De-peg

Simple explanation

Background: Korean exchanges trade Tether (USDT) and other stablecoins for won, and kimchi premium figures, CoinGaja's included, take 1 USDT as $1, so a de-peg shows up at once in both the kimchi premium and the Tether premium. Koreans say 디페깅.

A peg ties one asset's value to a fixed reference. Stablecoins such as Tether (USDT) and USDC are built so that one coin equals one dollar, and a de-peg is when that link slips and the price moves clearly away from $1. Everyday wobbles such as $0.999 or $1.001 are not usually called a de-peg; the word is used when the price is off by a few percent or stays away for a long time. There is no official threshold. The same word is used for tokens built to track one unit of another coin when they drift away from it.

How a peg is held depends on the kind of stablecoin. With fiat-backed coins (USDT, USDC), which hold reserves such as cash and short-term US Treasury bills, arbitrage pulls the price back: below $1, traders buy cheap and redeem with the issuer for $1; above $1, they mint new coins at $1 and sell them dear. But only the issuer's account holders can deal with it directly, on terms that vary by issuer, so most individuals can only buy and sell on exchanges. Crypto-collateralized coins hold extra collateral and sell it off (liquidation) when its value drops; algorithmic coins, which try to hold the price by minting and burning another token with no collateral, have almost nothing to fall back on once confidence breaks.

A de-peg usually starts with doubt: "Can I really get $1 back?" A bank holding the reserves fails, bad news about the issuer spreads, or the whole market crashes and everyone rushes for the exit at once. Over a weekend, when banks are closed, the way into dollars can be shut and recovery can be slower. In a crisis, money can also crowd into one particular stablecoin and push it above $1.

There have been big de-pegs. The algorithmic TerraUSD (UST) first wobbled on May 7, 2022, collapsed from May 9, fell to a few tens of cents within days and never got back to $1; LUNA, the token meant to support it, went from around $80 to a few cents by May 12. In the shock, Tether (USDT) dropped to $0.95 on some exchanges on May 12 before returning to about $0.998 the same day, and Tether said it processed $10 billion of redemptions in the twelve days from May 11. DAXA, the alliance Korea's won-market exchanges launched in June 2022, was set up after this crisis to build investor protections together.

Fiat backing is no guarantee either. When Silicon Valley Bank (SVB) was shut on March 10, 2023, USDC's issuer Circle said $3.3 billion of its roughly $40 billion in reserves sat at the bank. On March 11, USDC fell to around $0.87 at one point, and Coinbase paused conversions between USDC and dollars over the weekend while banks were closed. After the US Treasury, Federal Reserve and FDIC said on March 12 that all SVB depositors would be protected, USDC was back near $1 within days.

In a de-peg, anyone holding the stablecoin "as cash" takes the loss directly. Markets priced in that stablecoin lose their yardstick, so other coins' prices look odd, and futures or loan positions using it as collateral see the collateral shrink and face a higher risk of liquidation. Selling in a panic locks in the loss if the peg soon comes back; holding on in the belief it will recover can mean losing almost everything if it collapses for good, as UST did. There is no way to know in advance which it will be.

It shows up in kimchi premium math straight away. CoinGaja uses Binance's USDT-market price as the overseas price and counts 1 USDT as $1. If Tether drops to $0.97, coins on Binance are quoted correspondingly higher in USDT, the overseas price converted at the exchange rate comes out too high, and the rate-based premium reads a little over 3 percentage points too low. If Tether's won price in Korea follows its value abroad down, the Tether premium (Korean USDT price ÷ KRW/USD rate − 1) falls by about as much and can turn negative. The Tether-based premium, which converts the overseas price with Upbit's USDT won price instead of the rate, stays almost unchanged because the two effects cancel out. So if the kimchi premium and the Tether premium both sink sharply for no other reason, check Tether's own value before anything else.

CoinGaja's Live Tether premium page shows the Tether premium on Upbit, Bithumb, Coinone and Digital X, their median (the headline value) and a chart, refreshed every 30 seconds. Its "USDT abroad" figure is Coinbase's USDT/USD price, a reference for how far Tether is from $1 that is not used in the premium itself. If that figure sits near $1 while the Tether premium moves, the move comes from Korean demand; if it too is clearly away from $1, a de-peg is the likely suspect. The How CoinGaja calculates the premium page explains the 1 USDT = $1 basis and the Tether-based premium, and the Kimchi premium by coin table can switch between the rate-based and the Tether-based premium.

Example

※ Example numbers, for illustration only

See it on CoinGaja

• 💵 Live Tether premium›
• 🧮 How CoinGaja calculates the premium›
• 📊 Kimchi premium by coin›

Related terms