Yala's stablecoin YU experienced a significant depegging again between 4:15 AM and 5:00 AM on Monday (November 17), with the price quickly dropping to $0.64. According to CoinMarketCap, as of 3 PM on Monday, the price of YU was $0.4869, with a market cap of approximately $43.73 million, a 24-hour decline of 47.75%, and a trading volume of only $12,650, down 98.53%.

Before this depegging occurred, the DeFi community Yam had issued a warning on November 15 on the X platform, stating, "We have observed dangerous signals from Yala's stablecoin YU. An address closely related to Yala is fully borrowing USDC and most of the YU funds from the Yala Frontier market on Euler. Despite interest rates remaining high, there has been no repayment action. Currently, the market's capital utilization rate has reached 100%, meaning lenders cannot withdraw any liquidity."

In fact, this is the second time YU has depegged in just two months. In mid-September, an attacker exploited a vulnerability in the LayerZero multi-chain bridge or private key permissions to mint approximately 120 million YU without authorization. About 77,000 YU were converted into an equivalent amount of USDC and further exchanged for 1,501 Ethereum (ETH), which were dispersed to multiple wallets. After the incident, the price of YU briefly fell to around $0.20, far below the pegged target of $1.

To address the crisis, Yala suspended the "Convert" and "Bridge" functions and launched an investigation in collaboration with a security firm, while emphasizing that Bitcoin collateral assets were unaffected.

As an important infrastructure in the crypto market, the core value of stablecoins lies in their peg to fiat currencies or other assets, providing price stability and liquidity assurance. However, recent depegging events have shown that even stablecoins claiming to be backed by physical or crypto assets can experience value deviations from their target price.

The fundamental reasons for depegging can usually be categorized into three types: insufficient collateral or volatility of pledged assets, market liquidity pressure, and smart contract or operational risks.

Firstly, some stablecoins rely on collateral assets that may experience value fluctuations or be under-collateralized. Once the market experiences significant volatility, the market value of the collateral may not fully support the issuance volume, leading to a loss of peg.

Secondly, insufficient liquidity is also a significant trigger for depegging. In exchanges, AMMs, or lending platforms, if the liquidity pool for redeeming the stablecoin is limited, when a large number of users concentrate on redeeming or borrowing, the market's absorption capacity may be insufficient, causing prices to deviate rapidly. This risk is further amplified, especially when cross-chain operations are frequent or liquidity is concentrated in specific addresses.

Additionally, technical and operational vulnerabilities are also important factors in the instability of stablecoins. Errors in smart contracts, private key leaks, unauthorized minting, or multi-chain bridge security incidents can quickly increase the circulating supply of stablecoins or restrict user withdrawals, thereby undermining the pegging mechanism. The high leverage and automated strategies in the DeFi market may also trigger a chain reaction during price fluctuations, accelerating the depegging.

Currently, to prevent depegging events, many projects are attempting measures such as reserve proofs, over-collateralization, and real-time audits. These innovations mark a shift of stablecoins from algorithmic fantasies to transparent, trust-building mechanisms, but investors must also understand that in the crypto market, the stability of $1 has never been absolutely guaranteed.

The earliest example of depegging was the NuBits incident in 2018. NuBits was launched in 2014, claiming to maintain a stable price of $1 without fiat reserves, relying on algorithms to adjust supply and using "trust currency" (NuShares) to maintain system balance.

However, in 2016, when the Bitcoin (BTC) market entered a bull market, a large number of NuBits holders concentrated on selling NuBits to chase Bitcoin's gains, leading to a break in its peg. In 2018, as the crypto market plummeted, NuBits also began to face selling pressure. Due to a lack of real collateral and external funding support, the system could not maintain the buy support price, causing the token to quickly lose its peg to $1, dropping to around $0.20, with prices unable to recover for a long time.

In May 2022, the collapse of TerraUSD became one of the largest disasters in stablecoin history. At that time, large funds withdrew approximately 375 million UST from the Anchor protocol, rapidly undermining market confidence. Investors began to sell off en masse, causing UST to fall below $1, triggering panic redemptions. To restore the peg, the system continuously minted LUNA to buy back UST, but as selling pressure increased, the supply of LUNA skyrocketed from about 1 billion to trillions in just a few days, with the price plummeting to nearly zero.

Fiat-collateralized stablecoins have also experienced depegging. USDT once fell to about $0.80 in 2018 due to market concerns about its solvency; while USDC briefly lost its peg to $1 after the collapse of Silicon Valley Bank in 2023.

In the recently passed October, the synthetic dollar stablecoin USDe issued by Ethena Labs also saw its price on the Binance platform drop to about $0.65. The core reason for the event was not the failure of the Ethena protocol mechanism, but rather an abnormal price source on Binance during extreme market conditions. Binance used its own order book as a pricing basis, but its depth was insufficient, leading to a rapid pull under heavy selling pressure, resulting in a "localized depegging" that deviated from the true market price.

Stablecoins aim to provide reliability, but when they decouple, they can pose serious risks to investors and the broader crypto market. Here are some key risks that investors should be aware of:

Financial Loss: Depegging can lead to irreversible value losses. For stablecoins, their annual risk level is higher than that of traditional banks, increasing the likelihood of investors suffering financial losses.

Regulatory and Reputation Risk: The stablecoin market is close to $300 billion, primarily dominated by mainstream coins like USDT, USDC, and USDe. Increasing regulatory scrutiny has raised concerns about the financial stability of issuers, while also highlighting that mainstream adoption remains limited.

Systemic Impact: The collapse of a single stablecoin can trigger a chain reaction throughout the entire market. For example, the Terra collapse caused billions of dollars in losses while impacting related DeFi systems, highlighting the high interconnectivity of various segments in the crypto ecosystem, with risks having a magnifying effect.

Multiple stablecoin collapses show that dollar-pegged digital assets have both development potential and significant vulnerabilities.

Each imbalance exposes issues such as insufficient liquidity, low collateral quality, and over-reliance on algorithms. Some analyses suggest that to reduce risks, stablecoin issuers should strengthen collateral mechanisms, adopt over-collateralization models, and prioritize high-quality, liquid assets. Additionally, increasing transparency, including providing reserve proofs, conducting regular independent audits, and clearly disclosing reserve and redemption policies, is essential. Backup funds can also play a buffering role during sudden market sell-offs, stabilizing the pegging level of stablecoins.

Related: Cryptocurrency market plummets over the weekend, Bitcoin (BTC) briefly erases gains from 2025.

Original article: “Yala Stablecoin YU Depegs for the Second Time: Can Stablecoins Really Be Stable?”

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