to reduce dependence on any single asset class. Cross-chain pegging mechanisms are being improved to reduce arbitrage friction.

On the trust front, the industry is moving toward radical transparency. On-chain audits are becoming standard. Real-time reserve disclosure is increasingly available. The reputational cost of pegging failures has created strong incentives for protocols to err on the side of overcollateralization and conservative design.

On the regulatory front, frameworks like MiCA are establishing minimum standards for pegging mechanisms, reserve adequacy, and disclosure. As standards converge globally, the business case for unsustainable pegging designs weakens.

The cryptocurrency industry’s relationship with stablecoin pegging has evolved from naive optimism—“our algorithm will maintain the peg!”—to mature realism: pegging requires mechanical soundness, genuine trust, and regulatory alignment.

The focus is shifting decisively away from “how do we grow stablecoin adoption as quickly as possible?” and toward “how do we build stablecoin systems that can genuinely maintain their pegging through severe market stress?” That reorientation is painful but necessary. Only stablecoins that can actually sustain their peg will ultimately support the next wave of cryptocurrency adoption. The crises of 2021-2025 have been expensive tuition in that fundamental lesson, but the lesson has clearly been learned.