Stablecoin depeg: what happens to lending markets and vaults

When a stablecoin loses its $1 price, the damage inside lending markets and vaults depends on how each one prices the coin and who is left holding the gap.

A stablecoin depeg is any period when a coin built to trade at $1 trades well below it, usually because holders doubt the reserves or can't redeem fast enough. USDC previously depegged: it fell to about 86 cents in March 2023 after Circle disclosed $3.3 billion of reserves at Silicon Valley Bank, according to a Federal Reserve note. USDT, DAI, FDUSD and USDe have all traded well below $1 at some point, and UST never came back.

Stablecoins sit inside lending markets as collateral and inside vaults as deposits, and each protocol decides for itself what a depegged coin is worth. That choice decides who gets liquidated, who ends up with bad debt, and whether anyone can withdraw.

Has USDC ever depegged?

Yes. Silicon Valley Bank failed on Friday 10 March 2023, Circle confirmed its exposure that evening, and USDC traded as low as 86 to 87 cents over the weekend while US banks were closed and Circle couldn't process redemptions. It returned to $1 after US regulators said on 12 March that all SVB deposits would be protected. Circle then redeemed $3.8 billion of USDC between Monday and Wednesday.

DAI fell with it. More than half of DAI's backing was USDC at the time, held in MakerDAO's peg stability module (PSM), which swapped DAI and USDC 1:1. As holders dumped USDC into the PSM, about 1 billion USDC went in on each of 10 and 11 March. MakerDAO voted to cap the module at 250 million a day and raise its fee to 1%, and the vote passed in just over two hours, though its governance delay meant the change couldn't take effect for 48 hours.

Major stablecoin depegs and what lending markets did

Lows and durations from Spark's depeg history, S&P Global, The Block and Galaxy Research, read 23 September 2026. Lows varied by venue.

What happened inside lending markets in each depeg

• UST, May 2022: Chainlink's LUNA feed hit its built-in minimum price and stopped updating, so Venus still valued LUNA at about $0.107 while it traded near $0.01. There, two accounts deposited 230 million LUNA at the stale price and borrowed about $13.5 million. Venus paused the protocol for 48 hours and covered the shortfall from its risk fund.
• USDC, March 2023: Aave used a market price, so loans in its stablecoin E-Mode, which lends at high loan-to-value, were liquidated as USDC fell. a Gauntlet post-mortem put realised bad debt at about $280,000 on Avalanche and $20,000 on Arbitrum, and stablecoin markets on Avalanche were frozen. Compound v2 hardcoded USDC at $1.00, so its borrowers weren't liquidated, and Gauntlet warned that below $0.855 the fixed price would let USDC suppliers borrow more than their collateral was worth.
• USDe, October 2025: Binance priced USDe from its own order book, which briefly printed about $0.65, and liquidated margin users on that price. Onchain, Aave had voted in February 2025 to price USDe at the USDT price, and LlamaRisk found no USDe liquidations there. About $894 million of USDe withdrawn from Binance was redeemed through Ethena at $1 within seven hours.
• xUSD, November 2025: Stream Finance suspended withdrawals after an external fund manager lost about $93 million. Several lending markets priced xUSD with a manually updated oracle, so collateral kept its old value while the token collapsed. In one curated lending vault the oracle stayed at $1.26, liquidations never fired, and depositors were left with about $650,000 of bad debt, according to Tiger Research.

How do oracles price a stablecoin during a depeg?

An oracle is the price feed a lending market uses to value collateral. The three common designs protect different people:

A fixed price works when the coin really is redeemable at $1 and the dip is a market dislocation, as USDe's was on Binance. It fails when the backing is gone, because the market keeps valuing collateral at $1 long after buyers have stopped paying that, so the choice of oracle is a bet on which kind of depeg is coming.

Who absorbs the loss when a depeg causes bad debt?

• The protocol's reserve: Venus paid its LUNA shortfall from its risk fund
• The venue: Binance compensated liquidated users $283 million from its own balance sheet
• Lenders and vault depositors: where no reserve covers it, bad debt stays in the market and suppliers share the loss, as with xUSD
• Holders who sell into the dip: anyone who sold USDC at 87 cents locked in a loss the coin itself recovered within days

Bank groups use these episodes in their case against stablecoins. The Bank Policy Institute has argued that stablecoins are prone to runs and that lenders on DeFi platforms can lose money even when the stablecoin itself is fully backed.

How an onchain vault behaves in a depeg

A vault that holds stablecoins has the same pricing decision to make, plus a second one about withdrawals. On Upshift, a multi-asset vault takes several deposit assets and prices each into one reference asset with an oracle, and every redemption pays out in that reference asset. The rest is set in the vault contract:

• Limits on value changes: each update to the vault's reported assets is capped by a maximum change per day, and changing that cap is timelocked
• Separate pauses: deposits and withdrawals can be paused independently, so a vault can stop new money arriving without trapping existing holders
• Redemption rules: standard redemptions settle after a set lag, and many vaults also offer instant redemption for a fee, subject to available liquidity
• Permitted protocols: each vault's allowed protocols are set in its contract under the risk management framework

Sentora USD on Ethereum, curated by Sentora, is one example. It takes USDC, USDT, PYUSD and RLUSD and redeems in USDC, and it held about $74 million on 23 September 2026 according to Upshift's backend (current rates are on the vault page). The guide to how vaults are secured covers the controls in more depth, and tiering vault strategies by risk covers how curators size exposure to weaker stablecoins.

Depeg risks to check before depositing

• Reserve and redemption risk: the coin depends on its issuer holding the reserves and redeeming at $1, and redemptions can slow on weekends, as USDC's did
• Design risk: synthetic and algorithmic designs such as USDe carry risks that fiat-backed coins don't; the USDC vs USDT comparison covers the two largest
• Oracle risk: a market-price feed can liquidate you on a dip, and a fixed price can leave lenders with bad debt
• Protocol risk: smart contract bugs and governance delays, such as MakerDAO's 48-hour wait, limit how fast a protocol can react. Upshift's contracts have had 10 smart contract audits by 6 independent firms

Always make sure to do your own research and be aware of the above and any other risks before depositing.

Frequently asked questions

Has USDC ever depegged?

Yes. It fell to about 86 to 87 cents on 11 March 2023 after Circle disclosed $3.3 billion of reserves at Silicon Valley Bank, and it recovered within about three days once US regulators protected SVB deposits.

Has USDT ever depegged?

Briefly. USDT traded at about $0.945 on 12 May 2022 during the Terra collapse and recovered within a day as Tether met about $7 billion of redemptions.

Did USDe depeg in October 2025?

On Binance, yes: it printed about $0.65 on 10 October 2025. It held near $1 on most other venues and onchain, and Ethena kept processing redemptions at $1 throughout.

Why are banks against stablecoins?

Bank groups argue that stablecoins pull deposits out of banks, that they are prone to runs, and that yield-bearing stablecoins would speed up deposit outflows. The GENIUS Act, signed in July 2025, bars stablecoin issuers from paying holders interest.

What happens to my loan if the stablecoin I borrowed against depegs?

It depends on the market's oracle. With a market-price feed your position can be liquidated as the price falls; with a fixed price it stays open, and the risk moves to the lenders.

Keep reading

• How the GENIUS and CLARITY Acts reshape stablecoin yield. What US law says about paying holders.
• What are DeFi yield vaults. Strategies, risks and how to compare them.
• How to earn yield on stablecoins in 2026. The main routes across every major stablecoin.