Stablecoins, cryptocurrencies designed to maintain a stable value relative to a reference asset like the U.S. dollar, have become a popular tool in the digital asset space, offering a perceived safe haven from the volatility typically associated with cryptocurrencies. However, the past few years have been riddled with instances where stablecoins have failed to maintain their peg, raising concerns about their stability and the risks they pose to investors.
High-Profile Depegging Events
One of the most significant stablecoin collapses was that of TerraUSD (UST) in May 2022. UST, an algorithmic stablecoin linked to the Luna token, experienced a dramatic depeg from its intended $1 value, triggering a "death spiral" that wiped out over $45 billion in market value across UST and Luna. The failure of UST was attributed to flaws in its algorithmic design, which proved unsustainable under pressure. The incident shook the crypto market and prompted increased regulatory scrutiny of stablecoins.
More recently, in September 2025, the YU stablecoin, a Bitcoin-backed asset issued by the Yala protocol, also experienced a severe depegging event. A security exploit allowed an attacker to mint 120 million unauthorized YU tokens on the Polygon network, which were then bridged to other chains and sold for USDC. This influx of unbacked YU caused the stablecoin's value to plummet from $1 to as low as $0.20. While Yala has taken steps to address the exploit and restore the peg, the incident highlights the vulnerabilities that even collateralized stablecoins can face.
Reasons Behind Stablecoin Failures
Several factors can contribute to a stablecoin's failure to maintain its peg:
- Algorithmic Instability: Algorithmic stablecoins, like UST, rely on complex algorithms to maintain their value. These algorithms can be vulnerable to market volatility and may fail to maintain the peg during periods of high stress.
- Insufficient Collateralization: Some stablecoins are backed by reserves of other assets, such as fiat currency or other cryptocurrencies. If the value of these reserves is insufficient or if the reserves are not readily accessible, the stablecoin may be unable to maintain its peg.
- Liquidity Issues: Stablecoins need sufficient liquidity to allow users to buy and sell them without significantly impacting the price. If a stablecoin's liquidity is low, even relatively small sell orders can cause a depeg.
- Security Exploits: As demonstrated by the YU depeg, security vulnerabilities can be exploited to mint unauthorized tokens or compromise the reserves backing the stablecoin.
- Loss of Confidence: A loss of confidence in a stablecoin can lead to a "bank run," where users rush to redeem their tokens, further exacerbating the depeg.
Risks for Investors
Investing in stablecoins carries several risks that investors need to be aware of:
- Depegging: The most obvious risk is that the stablecoin will lose its peg and decline in value. In extreme cases, a stablecoin can collapse entirely, resulting in significant losses for investors.
- Counterparty Risk: Stablecoins rely on centralized entities to manage their reserves and maintain the peg. There is a risk that these entities could become insolvent, be subject to regulatory penalties or otherwise fail to meet their obligations.
- Regulatory Risk: The regulatory landscape for stablecoins is still evolving, and increased regulatory scrutiny could impact the value and viability of stablecoins.
- Systemic Risk: The interconnectedness of stablecoins with other parts of the crypto ecosystem means that the failure of one stablecoin can have wider implications. Terra's collapse, for example, destabilized related DeFi systems, illustrating how interconnected risks can amplify damage across the crypto ecosystem.
Regulatory Developments
In response to the risks posed by stablecoins, regulators around the world are increasingly focusing on stablecoin regulation. In the United States, the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) was signed into law in July 2025, establishing a regulatory framework for payment stablecoins. The GENIUS Act requires stablecoin issuers to hold at least one dollar of permitted reserves for every one dollar of stablecoins issued and subjects them to regulatory oversight.
Conclusion
While stablecoins offer potential benefits, such as price stability and ease of use, they are not without risk. The failures of UST and YU serve as stark reminders that stablecoins can and do fail to maintain their pegs, leading to significant losses for investors. Investors should carefully consider the risks associated with stablecoins and conduct thorough research before investing. As the regulatory landscape for stablecoins evolves, it is crucial to stay informed about the latest developments and how they may impact the value and viability of these digital assets.