How Does Arbitrage Fail to Prevent a Death Spiral in a Highly Volatile Market?

Arbitrageurs profit by buying the de-pegged stablecoin at a discount and selling it for the pegged value (or reserve asset). However, in a death spiral, two factors cause failure.

First, the reserve asset's price falls too quickly, erasing the profit margin for the arbitrageur. Second, the sheer volume of panic selling overwhelms the arbitrageurs' capital and capacity.

The risk of the reserve asset becoming worthless outweighs the potential profit, halting arbitrage activity.