Why some stablecoins recover and others collapse: UST (May 2022), USDC (March 2023), DAI (March 2020)
Research retrieval: 2026-09-25 (UTC). Historical research comparison only; not investment advice.
Labels used: [Fact] = stated in a cited source; [Inference] = my interpretation; [Uncertain] = conflicting or missing evidence. "Primary" = issuer, protocol, governance, regulator or court record. "Secondary" = press or third-party analysis.
Executive summary
These three episodes were different kinds of crisis. They should not be treated as three versions of "a stablecoin depegged."
- UST (May 2022): a failure of the token's design. UST was backed only by the ability to swap it for newly minted LUNA, whose value depended on confidence in UST, plus a discretionary bitcoin reserve. When holders rushed to exit, minting LUNA destroyed its value. The reserve was gone within days and the peg never returned. Losses were realized and permanent. The SEC's figure of about $40 billion measures lost market value, not investor losses.
- USDC (March 2023): a banking and custody shock. The reserves existed, but 8% ($3.3B) were stuck at a failed bank over a weekend, when wire redemption was not running. The price recovered once US authorities guaranteed all SVB deposits and Circle resumed redemptions. The reserve loss was temporary and never realized. Holders who sold below $1 did realize losses.
- DAI (March 2020): a contained failure of the liquidation system. An ETH crash and network congestion broke Maker's auctions, and some vaults' ETH sold for zero DAI. About $4–5.7M of debt was left unbacked; estimates vary by source. DAI traded above $1, reportedly because borrowers needed DAI to repay. New MKR covered the shortfall. Liquidated vault owners bore realized losses. DAI holders took no haircut.
Answer [Inference]: Recovery depended on two things: backing whose value did not depend on the coin itself, and someone with enough capacity to absorb the loss. For USDC that was the US deposit guarantee; for DAI, MKR dilution. UST had neither. Its backstop, LUNA, depended on UST, and its reserve was finite.
1. UST / Terra, May 2022
Design at the time.
- Backing: no external collateral. The market module swapped 1 UST for $1 of newly minted LUNA, and the reverse, through a virtual constant-product pool (Terra Classic docs, primary, undated). Capacity was capped by
BasePool (docs default 250,000 SDR). Proposal 1164 put the live value at 50M SDR, about $293M a day (CoinDesk, 2022-05-11, secondary). [Uncertain] I did not retrieve the on-chain proposal itself.
- Demand support: Anchor Protocol paid "as much as 20 percent" (SEC, 2023-02-16, primary, a regulator allegation).
- Reserve: the Luna Foundation Guard (LFG) held about 80,000 BTC that it could use at its discretion to defend the peg.
- Governance: LUNA stakers voted on chain. In practice Terraform Labs (TFL) and LFG acted at their own discretion.
Timeline (UTC dates approximate to the day)
| Date | Event | Source |
|---|
| 2022-05-07/08 | UST trades below $1 after large exits. LFG begins converting reserves (audit: from May 8) | JS Held audit for LFG, 2022-11-16, Medium* |
| 2022-05-09 | LFG announces $1.5B of BTC and UST loans to defend the peg | CoinDesk, 2022-05-09 (secondary) |
| 2022-05-11 | Do Kwon backs Proposal 1164 to expand mint/burn capacity | CoinDesk, 2022-05-11 (secondary) |
| 2022-05-12 | End of the reserve-defense window in the audit | JS Held audit (as above) |
| 2022-05-16 | LFG says it has 313 BTC left, from about 80,000 | CoinDesk, 2022-05-16 (secondary) |
| 2023-02-16 | SEC charges TFL and Kwon with fraud | SEC 2023-32 |
| 2024-06-13 | $4.47B settlement; TFL to wind down and distribute assets | SEC 2024-73 |
*The audit is a primary record commissioned by LFG. Direct retrieval was blocked (HTTP 403), so its figures come from a Bitcoin.com summary.
Trigger and spread. [Fact] By the end of May 2022, UST, LUNA and MIR were "essentially worthless" (SEC 2023-32). [Fact] LFG spent 80,081 BTC plus 49.8M in stablecoins (about $2.8B) between May 8 and 12 (audit). [Inference] Stress spread three ways. The capped pool slowed arbitrage. Redemptions minted LUNA, which crushed its price and the backstop. Reserve sales bought too little UST. [Uncertain] Who made the first large exits, and whether they coordinated, remains unresolved in the primary record.
Outcome and losses.
- UST and LUNA holders suffered realized, permanent losses; the peg was never restored.
- LFG's reserve was spent.
- The SEC's "$40 billion" is combined market value lost, not net investor loss. It mixes paper wealth with realized losses.
- The 2024 settlement directs remaining TFL assets to victims. [Uncertain] Recovery rates not verified.
