Depeg
An event where a stablecoin loses its intended peg to the underlying asset (usually $1.00 USD), trading significantly above or below its target value. Depegs can be temporary (caused by market panic or liquidity crunches) or permanent (caused by insolvency or mechanism failure), and they can trigger cascading liquidations across DeFi.
“When Silicon Valley Bank collapsed in March 2023, USDC briefly depegged to $0.87 because $3.3 billion of its reserves were held at the bank. It recovered after the FDIC guaranteed deposits.”
Stablecoin
A cryptocurrency designed to maintain a stable value relative to a reference asset, typically the US dollar. Stablecoins provide a way to hold value and transact in crypto without exposure to price volatility. The three main types are: fiat-backed (USDC, USDT — backed by dollar reserves), crypto-backed (DAI — overcollateralized with crypto), and algorithmic (maintaining peg through algorithmic supply mechanisms).
Algorithmic Stablecoin
A stablecoin that maintains its peg through algorithmic mechanisms — such as minting and burning tokens or adjusting supply via incentives — rather than being backed by fiat reserves or overcollateralized crypto. Algorithmic stablecoins are considered higher risk because they can experience 'death spiral' depeg events if confidence collapses.
Liquidation
The forced closing of a leveraged position or the seizure and sale of collateral when a borrower's position falls below the required margin or collateralization ratio. In DeFi lending, liquidation occurs automatically via smart contracts when the value of collateral drops below a protocol-defined threshold, protecting lenders from bad debt.