$60 Billion Lost in Pegging Failures: 5 Stablecoin Crashes That Shook Crypto

Stablecoin pegging failed five times (2021-2025), erasing $60 billion. IRON, UST, USDC, USDe, and xUSD crises exposed pegging flaws. Each collapse proves stablecoin pegging requires three pillars: mechanism integrity, market confidence, and regulation—any failure triggers catastrophic de-pegging spirals.

The Algorithmic Pegging Death Spiral: IRON Finance

The first major pegging failure that exposed algorithmic stablecoin vulnerabilities occurred in summer 2021 with IRON Finance on Polygon. IRON utilized partial collateralization pegging: partly backed by USDC and partly by TITAN governance token value through algorithmic dependency. This hybrid pegging mechanism created a fatal structural weakness.

When large TITAN sell orders destabilized the token price, major holders began exiting, triggering a classic pegging death spiral: IRON redemptions forced minting and selling more TITAN, which crashed TITAN price further, which destroyed IRON’s pegging ability even more. This feedback loop represents the fundamental flaw in algorithmic pegging—once the internal asset supporting the peg plummets, the mechanism has virtually no repair capacity.

On the day TITAN collapsed, even prominent American investor Mark Cuban suffered losses. More importantly, it marked the first time the market realized algorithmic pegging is highly dependent on market confidence and internal mechanisms. Once confidence collapses, preventing the pegging death spiral becomes nearly impossible.

The IRON Finance pegging failure established a critical lesson: algorithms cannot create value, they can only allocate risk. When the risk allocation breaks down under stress, pegging mechanisms fail catastrophically.

LUNA’s $40 Billion Pegging Catastrophe

In May 2022, the cryptocurrency world witnessed history’s largest stablecoin pegging collapse when Terra’s UST and sister coin LUNA both crashed. UST, then the third-largest stablecoin with $18 billion market cap, was considered algorithmic pegging’s success story.

The pegging mechanism worked through arbitrage: if UST traded below $1, users could burn 1 UST to mint $1 worth of LUNA, profiting from the difference while restoring the peg. Conversely, if UST exceeded $1, users could burn $1 of LUNA to mint 1 UST. This bidirectional pegging relied entirely on LUNA maintaining value.

In early May, massive UST sell-offs on Curve and Anchor caused pegging to slip below $1, triggering sustained exchange runs. UST quickly lost its dollar peg, plummeting from $1 to under $0.30 within days. To maintain pegging, the protocol issued enormous LUNA quantities to redeem UST, resulting in LUNA price collapse.

Within days, LUNA crashed from $119 to near zero, obliterating nearly $40 billion in market value. UST dropped to pennies, and the entire Terra ecosystem vanished within a week. The scale of this pegging failure was unprecedented, affecting millions of investors globally and triggering the “crypto winter” of 2022.

LUNA’s demise forced the industry to confront harsh realities about algorithmic pegging:

· Pegging mechanisms are highly susceptible to entering irreversible spiral structures under extreme conditions

· Investor confidence is the only trump card supporting algorithmic pegging, and it’s the easiest to fail

· No amount of marketing or adoption can save fundamentally flawed pegging design

This catastrophic pegging failure prompted global regulators to include “stablecoin risks” in compliance considerations for the first time. The United States, South Korea, and European Union subsequently imposed strict restrictions on algorithmic stablecoins, with many jurisdictions effectively banning algorithmic pegging mechanisms.

USDC’s Brief Pegging Crisis: Traditional Finance Contamination

With algorithmic pegging models discredited, many assumed centralized, fully-reserved stablecoins were risk-free. The 2023 Silicon Valley Bank (SVB) scandal shattered this assumption and revealed that even traditional reserve-backed pegging faces systemic vulnerabilities.

When SVB failed, Circle admitted to holding $3.3 billion in USDC reserves with the collapsed bank. Amid market panic, USDC’s pegging briefly broke, dropping to $0.87. This represented a classic “liquidity pegging failure”—short-term redemption capability was questioned, triggering market sell-offs despite full reserves existing.

Fortunately, this pegging disruption was brief. Circle quickly issued transparent announcements promising to cover any potential shortfall with corporate funds. Ultimately, USDC re-established pegging after the Federal Reserve announced deposit protection measures.

