When "stability" begins to fluctuate: A full review and structural analysis of the USD1 de-pegging event

Author: 137Labs

On February 23, a stablecoin named USD1 suddenly experienced a significant discount in the secondary market.

On-chain quotes briefly dropped to around 0.98 USDT, and social media quickly heated up. The project team, World Liberty Financial (WLFI), then publicly stated that this was a “coordinated attack,” emphasizing that reserves and redemption mechanisms were unaffected.

The price subsequently recovered.

But the issue has already arisen—

When a “stablecoin” starts to trade at a discount, is it just liquidity friction or a sign of cracks in the credit structure?

1. Timeline: From peg to “attack theory”

Based on reports from CoinDesk, The Block, Decrypt, Wu Says Blockchain, PANews, Chain Catcher, and others, the event roughly unfolded as follows:

1️⃣ Abnormal secondary market fluctuations

USD1 quickly fell to around 0.98 in some trading pairs

The discount lasted for a short period

Then the price recovered

Unlike the brief de-pegging of USD Coin in 2023 due to bank risks, this event did not involve a clear systemic banking shock.

2️⃣ WLFI official response

WLFI publicly stated:

This was an organized short-selling and coordinated attack

Reserve assets showed no anomalies

Redemption functions are operating normally

The 1:1 peg structure remains unchanged

This statement was later echoed by Chinese media outlets including Wu Says Blockchain and Chain Catcher.

3️⃣ Amplification on social media

The event spread rapidly on X (Twitter).

Some related tweets were deleted, fueling further market speculation. In the current highly emotional market environment, “deletion actions” are often interpreted as signals rather than accidental moves.

Thus, the question shifted from “Is the price de-pegged?” to:

Are there reserve risks?

Is there a concentrated run?

Is there insufficient disclosure of information?

2. The essence of de-pegging: liquidity issue or solvency problem?

Determining whether a stablecoin has de-pegged hinges on distinguishing two entirely different risk structures.

The first is liquidity shock. In this case, reserves remain sufficient, redemption mechanisms are intact, but due to shallow trading depth, market maker withdrawals, or concentrated sell pressure, the secondary market temporarily becomes unbalanced. Arbitrage mechanisms usually restore the price quickly.

The second is a solvency crisis. If the reserve assets are problematic, or if there is maturity mismatch or assets cannot be liquidated immediately, de-pegging is no longer just a trading fluctuation but a revaluation of the balance sheet. In this scenario, discounts tend to persist and are accompanied by delayed redemptions or loss of trust.

Based on current disclosures, USD1 appears closer to the first scenario.

It is very different from the algorithmic death spiral of TerraUSD in 2022. UST’s collapse was due to mechanism failure, whereas USD1’s peg deviation resembles a liquidity tilt over a short period.

Nevertheless, this event still holds significance.

Because the true anchor of a stablecoin is not just its reserve assets but market trust.

Once trust is questioned, prices react before fundamentals do.

3. The credit structure of stablecoins: where exactly are they “stable”?

Stablecoins are essentially the “base currency” of the crypto market.

Their credit support generally comes from three models:

Algorithmic

Collateralized

Centralized reserve-backed

USD1 belongs to a more centralized reserve structure.

The risks in this model are not from the algorithm but from:

Reserve transparency

Asset liquidity

Maturity structure

Market depth

If the market suspects reserve discounts or liquidity risks, prices often fall first. This is very similar to shadow banking runs in traditional finance—once depositors start doubting, withdrawal behavior amplifies the risk.

4. Why is the market reaction this time particularly sensitive?

The panic index was already at an extremely low level that day.

In an environment with tight liquidity:

Leverage levels decline

Risk appetite weakens

Market becomes highly sensitive to uncertainty

Stablecoins are not just trading tools; they are also the foundation of lending and liquidity.

Once discounts appear, chain reactions may include:

Lower collateral ratios

Triggering liquidations

Further leverage compression

Capital outflows from the market

Therefore, even if prices recover quickly, the psychological impact remains.

5. Is the “attack theory” valid?

WLFI attributes this volatility to a “coordinated attack.”

In crypto markets, short-selling and rumor resonance are common. When trading depth is insufficient and market sentiment fragile, prices can be easily exaggerated.

But whether an attack can sustain depends on a key factor:

Does the market believe the reserves are real, redeemable, and sustainable?

If reserve transparency is high and redemptions are smooth, attacks are unlikely to succeed long-term; if disclosure is lacking, panic can reinforce itself.

6. The difference between USD1 and USDC, USDT, and the real meaning of this de-pegging

Historically, USDC briefly fell to 0.88 USD in 2023 due to bank risks, caused by exposure of the custodian bank and limited reserve liquidity.

Tether has experienced minor de-peggings multiple times, usually during extreme panic or concentrated redemption pressure, but ultimately recovers as redemption mechanisms remain open and reserve liquidity is verified.

USD1 now seems to be undergoing a “trust stress test.”

This event is more akin to a liquidity shock rather than a solvency crisis. The quick price recovery indicates no systemic run has formed.

But what truly matters is whether the market begins to reassess the “stability” risk premium.

Stablecoins are the monetary backbone of the crypto market.

When doubts about their safety arise, the effects propagate along the credit chain:

Leverage declines

Lending contracts

Assets are re-priced

Funds flow back into mainstream assets or exit the market

Even if the event is only a short-term fluctuation, it increases future financing and liquidity costs.

De-pegging is never just a price issue; it is a credit pricing issue.

Prices can recover quickly, but trust takes time to rebuild.

This de-pegging of USD1 may not evolve into systemic risk, but it reminds the market—

In a liquidity contraction phase, credit always changes before prices do.

And once credit begins to be re-evaluated, the entire risk structure will also change.