Depeg risk is the danger that an asset-backed or pegged token loses alignment with the asset it tracks. The causes are distinct: broken arbitrage, insufficient backing, a redemption run, or oracle failure. For pegged designs it is the central risk the whole mechanism exists to prevent.
A peg that holds when markets are calm fails exactly when stress arrives, so the adversarial scenario is the only real test of robustness.
How it works
The vectors are not uniform. Broken arbitrage, illiquid reserves, a redemption run that outpaces custody capacity, and an oracle feeding bad price data can each act alone or compound into a cascade.
How the peg is maintained decides which vector is most dangerous. Collateralized stablecoins face haircut risk: if reserves fall in value faster than the protocol can liquidate them, backing drops below 1:1 and the peg becomes insolvent. Algorithmic mechanisms fail differently, because a shock to the companion asset removes the restoring force at the worst moment.
Design consequence
Peg stability analysis has to include a stressed reserve scenario, not just a steady state. Reserves must be large enough and liquid enough to absorb a redemption spike, not just a steady redemption rate. MiCA now mandates minimum reserve composition and liquidity standards for asset-referenced tokens precisely because so many historical designs were sized for normal conditions and broke under tail events.
Example
The May 2022 TerraUSD collapse is the canonical case. Once the algorithmic arbitrage mechanism started losing confidence, the LUNA minting needed to restore the peg inflated supply faster than demand could absorb it, driving a hyperinflationary spiral within 72 hours.
See RWA Tokenomics Design for how this applies in practice.
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