How Does a Depeg Affect the Fiat Value of the Assets Held within an Insurance Fund?

If the insurance fund holds the depegged stablecoin as its primary asset, the fund's fiat value immediately drops by the same percentage as the depeg. This significantly reduces the fund's ability to cover negative equity balances, as the capital intended to cover $1 of loss is now worth less than $1.

If the fund holds a mix of assets, only the stablecoin portion is affected. This loss of value increases the probability of an ADL event, potentially causing a cascade of issues across the exchange.