
Understanding the Failure of Stablecoins: Insights and Implications
An analysis of the reasons behind stablecoins' failures to maintain their $1 peg, featuring notable cases and the risks facing investors.
Stablecoins are getting closer to a market cap of $300 billion, but their widespread acceptance is hampered by the risks associated with depegging and the trustworthiness of their collateral.
Key Points
- The failure of stablecoins like NuBits (2018), TerraUSD (2022), and USDC (2023) highlights vulnerabilities in both algorithmic and fiat-backed models.
- TerraUSD’s crash resulted in approximately $50 billion in lost value, showcasing the fragile nature of algorithmic stablecoins.
- In 2025, Yala’s Bitcoin-backed YU lost its peg due to a security breach, emphasizing the importance of liquidity and cross-chain security.
Despite substantial growth, mainstream adoption of stablecoins remains elusive. This article examines real-life instances of stablecoin depegging, the underlying reasons, associated risks, and preventative measures issuers could undertake.
Historical Context of Stablecoin Failures
Numerous instances of depegging have revealed design flaws in these assets. For example, the 2018 collapse of NuBits exposed the fragility of unbacked algorithmic models. Even Tether’s USDt experienced temporary drops below $1 during market downturns due to liquidity concerns.
The failure of TerraUSD in May 2022 triggered a crisis, leading to a loss of $50 billion in market value and demonstrating the risks associated with algorithmic models.
The Aftermath of TerraUSD
TerraUSD’s demise revealed serious flaws within decentralized finance, after a panic-driven cycle prompted significant sell-offs. The speed at which panic spread illustrated the unique challenges posed by stablecoins compared to traditional finance.
Yala’s YU Depegging Incident
In September 2025, Yala’s stablecoin YU faced a depegging crisis due to an attack that exploited vulnerabilities within its protocol. This incident underscored the need for robust liquidity and security measures in stablecoin design.
Conclusion
Stablecoins offer an appealing stability proposition but can fail under market stress due to design flaws, trust issues, and external pressures. Adopting advanced collateral strategies and transparency measures can help restore investor confidence and mitigate risks inherent to these financial instruments.