Crypto Newbie / Simulators / Stablecoin Peg
Stablecoin De-Peg Mechanics Simulator
Not all stablecoins are stable the same way. Algorithmic stablecoins (UST/LUNA) defend their peg by minting a sister token — works until the sister token's market cap can no longer absorb sell pressure, then dies catastrophically. Collateralized stablecoins (USDC/DAI) defend via 1:1 reserves and arbitrage — robust if reserves are real and redemption works. This simulator runs both models so you can SEE why $40B Terra collapsed in a week while USDC survived a 13% depeg.
Stablecoin model
Apply sell pressure
Current state
Stable price
$1.0000
Stable supply
$10.00B
Sister token price
$80.0000
Sister token supply
$100.00M
The algorithmic mechanism in detail
UST defended its peg by allowing anyone to burn 1 UST → mint $1 of LUNA at any time. When UST traded at $0.99, arbitrageurs burned UST, got LUNA worth $1, sold LUNA for $1.00, profit $0.01 per UST. The mechanism worked beautifully when LUNA market cap was 5-10× UST market cap — there was always enough LUNA to absorb redemptions. The death spiral started when sustained sell pressure forced so much LUNA minting that LUNA's price crashed faster than UST could redeem. Each round of redemptions required MORE LUNA to absorb the next round, in a runaway feedback loop.
The collateralized mechanism in detail
USDC commits to redeem any 1 USDC for $1 USD with Circle (the issuer). When USDC trades at $0.98 in the secondary market, arbitrageurs buy USDC at $0.98, redeem with Circle for $1, pocket $0.02 risk-free. This continues until the discount disappears. The mechanism's strength is the FREE MONEY arbitrage — capital floods in proportional to the discount magnitude. The mechanism's weakness is the assumption that (1) reserves are real, (2) Circle stays solvent, (3) redemption is operational. All three were briefly questioned during the SVB crisis in March 2023.
Why algorithmic stablecoins keep being attempted
Despite UST's catastrophic failure, new algorithmic stablecoins keep launching — Frax (partial-algo), USDe by Ethena (delta-neutral), Reflexer's RAI. The appeal: capital efficiency. A collateralized stablecoin needs $1 of reserves per $1 issued — a huge capital lockup. Algorithmic models in theory need MUCH less capital. The harsh reality: every pure-algo model since 2020 (Basis Cash, ESD, USDX, UST) has failed. Hybrid models (Frax, USDe) survive by mostly being collateralized with algorithmic elements at the edges.
What to actually use as a stablecoin
For retail safety in 2026: USDC (Circle, US regulated, monthly attestations), USDT (Tether, much larger reserves but less transparent), DAI (overcollateralized by ETH+RWA, decentralized). Avoid: any pure-algo model, smaller alt stablecoins (TUSD, USDP, etc. have thinner liquidity), wrapped stablecoins on small chains (bridge risk on top of stablecoin risk). The math here: a 50% loss on your stablecoin holdings during a depeg event would wipe out years of yield — the security premium for using the top-3 is well worth it.
Frequently asked questions
+Is DAI algorithmic or collateralized?
Mostly collateralized but with algorithmic elements. DAI is backed by overcollateralized loans (you lock up ETH worth 150%+ of the DAI you mint). The 'algorithmic' part is the stability fee — interest rate adjustments by MakerDAO governance to maintain the peg. Since 2022, DAI also holds significant USDC and real-world assets (US treasuries) as collateral. So DAI is more 'crypto-collateralized + USDC-cushioned' than algorithmic.
+How long did UST take to collapse?
5 days from peg loss to total death. May 7 2022: UST briefly dropped to $0.985 (within normal volatility). May 9: dropped to $0.65 after a coordinated attack on liquidity pools. May 10: LUNA started crashing as massive UST→LUNA redemptions happened. May 12: LUNA was $0.50 (down from $80). May 13: LUNA was $0.0001 and UST was $0.07. $40B+ market cap vaporised. Anchor Protocol (which held most UST) was the largest single casualty.
+Did USDC really almost depeg permanently?
It dropped to $0.87 on March 11 2023 after Silicon Valley Bank (where Circle held $3.3B of reserves) failed. The depeg lasted ~72 hours. Circle confirmed reserves were intact + the US government guaranteed all SVB depositors, after which USDC quickly recovered to $1.00. The lesson: even 'safe' stablecoins have ~3% probability of brief depegs annually. Don't keep your entire emergency fund in a single stablecoin.
+What's USDe and is it safe?
USDe (Ethena) is a delta-neutral stablecoin: backed by long-spot-crypto + short-perp-crypto positions, exploiting funding-rate yield. Not collateralized 1:1 with USD reserves. Survival depends on funding rates staying mostly positive (they're ~60% of the time historically). When funding flips persistently negative, USDe could lose backing faster than redemption capacity. So far (2024-2026) it's worked but it's structurally exposed to a sustained bear-market funding regime that hasn't happened yet.
+Should I trust Tether's reserves?
Tether claims 100% backing but attestations (not full audits) lack transparency vs USDC. Tether has been fined by regulators for misrepresenting reserves in the past. Despite this, USDT remains the world's largest stablecoin by volume because of Asian liquidity preferences. For US/EU users, USDC > USDT for safety; for Asia DEX trading, USDT is unavoidable. Hold USDT only on regulated venues with real-time auditing.