Why Peg Stability is a Social, Not Technical, Problem

A peg is a price. Price discovery requires deep, adversarial liquidity. On-chain oracles like Chainlink are data feeds, not markets. The real defense is a $100M+ perpetual futures market ready to arbitrage any deviation, creating a cost-of-attack measured in billions.

• Key Insight: A peg defended only by multisigs and oracles is a soft target.
• Real-World Example: The 2022 UST collapse was a liquidity death spiral, not an oracle hack.

USDC is trusted because its "collateral" is regulated bank deposits and short-term Treasuries. DAI's collateral story is over-collateralized crypto assets plus real-world assets. The peg holds as long as the narrative of redeemability holds. When the story breaks (e.g., SVB collapse for USDC, crypto winter for DAI), the peg breaks.

• Key Insight: Peg stability is a function of narrative permanence.
• Mechanism: Redemption arbitrage only works if the redemption promise is credible.

Protocols obsess over attracting TVL (entry). True stability requires frictionless exits. A peg shatters when the cost to exit (slippage, delays, fees) exceeds the perceived risk of holding. This is why Curve 3pool stability relies on whale incentives, and why fast bridges like LayerZero and Across use liquidity networks, not locked assets.

• Key Insight: A peg is a one-way door if you can't leave at par.
• Design Imperative: Stability mechanisms must subsidize exits, not punish them.

The algorithmic stablecoin UST relied on a reflexive mint/burn mechanism with its sister token, LUNA. This created a system where confidence was the primary collateral.

• Social Fragility: A loss of confidence triggered a negative feedback loop, collapsing the $40B+ ecosystem in days.
• Technical Failure: The code worked as designed; the failure was in the underlying economic assumptions and market psychology.

A partial-collateralized algorithmic stablecoin (IRON) used a multi-token model. It demonstrated how even a well-intentioned design fails without a lender of last resort.

• Fragile Equilibrium: A ~20% price dip triggered mass redemptions, exhausting the USDC collateral reserve.
• Coordination Failure: The protocol had no mechanism to halt redemptions or coordinate stakeholders during a crisis, leading to a classic bank run.

MakerDAO's DAI is often cited as a success, but its stability is enforced by a complex, active governance layer, not pure code.

• Social Solution: MKR token holders vote on collateral types, stability fees, and emergency shutdowns.
• Centralization Tension: To scale and maintain the peg, governance has integrated ~$10B in centralized assets (e.g., USDC) as collateral, creating a new set of social and regulatory dependencies.

A "fully-backed" centralized stablecoin depegged due to off-chain events, proving that all stable assets are only as strong as the social and legal trust in their issuer.

• Off-Chain Risk: Depeg triggered by SVB bank failure and uncertainty over Circle's $3.3B exposure.
• Trust-Based: The peg was restored not by smart contracts, but by public assurances from Circle and federal intervention, highlighting the ultimate social foundation.

A depeg is not a failure of a price feed, but a failure of the arbitrage mechanism it's meant to enable. On-chain oracles like Chainlink provide data, but they can't force market makers to act if the risk-reward is misaligned.

• Key Insight: A stablecoin with $1B+ TVL needs a correspondingly deep, incentivized liquidity layer (e.g., Curve pools, Uniswap v3 concentrated positions) to absorb shocks.
• Failure Mode: Thin liquidity leads to slippage > peg deviation, killing the arbitrage loop and creating a death spiral.

MakerDAO's journey from pure ETH to a ~$10B RWA portfolio proves this. Concentrated, volatile collateral (e.g., only native L1 token) creates reflexive risk. The goal is uncorrelated, yield-generating assets.

• Key Insight: Real-World Assets (RWAs) like Treasury bills provide stability and yield, but introduce off-chain legal and custody risk (see Ondo Finance, Mountain Protocol).
• Trade-off: You're swapping smart contract risk for counterparty risk. The peg is only as strong as the weakest legal jurisdiction in your collateral basket.

A stablecoin's peg holds if users believe they can exit at $1. This requires a credible, non-dilutive redemption mechanism. Algorithmic models like Terra's UST failed because the exit (burn UST, mint LUNA) was dilutive and reflexive.

• Key Insight: Frax Finance's AMO (Algorithmic Market Operations) and Maker's PSM (Peg Stability Module) work because they use direct, non-dilutive asset swaps (e.g., FRAX for USDC, DAI for USDC) backed by deep reserves.
• Red Flag: Any model where defending the peg requires minting and selling a volatile governance token is inherently unstable under sustained >5% outflow.

DAOs vote on oracle parameters, collateral types, and fee structures. This makes the peg a political consensus problem. See Maker's struggle with Spark Protocol's DAI savings rate or Aave's GHO stability module debates.

• Key Insight: Voter apathy and plutocracy mean a handful of whales can set risk parameters that benefit their positions, not the peg's stability.
• Solution Space: Moving towards minimized, time-locked governance (like Ethena's custodial framework) or fully algorithmic rules reduces this attack vector, but increases rigidity.

The endgame for a $100B+ stablecoin is not competing with USDT, but becoming a neutral settlement layer for traditional finance. This requires regulatory clarity and institutional-grade rails.

• Key Insight: Projects like Mountain Protocol's USDM (SEC-registered) and Circle's push for a MiCA-compliant Euro Coin are betting that compliance is a feature, not a bug.
• Existential Risk: A US FedNow-backed interbank token or a wholesale CBDC could instantly outcompete on trust, making most decentralized collateral engineering irrelevant.

Yield for holders must come from somewhere. Maker's DSR, Aave's GHO incentives, and Ethena's sUSDe staking yield are all subsidies to bootstrap demand, paid from protocol revenue or external yields.

• Key Insight: Long-term, a stablecoin's sustainability fee (interest) must exceed its stability subsidy. Most fail this basic accounting.
• Investment Filter: Look for protocols that monetize the balance sheet (e.g., lending via Spark, staking via EigenLayer, T-bill yields) directly, not just from transactional fees.