The SVB incident demonstrated that stablecoin pegging depends not only on reserves but also on confidence in reserve liquidity. Even the most traditional pegging mechanisms cannot completely isolate from real-world financial risks. Once pegged assets rely on traditional banking systems, vulnerability becomes unavoidable.

This crisis added a new dimension to pegging risk assessment: counterparty risk. The “anchor” of stablecoin pegging extends beyond cryptocurrency reserves to include the stability and accessibility of traditional financial institutions holding those reserves.

USDe’s False Alarm: Leverage-Induced Pegging Panic

In October 2024, the cryptocurrency market experienced unprecedented volatility, with Ethena Labs’ USDe caught in a pegging scare. Unlike previous failures, this pegging disruption didn’t indicate mechanism breakdown but rather exposed vulnerabilities in how users interact with synthetic stablecoins.

USDe maintains pegging through an on-chain Delta-neutral strategy: long spot positions plus short perpetual futures contracts. Theoretically, this pegging mechanism can withstand volatility while generating yield from funding rates. In practice, the design proved stable in calm markets, delivering ~12% annualized returns.

However, some users developed “revolving loan” strategies: pledging USDe to borrow other stablecoins, exchanging them for more USDe, and repeating the process to layer leverage. This amplified both returns and pegging risks.

On October 11, Trump announced 100% tariffs on Chinese imports, triggering market panic. During this chaos, USDe’s core pegging mechanism remained intact, but temporary price deviation occurred due to:

Liquidation cascades: Users employing USDe as derivatives margin faced contract liquidations in extreme volatility, creating massive selling pressure that temporarily broke pegging.

Leverage unwind: “Revolving loan” structures on lending platforms faced simultaneous liquidations, amplifying stablecoin selling pressure and pegging stress.

Arbitrage breakdown: On-chain gas congestion during exchange withdrawals prevented smooth arbitrage, delaying pegging restoration mechanisms.

USDe briefly fell from $1 to ~$0.60 before recovering. Unlike asset-failure pegging collapses, this incident involved no asset disappearance—the temporary pegging imbalance resulted from macroeconomic shocks, liquidity constraints, and liquidation path congestion.

Following the incident, Ethena clarified the system functioned normally with sufficient collateral. Subsequently, they announced enhanced monitoring and increased collateral ratios to strengthen pegging resilience.

November 2024: xUSD Chain Reaction Pegging Collapse

The USDe pegging scare had barely subsided when another crisis erupted in November, demonstrating how interconnected DeFi creates cascading pegging failures.

xUSD, a yield-generating stablecoin issued by Stream, experienced pegging collapse when its external fund manager reported ~$93 million in asset losses. Stream immediately suspended platform deposits and withdrawals, and xUSD plummeted from $1 to $0.23 during panic selling—a 77% pegging failure.

The xUSD pegging collapse triggered immediate contagion to Elixir’s deUSD stablecoin. Elixir had lent 68 million USDC to Stream (65% of total deUSD reserves) with xUSD as collateral. When xUSD lost 77% of its pegging value, deUSD’s asset backing collapsed instantly, triggering massive redemptions and pegging failure.

The panic spread to USDX, a MiCA-compliant stablecoin from Stable Labs. Despite having no direct exposure to xUSD or deUSD, USDX suffered guilt-by-association pegging panic, dropping from $1 to ~$0.30 as investors fled all yield-generating stablecoins.

In days, stablecoin market cap evaporated by over $2 billion. A single protocol crisis escalated into sector-wide liquidation, revealing that DeFi’s high-frequency coupling means pegging risks are never isolated. When one stablecoin’s pegging fails, contagion threatens the entire ecosystem.

The Future of Stablecoin Pegging

These five years of pegging failures reveal a harsh truth: the biggest risk of stablecoins is that everyone assumes they’re “stable.” From algorithmic models to centralized custody, from yield-generating innovations to composite structures, all pegging mechanisms can collapse when design flaws meet trust breakdown.

The industry is evolving. Technology proactively addresses vulnerabilities—Ethena adjusting collateral ratios, protocols strengthening monitoring. Transparency improves through on-chain audits and regulatory requirements. User sophistication grows as more people examine underlying mechanisms, collateral structures, and risk exposures.

The focus is shifting from “how to grow quickly” to “how to operate stably.” Only by genuinely improving pegging resilience can the industry create financial instruments capable of supporting the next cycle.