Counterparty risk is the risk that the institution you trust — a <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a> issuer, bank, or exchange — fails to keep its promise, and your assets face loss. Holding USDC means trusting Circle and its bank partners. Holding USDT means trusting Tether's reserve claims. If any link in that trust chain breaks, your 'stablecoin' can become a worthless IOU — even if the on-chain number hasn't changed.

De-peg refers to a <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a>'s market price deviating from its target peg value. For a USD-pegged stablecoin, 1 coin normally equals $1; when market price drops to $0.95 or rises to $1.05, a de-peg has occurred. De-pegs can be temporary (hours to days, recovering after market correction) or permanent (issuance mechanism collapses, unable to recover). The consequences are vastly different: the former has limited impact; the latter can result in total principal loss for holders. Key factors for assessing de-peg severity: deviation magnitude, duration, and whether the issuance mechanism still functions.

A <a href="/en/glossary/derivatives-and-leverage/liquidation/" target="_blank">Liquidation</a> cascade occurs when market declines trigger the first batch of position liquidations, and the liquidation actions themselves further push down asset prices, causing more positions to hit their liquidation thresholds — creating a self-reinforcing downward spiral. This is the most dangerous systemic risk for crypto-collateralized stablecoins (like DAI/USDS) — not how much the market itself falls, but how the liquidation mechanism 'amplifies' the decline far beyond what fundamentals justify, potentially plunging the entire protocol into a bad debt crisis.

Proof of Reserves is the verification mechanism <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a> issuers use to prove to the outside world that they actually hold adequate reserves. USDT publishes monthly reserve reports, USDC has monthly attestations from Grant Thornton, and Maker's on-chain collateral can be checked by anyone at any time. But 'having a report' doesn't equal 'reserves are adequate' — report quality, independence, and frequency vary enormously. Part of the 2022 FTX collapse stemmed from opaque reserve data.

<a href="/en/glossary/onchain-data/proof-of-reserves/" target="_blank">Proof of Reserves (PoR)</a> is a mechanism used by crypto asset exchanges or <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a> issuers to publicly verify that their held assets are sufficient to cover user liabilities. Two method types: auditor attestation (like Circle's monthly Deloitte report, confirming 'reserves ≥ circulation'); and cryptographic PoR (using <a href="https://crypto-bible.com/en/glossary/blockchain-fundamentals/merkle-tree/" target="_blank">Merkle Tree</a> and similar techniques that allow anyone to independently verify their account balance is included in the claimed total reserves). PoR is an important transparency standard the industry pushed for after FTX's 2022 collapse — FTX never provided credible PoR, and if users had been able to verify beforehand, collapse losses could have been substantially reduced.

Depeg risk is the most central risk of stablecoins: the possibility that a <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a>'s market price deviates from its target peg value (usually $1). Depegging comes in two types: temporary (caused by market panic or insufficient liquidity, typically self-correcting within hours to days — like USDC's 2023 SVB event); permanent (issuer bankruptcy, reserve exhaustion, or algorithmic failure causing complete collapse to zero — like UST in 2022). The key to judging whether a depeg is temporary or permanent: whether the underlying reserves or mechanism remain intact.