Depeg Definition in Crypto

A depeg is when a pegged crypto asset stops trading at the price it is supposed to track. Most people meet this term in the context of stablecoins, which aim to hold a fixed value such as 1 US dollar. Pegs can also apply to wrapped tokens that mirror another crypto across chains. When the market price strays meaningfully from the target, the asset has depegged.

Pegged assets and how the peg works

Pegged assets are designed to copy the value of something else. Stablecoins usually target a fiat currency, while wrapped tokens mirror a coin that lives on a different blockchain. Many fiat-backed stablecoins try to hold a one-to-one reserve of cash and safe assets. Others lean on algorithms and smart contracts that expand or contract supply to nudge the price back to the target.

What counts as a depeg

A depeg means the trading price diverges from the intended reference. If a dollar-pegged coin trades at 0.98 or 1.02 dollars, it is already off the mark, even if the move looks small. The key point is that the asset is no longer matching its reference value, which can shake confidence for traders who rely on that stability.

Common triggers

Depegs can happen for several reasons that often feed into one another:

• Liquidity stress occurs when redemptions or market depth are not enough to absorb flows
• Panic selling or bank-run dynamics as holders rush to exit
• Weak collateralization, such as reserves that do not cover the circulating supply
• Smart contract bugs or exploits that break the mechanism holding the peg
• Regulatory shocks that disrupt issuance, redemption, or banking partners
• Market manipulation by large players that push the price away from the target

Temporary versus lasting depegs

Not every depeg ends in disaster. Some are brief and close quickly once redemptions resume or liquidity improves. Others are structural, where flaws in design or collateral backing lead to a deep and lasting break. The TerraUSD event in May 2022 is a well-known example of a severe and persistent depeg in an algorithmic setup.

Market impact

Stablecoins and other pegged assets sit at the center of many crypto activities. They are used as trading pairs, collateral in lending markets, and building blocks in DeFi. When a widely used asset loses its peg, price shocks can ripple into exchanges, lending protocols, and other on-chain apps. Even short depegs can force liquidations and widen spreads, while long depegs can cause substantial losses.

How projects try to keep the peg

Issuers and protocols use several approaches to defend a peg:

• Collateral models that back the token with fiat, short-term bonds, commodities, or crypto reserves
• Overcollateralization thresholds to cushion market swings are often set well above 100 percent
• Transparent reserve reporting so users can judge backing and redemption strength
• Supply adjustments and market operations, such as mint or burn flows, to pull the price back toward the target

Monitoring a depeg

Traders watch the token’s market price versus its reference, the size and flow of redemptions, reserve disclosures, and any updates from the issuer. Quick communication and clear redemption paths often help limit the damage when a peg comes under pressure.