DeFi protocol Blast native stablecoin, USDB, depegged on Monday morning as the market registered weakness. At the time of writing, the stablecoin has recovered to trade at par of $1 on CoinMarketCap.

However, the crypto market bloodbath continues as Bitcoin remains weak under $50,000 during Monday intraday. Stablecoins often get depegged during a market downturn due to liquidity taking a hit on the back of market volatility.

USDB recovers after falling below $1

Stablecoin USDB, which is largely tied to DAI, and is native to the Blast ecosystem, has recovered after falling below $0.94. In the early hours of August 5, USDB dropped by more than 5%, according to market data. 

USDB depeg | Source: CoinMarketCap

However, USDB has joined the list of stablecoins like USDC that have depegged at least once. USDC depegged during the banking crisis in March 2023. Despite USDB recovery,  it continues to reflect some inherent risks in ‘risk-free’ stablecoins.

DAI, the decentralized stablecoin, has mostly remained stable near $1 on the day with slight volatility.

The broader crypto market weakness could be the primary reason behind USDB’s depegging. According to crypto analyst Miles Deutscher, factors like decreasing odds of a Trump presidency, fears of a looming recession, and a correction in the stock market, led to the crypto market bloodbath.

The analyst said on X that Yen’s market position, geopolitical tensions, and other market factors like Gox distributions are possibly playing a role.

Reasons why crypto is crashing:

• Trump presidency odds decreasing• Recession fears• Stock market correction• Yen unwind• Geopolitical tensions• Jump unwinding positions• Gox distributions• Recent pump trapped fresh longs• Altcoin dispersion

Perfect storm.

— Miles Deutscher (@milesdeutscher) August 4, 2024

Additionally, a recent price pump that trapped fresh long positions has reportedly impacted the markets. As a result, Bitcoin fell by around 15%.

Market changes lead to depegging, TVL fall

Sudden market condition changes for the worse as well as a change in demand and liquidity often lead to depegging of stablecoins. Poor collateralization ratios, regulatory crackdowns, bugs in the stablecoin’s code, and network congestion could also be factors that could depeg different types of stablecoins. To maintain their peg, stablecoins use collateralization with assets like USD or other stablecoin crypto assets. In this case, DAI.

The depegging can have a domino effect as high volatility and insufficient liquidity make it challenging for other stablecoin assets to maintain their respective pegs.

At press time, USDB and DAI  remain stable after recovery. Blast, Ethereum-based Layer 2, has a TVL or total value locked of close to $836 million as per DefiLlama. On August 3, the TVL was over $1 billion and the market weakness is also evident on the chain.

Blast bridged TVL registers decline | Source: DefiLlama

While investors need to hedge their potential risks, the broader market could recover as more long positions take hold after short-term profit-taking.