- [Fact, retrospective] Kwon pleaded guilty (August 2025) and was sentenced to 15 years (DOJ SDNY). [Uncertain] The sentencing date is unconfirmed because the page did not render.
2. USDC, March 2023
Design at the time.
- Backing: cash and short-dated US Treasuries. After the crisis, Circle reported 77% T-bills ($32.4B) and 23% cash ($9.7B), with custody at BNY Mellon and management by BlackRock (Circle, 2023-03-13, primary).
- Issuance and redemption: Circle minted and redeemed 1:1 for account holders by bank wire. Most holders exited by selling on exchanges or DEXs.
- Governance: Circle as a regulated company. Centre (Circle and Coinbase) governed the token standard ([Uncertain] background knowledge, not primary-verified here).
Timeline
| Date | Event | Source |
|---|
| 2023-03-10 | SVB closed. Circle discloses that $3.3B of about $40B in reserves is at SVB | The Block, 2023-03-10 (secondary quoting Circle's tweet) |
| 2023-03-11 | USDC falls as low as $0.88 (CoinGecko) | CNBC, 2023-03-11 (secondary) |
| 2023-03-11 | Maker emergency vote cuts its USDC swap module (PSM) intake to 250M DAI and adds a 1% fee | Maker executive, 2023-03-11 (primary) |
| 2023-03-12 | Treasury, Fed and FDIC: SVB depositors "will have access to all of their money starting Monday, March 13" | Federal Reserve, 2023-03-12 (primary) |
| 2023-03-13 | Circle: the $3.3B will be "fully available," and operations will resume through new banking partners | Circle, 2023-03-13 |
| 2023-03-14/15 | Domestic wires live on March 14. Backlog substantially cleared: $3.8B redeemed and $0.8B minted since Monday | Circle update, 2023-03-15/16 (primary) |
Trigger and spread. [Fact] The trigger was a bank failure, not a flaw in the token. [Inference] Over the weekend, wires could not clear. The secondary market was the only exit, so the price reflected the odds of recovering SVB deposits. Stress spread to protocols holding USDC. [Fact] DAI had about $3.1B of USDC exposure through the PSM (Cointelegraph, secondary), and Maker cut its intake (executive vote above).
Response and outcome. The deposit guarantee removed the loss. Redemptions reopened and arbitrage restored $1. [Inference] Without that guarantee, recovery would have depended on uninsured-deposit recoveries. That counterfactual is unknowable.
Losses. The reserve impairment was temporary and never realized. Holders who sold below par had realized losses, and buyers below par gained; neither amount is documented. [Uncertain] The $0.88 low is one aggregator's figure from a thin weekend market.
3. DAI, March 2020 ("Black Thursday")
Design at the time.
- Backing and issuance: Multi-Collateral DAI (launched November 2019) accepted only ETH and BAT. USDC became the third collateral on 2020-03-17 (Cointelegraph, secondary). Vaults minted DAI at a collateral ratio of at least 150%.
- Exit: DAI holders could not redeem except through Emergency Shutdown. The peg relied on arbitrage, the stability fee and the DAI Savings Rate.
- Liquidation and bad debt: keepers bid DAI for vault collateral in "flip" auctions (flip.sol, primary code). Uncovered debt is paid by minting MKR "on demand in return for dai" (flop.sol, primary code). [Uncertain] These are the code defaults and current repository versions. The live auction timings on 2020-03-12 were set by governance and were not verified here.
- Governance: MKR-holder polls and executive votes, with the Maker Foundation.
Timeline
| Date | Event | Source |
|---|
| 2020-03-12 | ETH falls about 43% ($194 to $111). Gas spikes and oracle lags. A keeper wins auctions with 0 DAI bids. A forum thread reports the surplus moved from +$500k to −$4M and says "Dai is off-peg" | Maker forum, 2020-03-12 (primary); Glassnode, 2020-03-17 (secondary on-chain analysis) |
| 2020-03-13 | Out-of-schedule executive vote changes auction parameters and targets the peg | Linum Labs blog (secondary) |
| 2020-03-17 | USDC added as collateral by emergency executive vote | Cointelegraph (secondary) |
| 2020-03-19 to 03-28 | Debt auctions sell 20,980 MKR for about 5.3M DAI | The Block, 2020-03-31 (secondary) |
| 2020-09-22 | MKR poll: about 65% vote for 0% compensation to vault owners | CoinDesk, 2020-09-23 (secondary) |
Trigger and spread. [Fact] ETH crashed while Ethereum was congested. Gas prices rose by an order of magnitude and price feeds lagged (Glassnode). With few keepers able to get transactions through, a bidder won collateral for zero DAI over roughly 2–3 hours (Maker forum). [Inference] The liquidation market failed, not DAI's reserves. DAI faced upward pressure as vault owners needed DAI to repay debt. [Uncertain] I found no primary record of the premium, so I report no figure.
