Depeg

A pegged token promises a price: one dollar for a stablecoin, one ETH for a liquid staking token. A depeg is when the market stops paying it. Small, brief deviations are normal; a depeg that lasts or deepens means holders can no longer exit at the promised price.

Why it matters to lending markets

Lending markets often accept pegged tokens as collateral, and some price them at the peg instead of the market. During a depeg that choice decides the outcome:

• If the oracle keeps reporting the peg, borrowers can keep taking loans against collateral worth less than its stated value, and positions that should be liquidated aren't.
• If the oracle tracks the market, liquidations fire, but a fast depeg can still outrun them and leave bad debt.

Defences

• Check any reference or "fundamental" price against a live market price, and refuse to lend when they diverge beyond a set limit.
• Add a depeg circuit breaker that stops new borrows against collateral that has drifted too far from its peg, while leaving liquidations running.
• Size collateral caps to what could be sold during a depeg, not at the peg.