Stablecoin Collapse Warning: Market Turbulence from UST to DEI

Why do stablecoins crash?

The goal of stablecoins is to maintain price stability, pegged to the US dollar or other assets. However, the security of stablecoins depends on their mechanism design and reserve situation. Once market confidence is shaken, the pegging mechanism may fail, leading to price decoupling. Especially for algorithmic stablecoins, their price stability relies on complex supply and demand adjustments, which can often trigger a cascade effect during large-scale sell-offs, leading to a “death spiral.”

Review of Representative Collapse Events

• TerraUSD (UST) - The largest collapse case in history
  In May 2022, TerraUSD (UST) experienced a severe de-pegging. Its mechanism relied on LUNA tokens to adjust supply and demand, but under immense redemption pressure, the mechanism completely failed. The price of UST plummeted from $1 to nearly $0, resulting in the evaporation of billions of dollars in market value, becoming the most serious stablecoin collapse event in cryptocurrency history.
• Iron Finance (IRON) - The Failure of Algorithmic Stablecoins
  In 2021, IRON promised to maintain a peg to the US dollar with partial collateral and algorithms. However, when market sentiment cooled and a large number of investors redeemed, the issue of insufficient reserves was exposed, leading to a price collapse. This event also made investors realize the instability of algorithmic stablecoins on a large scale for the first time.
• DEI Crash (2022)
  DEI is another stablecoin pegged to the US dollar that experienced a significant decoupling in 2022 due to insufficient collateral and market panic. Its price once fell below $0.5, and despite attempts by the project team to fix it, it still struggled to regain market trust.

The market chain reaction of stablecoin collapse

Once a stablecoin loses its peg, it will have a huge impact on the entire crypto market:

• Market panic intensifies: large amounts of funds are withdrawn, liquidity plummets;
• Exchanges and DeFi protocols affected: liquidity pools relying on stablecoins faced liquidation and capital losses;
• Bitcoin and Ethereum under pressure: Investors forced to sell mainstream assets for cash to hedge.
• Regulatory Pressure Increased: Governments around the world are starting to call for stricter scrutiny and transparency requirements for stablecoins.

What can investors learn from this?

The collapse of stablecoins tells us:

• Stablecoins are not a risk-free “cash alternative”;
• Algorithmic stablecoins are particularly vulnerable, and one should be wary of their “death spiral” risk;
• Use stablecoins in a decentralized manner, do not concentrate assets on a single project;
• Pay attention to transparency and prioritize stablecoins that have audit reports and publicly disclosed reserves.

The future of stablecoins and regulatory trends

As the frequency of collapse events increases, global regulatory agencies are beginning to pay attention to the issue of stablecoins. Future trends may include:

• Require stablecoin projects to disclose reserve assets and accept regular audits;
• Restrict the development of high-risk algorithmic stablecoins;
• Encourage compliant stablecoins (such as USDC, USDT) to enhance transparency and liquidity;
• Promote central bank digital currency (CBDC) as a stable alternative.

In the long run, stablecoins remain an indispensable infrastructure in the crypto market, but they can only truly serve as a “safe haven” when supported by transparent, compliant, and robust mechanisms.