From TerraUSD to YU: Why stablecoins fail to hold $1 and the risks investors can’t ignore
News Summary
Despite nearing a $300 billion market cap, stablecoin adoption remains limited due to risks like depegging, collateral issues, and trust deficits. The article highlights recurring stablecoin depegging events, from NuBits (2018), TerraUSD (2022, wiping out roughly $50 billion), USDC (2023, following Silicon Valley Bank's collapse), to Yala's YU (2025, due to an exploit and thin liquidity), revealing vulnerabilities in both algorithmic and fiat-backed models. Key reasons for stablecoins failing to maintain their $1 peg include liquidity shortages, loss of trust leading to bank-run scenarios, algorithmic flaws, and external pressures such as hacks or broader economic downturns. These risks translate into potential financial losses for investors, security vulnerabilities, regulatory and reputational concerns, and systemic impacts across the wider crypto market. To mitigate these risks, issuers are exploring measures such as stronger collateral (e.g., over-collateralized models, high-quality liquid assets), enhanced transparency (e.g., proof-of-reserves, independent audits), backstop funds, and robust technical security (e.g., thorough contract audits, multi-signature controls). Furthermore, regulatory alignment under frameworks like MiCA and US stablecoin bills, coupled with insurance coverage, is seen as crucial for bolstering investor trust.
Background
Stablecoins are a class of digital assets in the cryptocurrency market designed to maintain price stability by being pegged to fiat currencies (like the US dollar), commodities, or other cryptocurrencies. Their core objective is to provide a relatively stable store of value and medium of exchange within the often volatile crypto ecosystem. Despite the stablecoin market cap surpassing $300 billion by October 2025, its history is marked by several significant depegging events. Notable examples include the collapse of the algorithmic stablecoin TerraUSD in 2022, which resulted in an estimated $50 billion loss, and the brief depegging of fiat-backed USDC in 2023 following the collapse of its reserve bank, Silicon Valley Bank. More recently, in September 2025, Yala's Bitcoin-backed YU also experienced a depegging event due to a protocol exploit and thin on-chain liquidity. These episodes continue to highlight inherent design flaws and market fragilities within stablecoins.
In-Depth AI Insights
Beyond technical failures, what systemic implications do recurring stablecoin depeggings, even in 2025, hold for broader crypto adoption and regulatory posture? - Recurring stablecoin depegging events, even post-Yala's YU in 2025, continuously erode institutional and mainstream investor confidence in the crypto market. This instability will delay deeper integration of traditional finance with decentralized finance (DeFi) and likely hinder the widespread adoption of stablecoins as a daily payment instrument. - The Trump administration is likely to leverage these incidents as a rationale for increasing regulatory oversight across the entire crypto industry, particularly concerning consumer protection and financial stability. Expect pushes for stricter reserve requirements, independent audits, and potential restrictions on algorithmic stablecoins, which could increase compliance costs and centralize market power among a few large, regulated issuers. - Furthermore, depegging events highlight interconnected risks within the crypto ecosystem, where the failure of one stablecoin can trigger cascading effects. This prompts investors to reassess their exposure to DeFi protocols and may lead to a flight of capital towards more regulated and transparent traditional financial products. Given the increasing scale of the stablecoin market and persistent depegging events, what underappreciated risks does it pose to global financial stability, particularly in the context of integration with traditional finance? - The growth of stablecoins, especially their critical role as collateral and a medium of exchange in DeFi, means their depegging events are no longer solely crypto-internal issues. A significant, sustained depegging of a major stablecoin could trigger broader financial market instability through its potential linkages with traditional financial institutions (e.g., banks, payment processors). - The risk lies in market participants potentially not fully understanding and pricing in the 'contagion' mechanisms between stablecoins and traditional finance. For example, banks holding significant stablecoin reserves or institutions with substantial stablecoin lending exposures in DeFi could face unanticipated liquidity or solvency risks. - Moreover, the cross-border nature of stablecoins makes them challenging to regulate effectively by a single jurisdiction. This creates opportunities for potential regulatory arbitrage and could lead to challenges in coordinating global regulatory responses, making it difficult to implement unified measures during a crisis. In the face of ongoing stablecoin risks, how should investors adjust their investment strategies to balance the innovative potential of crypto assets with the imperative for capital preservation? - Investors should prioritize fiat-backed stablecoins with high transparency, clearly verifiable reserves, and regular independent audits. Deep due diligence on claimed collateral quality and audit reports is crucial, rather than relying solely on market hype. - Implement diversification strategies, avoiding concentrated stablecoin risk with a single issuer or a single type of stablecoin (e.g., purely algorithmic or partially collateralized). Consider allocating a portion of crypto-related capital to highly liquid and regulated traditional financial instruments to hedge against potential stablecoin risks. - Closely monitor global regulatory developments, particularly stablecoin legislation emerging from the US and EU. Regulatory clarity and stringency will directly impact the long-term stability and investability of stablecoins. Investors should be wary of projects that actively circumvent or fail to comply with emerging regulatory frameworks.