When a stablecoin loses the peg: what a casino balance is actually made of

The promise and the price are two different things

Every stablecoin is a claim on something. A fiat-backed coin like USDT or USDC is a claim on a reserve of cash and short-dated government paper held by the issuer, which promises to hand you a dollar for each token you return. A crypto-backed coin like DAI is a claim on a vault of other tokens, over-collateralised so that the vault is worth more than the coins issued against it. An algorithmic coin, of which TerraUSD was the largest, is backed by nothing you can redeem — only by a mechanism that mints and burns a second token to push the price back toward a dollar.

None of those designs sets the price. The price is what a buyer will pay on an exchange at this moment, and it is one dollar only as long as enough buyers believe the promise will be honoured. When they stop believing, the price falls, and it falls fastest for the design with the least behind it.

Lows are approximate and varied by exchange; the figures here are the widely reported troughs. Dates are UTC.

What each one looked like from the inside

Terra, May 2022. UST kept its peg by letting anyone swap one UST for one dollar’s worth of a sister token, LUNA, at any time. That works while LUNA has value. Over the weekend of 7–8 May large withdrawals from the main UST lending pool pushed the price to $0.98, then $0.90; holders rushed for the exit, each swap minted more LUNA, and LUNA’s price collapsed from tens of dollars toward zero, which meant a dollar’s worth of it was an astronomical number of tokens. By 13 May UST traded below ten cents and LUNA below a thousandth of a cent. Roughly forty billion dollars of market value had gone in a week. There was nothing to redeem, so there was nothing to come back.

USDC, March 2023. Circle, the issuer of USDC, held part of its cash reserve at Silicon Valley Bank. When the bank failed on Friday 10 March, Circle disclosed that $3.3 billion of the reserve — about eight percent of the coin’s backing — was inside it. Nobody knew that weekend whether depositors above the insured limit would be made whole, so the market priced the uncertainty: USDC fell to about $0.87 on Saturday 11 March. On the Sunday evening the US Treasury, the Federal Reserve and the FDIC announced that all deposits at the bank would be honoured, and USDC was back at a dollar by Monday. The coin was over-collateralised the whole time; the price still dropped thirteen percent, because the price is a bet on the promise, not the promise itself.

DAI, the same weekend. DAI was designed to be backed by crypto vaults, but by 2023 more than half of its collateral was USDC, because holding a dollar-pegged asset made the vaults easier to keep solvent. So when USDC fell, DAI fell with it, to about $0.90, and recovered when USDC did. The lesson was structural: a stablecoin is only as independent as the things behind it, and the thing behind DAI was, mostly, another stablecoin.

What a balance is made of here

The balance screen shows two numbers for each coin: an amount in the coin, and underneath it, an amount in the fiat currency you chose in your settings. Only the first of those is a fact about your account. The second is arithmetic done on the way to the screen.

So a USDT balance is an integer number of millionths of a USDT, and a display line such as “$1,000.00” is that integer, divided by a million, multiplied by the USDT price the server last sent for your display currency. If the server’s price for USDT reads 0.87 instead of 1.00, the display line reads $870.00 and the balance line still reads exactly the same number of USDT. Nothing was taken from the account; the conversion changed.

• Bets are in coin. Minimum bet, maximum bet and maximum profit are set per coin, not in dollars, and a wager of 10 USDT is 10 USDT whether the display line calls it ten dollars or eight seventy. The house edge on the game is unaffected by the price of the coin it is played in.
• The price map is a feed. The fiat figure comes from the server’s coin-price service, which polls a market price; where a crypto price comes from walks through that feed and when the price feed goes dark explains what the client does when it stops. A stablecoin depeg reaches your balance screen through exactly that path, as a price change.
• Withdrawals are in coin. You withdraw the coin units you hold; what they are worth on arrival is decided by the market on the day. During the USDC weekend, anyone who withdrew USDC and sold it on an exchange at $0.90 realised the loss; anyone who held it two days did not.

What it means for a player

A stablecoin is the most convenient unit to play in, because the numbers on the screen mean what they say without a mental conversion. It is also the coin whose risk is easiest to forget, precisely because the number looks like a dollar. A few habits keep the risk in view.

• Know the design of the coin you hold. Fiat-backed coins with published reserve attestations have survived every stress so far; the algorithmic design has not. That is not a prediction, only the record.
• Do not confuse the display line with the balance. If the fiat figure moves while the coin figure does not, the coin’s price moved. The account did not lose or gain a token.
• Panic is the mechanism. In each of the three cases above, the fall was driven by holders rushing to sell into a thin market. The people who lost most were the ones who sold at the bottom of a coin that recovered, and the ones who waited for a recovery in a coin that could not. Telling those two apart is the whole question, and it is a question about what backs the coin, not about the chart.
• A bankroll in a stablecoin is still a crypto bankroll. It carries redemption risk, custody risk and network risk — right coin, wrong network — on top of the game’s house edge, which is the only one of those the game itself is responsible for.

The price is a bet on the promise. The balance is a count of coins. Only the first one moved.the arithmetic in coinValue.ts, applied to March 2023