A stablecoin trading away from $1 is a depeg, and not all depegs are equal. Some are momentary liquidity wobbles that snap back; others are the first crack in a collapse. Telling them apart fast is a core risk-management skill, because stablecoins are the cash leg the whole market settles in.

Two kinds of depeg

The critical distinction is liquidity vs solvency:

  • A liquidity depeg is temporary imbalance — a rush of selling into thin weekend books, a venue outage, a large redemption queue. The backing is fine; the market just cannot clear instantly. These usually mean-revert as arbitrageurs and redemptions restore the peg.
  • A solvency depeg is the backing itself in doubt — reserves insufficient, frozen, or, for algorithmic designs, a reflexive mechanism unwinding. These do not reliably recover, and the canonical example, the 2022 algorithmic collapse, went to zero.

Misreading a solvency event as a dip is how people get destroyed.

How pegs are actually held

A fiat-backed stablecoin holds near $1 through arbitrage and redemption: authorized parties redeem 1 token for $1 of reserves (and mint the reverse), so any gap is an arbitrage that pulls price back. The peg's strength is really the strength of that redemption pathway and the quality of the reserves behind it.

When redemption is fast and reserves are sound, depegs are shallow and brief. When redemption is gated, slow, or the reserves are questionable, a small wobble can spiral.

Warning signs to watch

The on-chain and market tells that distinguish dangerous from benign:

  1. Redemption friction — gates, pauses, or a ballooning redemption queue.
  2. Reserve doubt — opacity, exposure to risky or illiquid assets, or a known counterparty problem.
  3. Supply contraction — large, sustained net burns as smart money exits first.
  4. DEX pool imbalance — stablecoin pools skewing heavily toward the suspect coin as holders dump it for safer ones.
  5. Algorithmic design — any peg held by a reflexive mint/burn loop rather than hard reserves carries inherent depeg-to-zero risk.

Reacting

Speed and hierarchy matter. A shallow depeg on a sound, transparently-reserved coin with open redemptions is usually noise. A depeg with redemption friction, reserve doubt, or reflexive mechanics is a reason to be out first and ask questions later — in a run, the redemption window is the scarce resource.

Takeaway

A depeg is a stablecoin off $1, and the question is always liquidity or solvency. Liquidity wobbles on well-reserved coins with open redemptions tend to revert; solvency events — gated redemptions, doubtful reserves, contracting supply, reflexive designs — can go to zero. Watch the redemption pathway and reserve quality, and in a genuine run, exit first.