Depeg Risk

Overview

Depeg risk affects stablecoins, wrapped assets, liquid staking tokens, and other instruments designed to maintain a relationship with another asset or unit. Market price can diverge from redemption value temporarily or permanently.

Causes include reserve losses, redemption restrictions, liquidity shortages, bridge failure, smart-contract bugs, counterparty stress, governance changes, market panic, or uncertainty about legal claims. A small market deviation may become severe when arbitrage or redemption stops functioning.

Users should assess reserves, redemption rights, issuer or protocol dependencies, market depth, concentration, and stress history. Limits, diversification, collateral haircuts, and exit plans reduce exposure, but displayed price stability cannot guarantee future convertibility. Scenario analysis should include impaired or closed redemption.

Depeg risk is the possibility that an asset intended to track a reference value trades or redeems materially away from that target. A stable price depends on credible redemption, reserves, liquidity, and functioning arbitrage; branding alone cannot prevent a depeg.

For Depeg Risk, the assessment should evaluate the possibility that an asset intended to track a reference value trades or redeems materially away from that target. The assessment record should separate observed evidence supporting the possibility that an asset intended to track a reference value trades or redeems materially away from that target from assumptions, state the time horizon and existing controls, and identify who owns any remaining exposure. Monitoring should test whether the conditions described in the possibility that an asset intended to track a reference value trades or redeems materially away from that target have changed enough to require a new rating, treatment, or approval.

Decision-makers should use findings about the possibility that an asset intended to track a reference value trades or redeems materially away from that target to select treatment, assign remediation, set review thresholds, and document why any residual exposure is accepted.