What Is a “Death Spiral” in the Context of a Cryptocurrency Stablecoin?

A stablecoin death spiral occurs when its peg to a fiat currency fails, often due to a lack of collateral or confidence. If the mechanism designed to maintain the peg involves selling the stablecoin's reserve asset, falling stablecoin demand forces more selling of the reserve.

This downward pressure on the reserve asset's price further destabilizes the stablecoin, creating a self-reinforcing collapse. This rapid devaluation is the spiral.