Is Your Stablecoin Actually Depegging? Here Is How to Tell

In the crypto landscape, stablecoin depegging often causes alarm, but this is frequently misinterpreted. Cain O’Sullivan of Hyperdrive explains that price drops can stem from liquidity issues rather than failures in the underlying reserves.

The New Money Market ‘Meta’: Redemption over Oracles

In the world of decentralized finance ( DeFi)—and the broader crypto economy—reports of a stablecoin depeg often send shockwaves. To the untrained eye, watching a stablecoin lose its parity on an exchange looks indistinguishable from a full-scale collapse. Yet, according to Cain O’Sullivan, co-founder of Hyperdrive, these events are frequently misunderstood by both users and protocol designers.

The critical distinction lies in whether a price drop represents a liquidity imbalance on exchanges or a fundamental failure of the asset’s underlying reserves. During periods of high market stress, users often rush to swap one stablecoin for another. Because decentralized and centralized exchanges have finite liquidity, this sudden surge in sell pressure naturally drives the market price down.

As O’Sullivan points out, this was illustrated during the 2023 Silicon Valley Bank (SVB) crisis. While the stablecoin $USDC traded as low as 90 cents on some exchanges due to panicked selling, the primary mint-and-redeem facility at Circle remained functional.

History repeated itself more recently on Oct. 10, 2025, during a massive $19 billion liquidation event initially triggered by escalating trade tensions. Ethena’s $USDe briefly plunged to 65 cents on Binance. However, much like the $USDC event, the protocol’s core design and 110% collateralization held firm. The depeg was largely a localized failure of Binance’s internal oracle and order book liquidity, while $USDe continued to trade at near-parity on decentralized venues like Curve.

“This is often not a true representation of the actual redemption value of the asset,” O’Sullivan notes. “Those fears were enough to make users want to exit… all whilst native minting and redeeming of $USDC on Circle was still working as normal.”

This distinction between market price and redemption value is driving a fundamental shift in how lending protocols are built. Traditionally, “general-purpose” lending allowed users to borrow one asset against another by using a price oracle to define their relationship in U.S. dollar terms.

Still, O’Sullivan argues that this model is becoming outdated, particularly as users increasingly seek to “loop” correlated assets—depositing collateral to borrow more of that same or a similar asset to multiply yield.

“General purpose lending protocols are inefficient for these cases because they are fundamentally limited by the amount of on-chain liquidity that exists for things like liquidations,” O’Sullivan explains.

The Hyperdrive co-founder believes the “new meta” involves protocols that move away from volatile market oracles. Instead, they are built to recognize the contractual redemption relationship between assets. By pricing based on the ability to redeem for the underlying collateral rather than the fluctuating price on a thin exchange, protocols can unlock liquidity that general-purpose markets simply cannot access.

The Hidden Risks of the ‘Safe Haven’

For newer investors, stablecoin pools are often marketed as a “safe haven,” creating an illusion that peg stability equates to an elimination of risk. In reality, moving from holding a single asset to entering a liquidity pool swaps simple price exposure for a complex web of counterparty and smart-contract risk.

Even in a world of so-called stable assets, O’Sullivan warns that users must still account for impermanent loss (IL). While IL is less of a factor in deep, reliable pairs like USDT/$USDC, it remains a significant threat in pools involving less established stablecoins with thin liquidity.

“The yield comes from trading fees, and often the fees on the pool aren’t enough to generate meaningful returns,” O’Sullivan says. This creates a real opportunity cost: users may take on the technical risks of a pool for returns that fail to justify the exposure, especially if a minor depeg in a “thin” coin triggers an unexpected imbalance in their position.

The danger for DeFi protocols occurs when they rely solely on market-based price oracles. If a protocol sees a market price of $0.90 and reacts by triggering mass liquidations, it can create a “death spiral” even if the stablecoin is still fully backed 1:1 at the source.

O’Sullivan stresses that protocols must distinguish whether a depeg stems from fleeting market dynamics or a deeper issue with underlying redemption—and respond accordingly. Market-based pricing, he warns, often breeds fragility, as thin liquidity and momentary panic can make a temporary discount look like a permanent collapse.

A more resilient alternative lies in redemption-rate pricing, which anchors value to the asset’s actual backing and redemption capacity. This “redemption-based liquidity” design helps protocols withstand market noise, reducing the risk of unnecessary liquidations and offering a sturdier foundation for DeFi infrastructure.

For those new to the ecosystem, understanding these layers of risk is vital. A price dip on a chart isn’t always a signal of failure, but a “stable” pool isn’t always a risk-free vault. By building protocols that understand the contractual link between assets and the reality of liquidity depth, the next generation of DeFi can provide the stability and capital efficiency that general-purpose markets lacked.

FAQ ❓

• What causes stablecoins to depeg from their value? A stablecoin may lose its peg due to liquidity imbalances on exchanges, often confused with a failure of its underlying reserves.
• How did the 2023 SVB crisis illustrate stablecoin dynamics? During the SVB crisis, $USDC traded below its intended value due to panic selling, even though its redemption functions at Circle remained intact.
• What risks do liquidity pools pose to new investors? While liquidity pools may seem safe, they introduce complexities like impermanent loss and varied counterparty risks that can outweigh potential returns.
• How can DeFi protocols improve risk management during price fluctuations? Protocols should use redemption-rate pricing to anchor value to actual asset backing, reducing unnecessary liquidations and enhancing resilience against market panic.