Stablecoin Depegs: Redemption Frictions vs Secondary-Market Liquidity

What a depeg is, precisely

A fiat-backed stablecoin is a claim. ethereum.org describes this category as digital representations of fiat currencies that can be purchased at a 1:1 ratio and later redeemed with the issuer for the underlying currency held in reserves.

The peg has two prices. One is the issuer’s redemption value: one token, one unit of currency, subject to the issuer’s process. The other is the secondary-market price: whatever a buyer will pay on an exchange or a pool at a given moment.

A depeg is a gap between the second price and the first. The gap can open for two very different reasons:

• The claim is impaired — the reserves are insufficient, frozen, or doubted.
• The route to the claim is impaired — redemption is slow, conditional, unavailable to most holders, or temporarily closed.

The second reason is more common than the first, and it is the one that gets misread. A stablecoin can trade at 0.98 while every token is fully backed, simply because the people who hold it cannot reach the redemption window in time.

The redemption promise has conditions

Circle’s documentation for its mint and redemption product sets out the process. Redemption converts stablecoins back to fiat by creating a payout to a linked bank account: Circle debits the stablecoin from the account, then sends a fiat transfer to the bank using the rail appropriate to the region.

Every clause in that description is a potential friction:

• An account with the issuer. The holder must be an eligible customer, not merely a token holder.
• A linked bank account. The payout has a destination, and that destination must exist and be verified.
• A supported rail. Circle lists FedWire, SWIFT, RTP, SPEI, SEPA and CHATS, and states that rail availability depends on the region and the currency.
• A business day. Domestic wires received before the daily cutoff settle the same business day; international wires take one to three business days.
• A settlement delay. Payouts typically settle on the next business day.

A token holder who satisfies none of these has a claim that is real but not reachable. Their only exit is the secondary market, at whatever price it offers.

Seven frictions and what each does to the price

1. Eligibility. If direct redemption requires an institutional account, the marginal holder cannot arbitrage the discount. The discount persists until someone with access finds the return attractive relative to the capital and risk involved. A narrow eligible set means a wide potential discount.

2. Minimum size. A minimum redemption amount excludes small holders from the par route entirely. It also makes the arbitrage uneconomic for anyone whose position is below the threshold, even if they are eligible.

3. Banking hours and cutoffs. A discount that opens on a Friday evening cannot be closed by redemption until the following business day at the earliest. The market knows this, and prices the weekend accordingly.

4. Settlement delay. Circle’s documentation puts payouts at typically the next business day, with international wires taking one to three business days. During the delay, the arbitrageur’s capital is committed and the price can move further. A longer delay requires a wider discount to compensate.

5. Network mismatch. A token on a chain the issuer does not accept must be moved before it can be redeemed. That costs gas, time and a bridge, each of which is another friction. The network compatibility guide covers the mechanics.

6. Fees and rail costs. Wire fees, conversion costs and onchain gas are small in percentage terms for large redemptions and material for small ones. They set a floor under the discount for small holders.

7. Capacity and suspension. An issuer can slow, queue or suspend redemptions in defined circumstances. A queue converts a delay into an unknown delay, which is a different risk and prices differently. A suspension removes the par route entirely, and the secondary market becomes the only market.

A worked example: decomposing a 1.5% discount

Suppose a stablecoin with a $1.00 redemption value trades at $0.985 on a venue. What has to be true for that price to be rational?

Build the discount from its parts, with stated assumptions:

The first two components are measurable and small. The last two are estimates — and they are where the analysis lives. A 1.5% discount is not evidence of a 1.5% reserve shortfall. It is a market price for uncertainty about access and solvency, and the split between those two is exactly what a holder needs to judge.

The arithmetic also shows why large holders behave differently from small ones. On $250,000, a fixed $25 fee is 0.01%. On $2,500, the same fee is 1%, which by itself can justify a visible discount for the small holder even when the issuer is perfectly sound. The peg is the same; the access is not.

A worked example: queue arithmetic

Take a stablecoin with 1,000,000,000 tokens outstanding. A shock leads 5% of holders to want out: 50,000,000 tokens.

If the issuer can process 10,000,000 per business day, the queue takes five business days to clear. During that time:

• Holders who can queue are exposed to the issuer’s process, not the market price.
• Holders who cannot queue must sell in the secondary market.
• The secondary price falls until buyers — mostly those with redemption access — are compensated for tying up capital for the queue duration.

The discount in this model is the price of standing in the wrong queue. It does not require any reserve shortfall. It requires only that the queue is finite and that access is uneven.

Change one parameter and the discount changes: double the daily capacity and the queue halves, which should compress the discount. Suspend redemption and the queue becomes infinite, which is a different pricing regime entirely.

Why secondary liquidity thins when it is needed

A market maker’s business is quoting two sides and earning the spread. During a run, the flow is one-sided: almost everyone wants to sell the stablecoin for the asset it is pegged to. Taking the other side means accumulating the very asset that is falling.

The rational response is to widen quotes, reduce size, or stop quoting. That is why the liquidity available to arbitrage a discount is often smallest at the moment the discount appears. The spread, depth and slippage guide describes how depth is measured; the point here is that depth is conditional on normal flow.

This is also why a discount can persist longer than a simple arbitrage model predicts. The arbitrage requires capital that is willing to hold the token through the queue, and that capital is scarce precisely when the queue is long.

Reading a depeg correctly

The first question is not “how far below $1 is it” but “which price is this”. A venue price, a pool price and a redemption value can all differ, and the guide to reading a depeg off the price chart covers how the quoted series is constructed.

The second question is whether the discount is uniform. If the same token trades at 0.985 on one venue and 0.998 on another, the gap is about access and logistics — someone can move the token between venues, or redeem it — rather than about the issuer’s balance sheet. If every venue shows the same discount, the market is pricing the claim itself.

The third question is what is actually open. Redemption status, processing capacity, supported networks and settlement timing are operational facts that can be checked. They are more informative than the shape of the chart. For the specific mechanics of one issuer’s process, the Circle Mint redemption guide walks through the stages.

The fourth is that a stablecoin’s reserve attestation answers a different question from a depeg. An attestation speaks to backing at a date; a depeg speaks to access now. The reserve attestation guide covers what such a report can and cannot establish.

How these sources were checked

The redemption process — payout to a linked bank account, debit of the stablecoin balance, the list of supported rails, the same-business-day cutoff for domestic wires, the one-to-three-business-day range for international wires, next-business-day payout settlement, and the possibility of a returned wire crediting funds back — comes from Circle’s “How minting and redemption works” documentation, retrieved 2026-10-24. The definition of fiat-backed stablecoins as 1:1 redeemable claims on reserves comes from ethereum.org’s Stablecoins page, retrieved 2026-10-24.

Every number in the two worked examples is an illustrative assumption stated in the table or text. No issuer’s actual fee, minimum, processing capacity or queue duration is asserted, because none was verified for this piece. The decomposition is a method for organising the question, not a measurement of any specific token on any date.