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How pegs fail
A peg fails when people ask for the real asset and the issuer or the design cannot produce it fast enough. The price on a market then drops below the promise.
The peg fails when people ask for the real asset faster than the design can produce it.
A worked case
A token is used as if it were a dollar in a lending protocol. Redemptions queue. The market price falls. Loans that treated it as a dollar are liquidated. The promise was a dollar. The trade was not.
A run
Everyone tries to exit. The reserves, if they exist, are slow, illiquid, or already lent out. The market price is what you can get now, not the number in the white paper.
No redemption
Some tokens have no window where you can hand them back for the backing. You are stuck selling to whoever will buy. That is not a dollar. It is a market.
A depeg can be brief or final. Either way, a plan that needed the peg to hold has already broken.
May 2022: the algorithm met a queue
A peg fails when people ask for the real asset faster than the design can hand it over. TerraUSD was built to stay near a dollar by being exchangeable for Luna. When confidence broke in May 2022, selling UST minted more Luna, and selling Luna pushed the price down, which made the peg harder to defend. The SEC's complaint describes the earlier May 2021 depeg as secretly supported by a trading firm's buying, which investors were not told. In May 2022 there was no second rescue of that kind. Both tokens went to about zero. The agency later said the collapse wiped out about 40 billion dollars in market value.
Anchor, the savings-like protocol that paid very high interest on UST, was the crowd's reason to hold a large amount of a token that had to be believed. A yield that high was not a bank account. It was a bid for deposits. When the deposits left, the mechanism that was supposed to create the dollars could only create more of the other token.
USDC's weekend below a dollar in March 2023 is the milder version: the reserves were mostly real, a bank failed, the price moved, and a government decision brought the reserves back. Milder is not the same as impossible. If you lend, borrow, or pay people in a token because it says dollar, write down what happens when it says ninety cents.
Read it yourself
These links are the record. They are not a recommendation, and they are not instructions. A news story or a court paper can still be wrong about a detail. The check does not change because a famous name is in the story.
Apply the check
Open a question. The line is about this topic. It is not a verdict that anything is safe.
Whoever exits before the discount, and the issuer if reserves are theirs.
The issuer, or the design, neither of which owes you a fast exit.
The queue, and the price on the market you actually trade.
Check yourself
If the website still says one dollar, is that the price you can sell at?
Not during a break. The market price is the one you can get.
After this you can ask whether you can redeem, and what you would actually receive today.