Shortfall figures conflict [Uncertain]: about $4M (Maker forum, same day), $4.5M (Glassnode), and 5.67M DAI, with 62,842.93 ETH (about $8.32M) sold for 0 DAI across 1,461 auctions (Whiterabbit, independent on-chain analysis, undated). The debt auctions raised about 5.3M DAI. The gaps probably reflect cut-off times, buffer netting and ETH valuation timing.
Losses. Liquidated vault owners lost collateral beyond the penalty. This loss was realized and was not compensated after the September 2020 vote. MKR holders were diluted by 20,980 new MKR (realized). DAI holders took no haircut. A class action was filed in April 2020 (CoinDesk, 2020-04-14, secondary). [Uncertain] Its outcome was not verified.
Comparison table
| UST (May 2022) | USDC (Mar 2023) | DAI (Mar 2020) |
|---|
| Backing | Endogenous: swap into newly minted LUNA, plus a discretionary BTC reserve | Cash and T-bills held off-chain | Overcollateralized ETH and BAT vaults |
| Issuance / exit | Protocol mint/burn against LUNA with a capped pool; secondary markets | Circle 1:1 mint/redeem by bank wire; secondary markets | Vault minting; no holder redemption outside shutdown; secondary markets |
| Governance | LUNA voting; TFL/LFG discretion | Company (Circle), Centre | MKR votes; Maker Foundation |
| Kind of crisis | Failure of the token's peg and design | Failure of the reserve bank and redemption rail | Failure of the liquidation and oracle system |
| Direction of peg deviation | Far below $1, permanently | Below $1 (low of $0.88 on CoinGecko), temporarily | Above $1, temporarily (figure not verified) |
| Response | Reserve spent; $1.5B loans; capacity proposal | Government deposit guarantee; new banks | Parameter changes; USDC collateral; MKR debt auction |
| Outcome | Collapsed | Recovered within days | Recovered; system recapitalized |
| Loss bearers | UST and LUNA holders, LFG (realized) | Sellers below par (realized); reserve loss avoided | Liquidated vault owners and MKR holders (realized) |
Five lessons for evaluating stablecoin designs [Inference, grounded in the cases above]
- Ask whether the backing is independent of the coin. LUNA fell because UST fell, so it was not a backstop. T-bills and ETH could fall in price, but not because of the coin.
- Map every exit path and when it operates. USDC's weekend wire gap and Terra's capped swap pool both left thin markets to set the price. Check hours, caps and who is eligible to redeem.
- Identify the loss absorber and its size. MKR dilution and the deposit guarantee were larger than the loss. LFG's reserve was spent in about five days.
- Stress-test infrastructure, not just collateral. DAI broke on congestion, oracles and keepers. USDC broke on bank concentration: 8% of reserves at one bank.
- Read figures by measurement type. Market-value wipeouts, single-venue lows and same-day deficit estimates are not realized losses.
Unanswered questions
- Who executed the initial UST exits, and did they coordinate?
- How much have Terra creditors recovered through the bankruptcy?
- What was the exact DAI premium in March 2020, and what was the reconciled final deficit?
- How much USDC was sold below par, and by whom?
Source list (retrieved 2026-09-25 UTC)
Primary:
- SEC 2023-32 (2023-02-16)
- SEC 2024-73 (2024-06-13)
- DOJ SDNY sentencing release (date not confirmed)
- Terra Classic market module docs (undated)
- LFG/JS Held audit (2022-11-16; not directly loaded)
- Circle pressroom (2023-03-13)
- Circle March 15 update (2023-03-15/16)
- Federal Reserve joint statement (2023-03-12)
- Maker executive vote (2023-03-11)
- Maker forum Black Thursday thread (2020-03-12)
- Maker
dss contract source, flip.sol and flop.sol (current repository versions; undated for this purpose)
Secondary: CoinDesk, The Block, CNBC, Cointelegraph, Glassnode, Bitcoin.com, Whiterabbit, Linum Labs. Links appear inline above.
Data appendix: measurement notes
- Terra settlement: $4.47B total from TFL (disgorgement, interest and penalty), plus about $204M from Kwon (SEC 2024-73).
- UST $40B: SEC's combined market value of UST, LUNA and MIR lost by the end of May 2022. It is not net realized investor loss.
- LFG $2.8B: audit figure valuing 80,081 BTC and 49.8M stablecoins at execution prices, May 8–12, 2022.
- USDC $0.88: CoinGecko aggregate low on 2023-03-11, as reported by CNBC. It depends on the venue.
- DAI deficit: $4M to 5.67M DAI depending on source and cut-off time; 5.3M DAI raised; 20,980 MKR sold.
- Structured data is in
cases.json.