How Does the Sudden Loss of Confidence in a Stablecoin Impact Market Makers on an Exchange?

Market makers (MMs) provide liquidity by simultaneously quoting bid and ask prices for derivatives contracts. A sudden loss of confidence in the settlement stablecoin forces MMs to immediately widen their spreads or halt quoting entirely.

This is because the MMs' profit and loss, which is settled in the depegged coin, becomes uncertain, drastically increasing their inventory risk. Reduced market-making activity leads to lower liquidity, higher slippage, and increased volatility, making the market less efficient and riskier for all participants.