I guess there's really a couple different failure modes for a pegged coin:
1. The backing organization isn't actually fully backing the coin with the backing currency. Too many people try to sell the coin at once, and the backing organization goes bankrupt.
2. The backing currency loses its real value, so that you can no longer exchange it for goods and services. You can buy as many as you want from your pegged coin, but all your money is gone. This could happen if the backing currency is another volatile coin, or if it is a fiat currency subject to hyperinflation.
I read Matt Levine's article on UST, and by his account it fell victim to the second failure mode: as holders lost confidence, the value backing Luna coin went down toward 0, due to the backing mechanism diluting the supply ad infinitum. Right now, Luna is at a low but positive value (in USD), and Terra has lost its peg, mainly because the backing mechanism is too slow. If it were infinitely fast, Luna would become worthless, and Terra would be worth whatever value speculators would gamble it at.
My apologies for the confusion, I got mixed up in the last comment. If you enforced the peg by contract, then you'd need a steady stream of buyers who believe it is valuable. But if you have a backing organization who can always provide a backing currency, then the peg can be maintained through arbitrage alone.
1. The backing organization isn't actually fully backing the coin with the backing currency. Too many people try to sell the coin at once, and the backing organization goes bankrupt.
2. The backing currency loses its real value, so that you can no longer exchange it for goods and services. You can buy as many as you want from your pegged coin, but all your money is gone. This could happen if the backing currency is another volatile coin, or if it is a fiat currency subject to hyperinflation.
I read Matt Levine's article on UST, and by his account it fell victim to the second failure mode: as holders lost confidence, the value backing Luna coin went down toward 0, due to the backing mechanism diluting the supply ad infinitum. Right now, Luna is at a low but positive value (in USD), and Terra has lost its peg, mainly because the backing mechanism is too slow. If it were infinitely fast, Luna would become worthless, and Terra would be worth whatever value speculators would gamble it at.
My apologies for the confusion, I got mixed up in the last comment. If you enforced the peg by contract, then you'd need a steady stream of buyers who believe it is valuable. But if you have a backing organization who can always provide a backing currency, then the peg can be maintained through arbitrage alone.