Stablecoin depeg risk: what holds a peg and what breaks it

A peg is a promise, not a property

A stablecoin's price holds near its target only while enough people believe they can exchange it for the target value, either directly with the issuer or with other traders. That belief rests on what backs the coin, who can redeem it and how quickly.

The Ontario Securities Commission's investor site prefers the term value-referenced crypto asset, because the word stable does not reflect how volatile these assets can be. It notes that even coins backed one-for-one by reserves may fail to hold the reference value, and that a run, with many holders trying to redeem at once, could sharply reduce value.

Four designs, four ways to slip

Stablecoins are usually grouped by what stands behind the peg. The design determines both how a depeg starts and how it might recover.

None of these designs is risk-free. Reserve-backed designs concentrate risk in an issuer and its banks; crypto-collateralized designs move it into smart contracts and oracles; algorithmic designs rely on market confidence that can disappear quickly.

Redemption: who can actually get $1 back

Par redemption is the mechanism that pulls a price back to $1, but it may not be open to everyone. The OSC's investor site notes that redemption rights can be at the issuer's discretion, are not always clearly disclosed and may not apply to every holder. Many holders can only sell on a trading platform, at whatever a buyer will pay.

That gap matters in a stress event. If only large, verified customers can redeem directly, and they face minimums or delays, the price on open markets can stay below $1 for some time even if the reserves are ultimately sufficient.

Worked example: a depeg inside a two-coin stable pool

Stable pools let traders swap between two coins that should be worth the same. They use a curve with an amplification setting that keeps prices tight near 1:1. In this illustration, you deposit $10,000 into a balanced two-coin pool with amplification A = 100: 5,000 units of coin X and 5,000 units of coin Y, each worth $1. Then coin X slips to $0.95 and stays there.

Had you simply held the coins, you would have 5,000 × $0.95 + 5,000 × $1 = $9,750. Inside the pool, arbitrage traders sell the cheaper coin X into the pool and take coin Y out. Your share ends up at roughly 8,964 units of X and 1,076 units of Y, worth about $9,592. That is about $158, or 1.62%, less than holding: impermanent loss on top of the depeg itself.

The table shows the same calculation at other prices, using the model behind the impermanent loss calculator. A standard constant-product pool barely registers a small depeg, while a highly amplified pool feels it far more, because it was built to keep swapping near 1:1.

Why the pool fills up with the weaker coin

High amplification makes the pool behave like a fixed exchange rate across a wide range of balances. That is what gives traders low slippage on normal days. It also means the pool keeps offering close to 1:1 for the healthy coin while the market says otherwise, so arbitrage drains the healthy coin until the pool is mostly the weaker one.

At $0.80 with A = 100, the illustrative $10,000 deposit would hold coins worth about $8,184, against $9,000 for simply holding. The trading fees earned in normal times would need to be large to cover a gap like that.

Depegs spill into lending and borrowing

A depeg rarely stays inside one pool. If a lending protocol values a stablecoin at a fixed $1, borrowers can post a depegged coin as collateral at more than its market value, leaving bad debt. If the protocol prices it at market, positions using that coin as collateral can suddenly be liquidated. The borrow health calculator shows how fast a health factor responds to a lower collateral price.

Debts can be affected too. A loan denominated in a stablecoin that later trades above $1 costs more to repay. These knock-on effects are part of why depeg risk and oracle risk are often discussed together.

Canadian status, as of October 2026

Federal legislation. As of October 2026, the federal Stablecoin Act has received Royal Assent (March 26, 2026, through Bill C-15) but is not yet in force; its provisions take effect on dates to be fixed by order. Finance Canada expects the framework to take effect in 2027. Under the framework as described by Finance Canada, issuers must hold one-for-one reserves of high-quality liquid assets in the reference currency, redeem at par, and may not pay interest or claim that a coin is a deposit or insured. The Bank of Canada will administer the framework and supervise issuers, and proposed regulations were published for consultation in October 2026.

Securities rules. Separately, Canadian securities regulators treat these coins as value-referenced crypto assets that may be securities or derivatives. Since December 31, 2024, registered crypto trading platforms may only offer such coins in line with the terms set by regulators.

Deposit insurance. The Canada Deposit Insurance Corporation lists cryptocurrencies, including stablecoins, as not covered. The OSC's investor site adds that CIPF does not cover them either and that they are not the same as cash in a Canadian deposit account. The regulation overview keeps this status up to date.

Comparing a stablecoin yield with insured savings

A stablecoin yield and a GIC or high-interest savings account can look similar on a rate table, but they carry different risks. The insured deposit has a defined protection limit; the stablecoin has depeg, issuer, platform and contract risk, and none of it is insured by CDIC.

The stablecoin vs GIC calculator lets you enter your own estimate of the chance and size of a loss and shows the yearly loss probability at which the two would break even after tax. It does not predict whether a depeg will happen; it makes the trade-off visible.

Questions to ask before you deposit

• What backs this stablecoin, and who publishes information about the reserves?
• Can you personally redeem at par, and are there minimums, fees or delays?
• Is the version you hold native to this chain, or a bridged or wrapped claim?
• If you provide liquidity, what amplification setting does the pool use?
• How do the lending protocols you use price this coin: fixed at $1, or at market?
• How would you compare this yield with a CDIC-eligible deposit after tax?