The Four Ways a Stablecoin Loses Its Peg

When a stablecoin trades away from its peg, the market is saying it doubts something. What it doubts determines whether the deviation closes in days or never. Four mechanisms account for essentially every episode, and they are distinguishable in real time by asking different questions.

One: reserve access

The assets exist, are high quality, and cannot be reached — held at a failed bank, frozen in a jurisdiction, or locked in a fund that has gated.

This produces a sharp deviation and a fast recovery once access is restored, because nothing about the underlying backing was ever wrong. The diagnostic question is whether the issuer has disclosed a specific, bounded blockage, and whether there is a mechanism that resolves it.

Holders who sold into this kind of deviation realised a loss that did not need to happen, which is the most common expensive mistake in this category.

Two: reserve quality

The assets are reachable and worth less than claimed — longer duration than disclosed, credit exposure that has soured, or a valuation that assumed a market that no longer exists.

This produces a slower, grinding deviation that does not close, because the shortfall is real. The diagnostic is whether the issuer can state precisely what the reserves are and have that verified independently. Vagueness at this moment is itself the answer.

Three: redemption closed

The backing is fine and there is no way to claim it. Redemption is unavailable — not yet enabled, suspended, or restricted to a class of holder you are not in.

This is the mechanism people understand least and it produces the most violent moves, because the arbitrage that normally holds the price near par requires being able to buy cheaply and redeem at full value. Remove redemption and nothing anchors the price at all.

The diagnostic is a yes-or-no question with an immediate answer: can anyone redeem this today, without permission, for the underlying. If not, the discount has no floor derived from the backing.

Four: the design never worked

The mechanism maintaining the peg depends on conditions that have stopped holding — most commonly a design where stability relies on demand for a second asset that falls precisely when the peg is tested.

This produces a deviation that accelerates rather than mean-reverting, because the corrective mechanism is itself the thing failing. The diagnostic is whether the peg depends on anyone's willingness to buy something. If it does, the peg is a market outcome rather than a redemption right.

Telling them apart while it is happening

• Is redemption open, permissionless and at par. If not, treat the discount as unbounded until that changes.
• Has the issuer named a specific, bounded problem, or issued reassurance without specifics. Specificity correlates strongly with recoverability.
• Is the deviation mean-reverting or accelerating. Reversion suggests liquidity; acceleration suggests mechanism.
• Does the peg depend on demand for another asset. If so, expect the mechanism to fail when tested rather than to defend.
• Is the discount larger on thin venues than deep ones. A venue-specific discount is a liquidity event, not a solvency one.

Why the distinction is worth money

Two of these mechanisms end with holders made whole and two do not, and they are indistinguishable on a price chart in the first hours.

Selling into an access-driven deviation converts a temporary inconvenience into a permanent loss. Holding through a design failure converts a partial loss into a total one. The questions above are the only thing separating the two decisions, and none of them require watching the price.