Five Years of Pegging Failures: Why Stablecoins Keep Losing Their Anchor

When we talk about stablecoins, the promise is simple: they maintain a stable value. Yet over the past five years, the crypto industry has witnessed a staggering number of pegging breakdowns that revealed a fundamental truth—maintaining a stable peg is far harder than most assumed. From algorithmic designs to traditional reserve models to yield-based innovations, every attempt to lock in value has eventually faced its moment of reckoning. This isn’t just about failed products; it’s about three systemic vulnerabilities that continue to haunt the space: flawed mechanisms, fragile trust, and inadequate regulation.

When Algorithms Promised Stability: The First Collapse

The story begins in summer 2021, when IRON Finance on Polygon became a phenomenon. IRON’s pegging mechanism relied on a hybrid model: part USDC reserves, part TITAN governance token backing. The theory was elegant—the algorithm would maintain pegging through a balanced system. Reality was harsher.

When TITAN prices weakened, large holders began selling. More sales triggered more redemptions of IRON, which required minting and flooding the market with more TITAN, which crashed the token, which destroyed IRON’s ability to maintain its peg. The chain reaction was brutal and inevitable. Within days, both IRON and TITAN reached near-zero, and even prominent investors like Mark Cuban weren’t spared. The market learned its first harsh lesson: when the internal assets backing a pegging mechanism lose confidence, no algorithm can stop the death spiral.

But IRON was merely the prelude. In May 2022, Terra’s UST—once the third-largest stablecoin with an $18 billion market cap—became the centerpiece of history’s largest stablecoin collapse. UST had been marketed as the success story of algorithmic pegging. Yet a massive sell-off on Curve and Anchor in early May shattered that narrative. As UST fell below $1, panicked redemptions flooded in. The protocol minted massive amounts of LUNA to defend the peg, but this only accelerated LUNA’s collapse. In a matter of days, LUNA plummeted from $119 to near-zero, erasing $40 billion in market value. UST dropped to pennies. The entire Terra ecosystem vanished.

The industry’s collective realization was profound: algorithms cannot create value—they only redistribute risk. When confidence evaporates, no mechanism can prevent an irreversible spiral structure. And with that collapse, regulators worldwide finally recognized stablecoin risks as a compliance concern. The US, South Korea, the EU, and others swiftly banned or severely restricted algorithmic stablecoins.

A False Sense of Security: When Reserve Stablecoins Fail

If algorithmic stablecoins were vulnerable, surely centralized, fully-reserved stablecoins were safe? The 2023 Silicon Valley Bank (SVB) crisis provided a definitive answer: no.

When SVB collapsed, Circle revealed it held $3.3 billion in USDC reserves with the failed bank. Market panic erupted, and USDC’s peg momentarily cracked—falling to $0.87. This wasn’t a mechanism failure; it was a liquidity and trust failure. The reserves existed, but redemption was suddenly uncertain, triggering a market stampede.

What made this incident instructive was what followed: Circle’s transparent disclosure and the Federal Reserve’s swift deposit protection restored confidence, and USDC re-pegged. The lesson cut deeper than any algorithmic collapse: even the most traditional stablecoins cannot escape real-world financial system risks. Once pegging depends on banking infrastructure, vulnerability is baked in. The “anchor” of a stablecoin isn’t just its reserves—it’s confidence in those reserves’ liquidity and accessibility.

Innovation’s Hidden Costs: Yield, Leverage, and Cascading Failures

By 2024, the stablecoin landscape had evolved. New models emerged: yield-generating stablecoins that promised returns while maintaining pegging through Delta-neutral strategies or creative collateral arrangements. USDe by Ethena Labs exemplified this innovation. By pledging USDe to borrow other stablecoins, then swapping them back for more USDe, users created a “revolving loan” strategy—layering leverage on top of the base mechanism and extracting yield from lending incentives. The system worked smoothly in normal markets, offering 12% annualized returns.

Then came October 11, 2024. Trump announced tariffs on China, triggering market-wide panic selling. USDe didn’t suffer from a mechanism breakdown, but pegging pressures mounted from multiple angles simultaneously: derivatives positions liquidated, revolving loan structures unraveled on lending platforms, exchange gas issues prevented arbitrage from correcting the price deviation. USDe crashed from $1 to $0.6 before recovering. It was a “temporary imbalance,” as Ethena clarified, but it revealed a critical insight: leverage-dependent pegging can fracture when multiple stress points activate at once.

The aftershocks proved even more destructive. In November, xUSD—a yield-generating stablecoin issued by Stream—collapsed when its external fund manager reported $93 million in asset losses. Stream froze withdrawals, and xUSD plummeted from $1 to $0.23. But the damage didn’t stop there.

Elixir had previously lent 68 million USDC to Stream, representing 65% of its total deUSD reserves. When xUSD fell past 65%, the collateral backing deUSD evaporated instantly, triggering bank runs on deUSD. From there, panic contagion spread to other yield-stablecoins like USDX. Within days, stablecoin market capitalization evaporated by over $2 billion. A single protocol’s failure had cascaded into a sector-wide liquidation, revealing that DeFi’s interconnected structures mean pegging risks are never truly isolated.

The Three Vulnerabilities Exposed

Looking across these five years of pegging failures, a pattern emerges—three layers of systemic risk that no single stablecoin model has fully solved.

Mechanism Design: Not All Anchors Are Created Equal

Algorithmic stablecoins anchor to governance token buybacks and minting. Once confidence breaks, the model collapses instantaneously. Reserve-based stablecoins anchor to cash or equivalents, yet their pegging still depends on redemption capacity and custodian stability. Yield-based stablecoins anchor to complex strategies involving leverage, external yields, and asset portfolio management. Each model concentrates pegging risk differently—but all three have failed when stressed.

Trust: The Forgotten Pillar

Pegging ultimately rests on collective confidence. With IRON and LUNA, confidence in the algorithm evaporated. With USDC, confidence in banking infrastructure wavered. With USDe and xUSD, confidence in yield mechanisms and interconnected collateral fragmented. Every de-pegging reveals that trust is the most fragile anchor of all.

Regulation: Fragmented and Reactive

Europe’s MiCA framework explicitly denies legal status to algorithmic stablecoins, while the US GENIUS Act targets reserve mechanisms. Yet regulatory frameworks remain fragmented across borders, complex in application, and slow to adapt. Information disclosure standards are still forming. The attributes of stablecoins as financial instruments remain disputed. Cross-border arbitrage and on-chain speed outpace regulatory capacity.

From Crisis to Resilience: A Shifting Paradigm

What emerges from these five years isn’t despair but a maturing recognition. The industry is moving away from “growth at all costs” toward “stability at all costs.” Ethena is adjusting collateral ratios and strengthening monitoring. On-chain audits and regulatory transparency are becoming baseline expectations. Users are learning to scrutinize mechanisms, collateral structures, and counterparty risks rather than blindly trusting brand names.

Pegging failures aren’t anomalies—they’re evolutionary pressure. Each crisis forces the industry to build more resilient instruments, to separate pegging mechanisms from growth narratives, and to accept that true stability requires redundancy, transparency, and restraint. The next generation of stablecoins will be defined not by their returns or speed, but by how reliably they maintain their pegging through multiple stress tests. That’s the only anchor that truly matters.