History of Stablecoin Depegs: Terra UST, USDC Silicon Valley Bank, and Risk Mitigation
Case studies of historical stablecoin failures: algorithmic collapse, fractional banking runs, and how to protect your portfolio.
Why algorithmic stablecoins fail reflexive death spirals, and why holding diversified stablecoins across multiple jurisdictions mitigates systemic risk.
1. Algorithmic Death Spirals vs Custodial Bank Runs
Algorithmic stablecoins like Terra UST relied on endogenous token burning. Once sell pressure broke the peg, hyper-inflation of the sister token led to immediate collapse.
Custodial stablecoins face banking counterparty risk: during the Silicon Valley Bank failure in March 2023, USDC temporarily traded at $0.88 until the FDIC guaranteed uninsured deposits.
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