What Is “De-Pegging” in the Context of Stablecoins and How Does It Affect LPs?

De-pegging occurs when a stablecoin loses its intended fixed exchange rate, typically 1:1 with a fiat currency like the US dollar. This event drastically changes the price ratio in a stablecoin pool.

For LPs in a stablecoin-to-stablecoin pool, a de-peg results in significant impermanent loss. Arbitrageurs will drain the pool of the asset that is still pegged, leaving the LP with a larger share of the de-pegged, less valuable asset, realizing a substantial loss upon withdrawal.