Stablecoins are an important part of the decentralized economy but over the years, it has not been particularly easy to define nor design a truly secure and decentralized stablecoin.
In 2023, it was reported that the stablecoin market saw over 600 depeg events. Whilst the majority of these reported events may have been minor price shifts, over the last couple years since the collapse of the Luna ecosystem, which was primarily powered by a decentralized stablecoin product, we've since major stablecoin depeg events.
sUSD fell as low as $0.68 in April 2025, USDe fell to $0.65 in October,XUSD lost 70% of its value, USDX fell to $0.40 and deUSD fell to as low as $0.02, to name a couple.
Whilst some of these stablecoins are lesser-known names, they were regardless DeFi stablecoins and all of these collapse events reflects on the entire decentralized finance ecosystem.
It is important to note that these depegs cited are all events that I did not follow up at the time personally, so I am not categorizing any as an "attack event."
That said, when it comes to stablecoins, there are generally one big risk factor and that is liquidity attacks follow depegs.
The design of most decentralized stablecoins ensures that people or users can always redeem them for the value of $1.
While this design makes for a good marketing message, it's in itself the biggest risks to truly secure stablecoins.
When Luna's UST depegged, what led to the complete collapse of the ecosystem was this very feature. People, in great numbers, bought UST for cheap on external markets and redeemed for LUNA tokens for up to 70% on the dollar, through the protocols' redeem function.
This was the biggest arbitrage event in the history of crypto, and whilst it wasn't in itself a crime, it led to the collapse of an ecosystem of several billions.
Arbitrage should stabilize ecosystems, economies or markets, not break them, hence why we ought to rethink what happens when a stablecoin losses peg.
Everyone who witnessed the crash of the Luna ecosystem would tell you that if only redeeming UST was turned off, the ecosystem would have survived and it could have been done through a decentralized consensus, but instead of turning off a monetary system in panic, we can design a deterrent against panic sellers or mass arbitrage practice.
If a stablecoin losses it's peg, you want to encourage or attract new investors or investments to regain peg and stabilize the ecosystem.
Also, for new capital inflow to restore peg, sell pressure has to be significantly suppressed. We saw how the Luna ecosystem spent billions in Bitcoin and more, trying to restore UST peg, but sell pressure and arbitrage trades were just too significant.
The single most effective way to suppress sell pressure and discourage mass arbitrage is to make it expensive to try to exploit the price depeg.
This means directly making it a losing trade to make for arbitrage traders and also deterring regular holders from panic selling.
This system allows decentralized stablecoin markets to sustain itself.
Think about it, if a stablecoin depegged and lost 30% of its value, and you had $10,000 invested, would you try to trade out knowing that you'll lose another 30% on that trade?
And if you're an arbitrage trader, what would make you purposely want to trade a market you'll lose 30% instantly?
On the other side, if you helped the stablecoin regain it's peg by buying, you could potentially instantly earn a profit.
Imagine getting paid to buy something.
When peg is restored, you can very easily exit the market.
The incentive layer when it comes to stablecoins should always lay with buyers and holders, since they are effectively holding onto a protocol or ecosystem's debt.
