Stablecoins are the plumbing
Almost everything in DeFi settles in a stablecoin. They're the base asset in most liquidity pools, the collateral of choice in lending markets, and the unit most yields get quoted in. USDC and USDT alone sit behind well over $100 billion in on-chain liquidity. So when one of them loses its peg, even for an afternoon, the damage doesn't stay put. It moves through every protocol that touches that token, which is basically all of them.
What March 2023 actually looked like
In March 2023 Circle disclosed that $3.3 billion of USDC reserves were sitting at Silicon Valley Bank, which was in the middle of failing. USDC dropped to around $0.87 on secondary markets. No hack, no broken design. It was a bank run on the reserves with a layer of market panic on top.
The knock-on effects showed up fast. On Curve's 3pool (USDC/USDT/DAI), traders dumped USDC for USDT, drained the USDT side, and pushed the pool past 90% USDC. If you were providing liquidity there, you woke up holding an asset trading at roughly a 13% discount.
Lending markets had a different headache. USDC was everywhere as collateral on Aave and Compound, so when it depegged, the value backing all those loans dropped and positions drifted toward liquidation. But liquidating USDC collateral at a 13% discount means the protocol eats a loss, since the liquidator is paying in depressed USDC. Some protocols still had oracles marking USDC at exactly $1.00, which stopped the liquidations but opened a different door: borrowers could game the stale price.
First-order: the pools go lopsided
The first thing that breaks is pool balance. In a USDC/USDT pool, once USDC drops to $0.90, everyone wants to sell USDC and grab USDT. The pool fills up with USDC and the USDT side empties out. The AMM does exactly what it's built to do, which here means automatically buying the falling asset and selling the good one, and LPs absorb that loss in real time.
It doesn't stop at one pool. Any pool holding the depegged token gets pulled the same way. USDC/ETH, USDC/wBTC, and meta-pools built on top of the 3pool all tilt as arbitrageurs pull out the non-USDC assets. LPs eat the depeg in proportion to their share.
Second-order: lending starts to cascade
Lending markets kick off the next wave, and there are two ways to get hit. Borrowers who posted USDC now have weaker collateral, which can trip liquidations. Lenders who parked USDC to earn yield find their deposits worth less on the way out, assuming the protocol is actually marking USDC to market.
How the oracle behaves is the whole game here. Leave it pricing USDC at $1.00 and the market pretends nothing happened, which blocks the liquidation cascade but lets borrowers deposit cheap USDC as full-price collateral and skim the difference. Price it at market instead and liquidations cascade, but the protocol stays solvent. Different protocols made different calls in March 2023, and their outcomes split along exactly those lines.
DAI got dragged in too. It's partly backed by USDC through the Peg Stability Module, so the market correctly read part of DAI's backing as impaired and DAI depegged as well. That pushed the mess one layer further, from USDC into DAI and then into everything that leans on DAI.
Then confidence goes
Underneath the mechanical stuff, depegs set off a behavioral cascade. Once one stablecoin cracks, people stop trusting stablecoins as a category. They rush to sell or redeem the others, and now you've got selling pressure on tokens that are perfectly well collateralized. That's the contagion piece, where one issuer's problem quietly becomes everyone's problem.
During the UST collapse in May 2022, even fully backed stablecoins like USDT dipped below $1.00 on some venues. Not because their reserves were shaky, but because scared holders were dumping anything with "stablecoin" on the label. And that panic can turn real: enough forced redemptions and an issuer might have to sell illiquid assets at a loss to keep up.
How I'd position before it happens
You can't fully wall yourself off from stablecoin risk if you touch DeFi at all, but a few habits shrink the blast radius:
- Spread your stablecoin holdings across USDC, USDT, and DAI so any single depeg only clips part of the stack.
- Keep your LP positions in stablecoin pools from getting too concentrated, since that's where imbalance losses land first.
- Watch reserve attestations for lead time. Circle publishes USDC attestations regularly and Tether reports quarterly. They're snapshots, not live feeds, but a real shift in reserve quality is a flare worth noticing.
The bigger edge is having a plan instead of a prediction. Know ahead of time which positions carry USDC risk versus USDT risk, and be able to unwind them fast, so you're acting instead of freezing when the peg slips. On Blockcircle I keep that exposure mapped out for exactly this reason. The traders who came out ahead in March 2023 were the ones who read it as a temporary bank-run wobble rather than real insolvency, and bought USDC around $0.88 to $0.92 knowing it would find $1.00 again once SVB got sorted. Decide which side of that you'd be on before the next one, not during it.