Cross-Chain Flaws Trigger YU's $1 Peg Collapse, Exposing Stablecoin Systemic Risks

The Bitcoin-backed stablecoin YU, issued by the Yala protocol, experienced a severe depegging incident in September 2025 after a security exploit allowed attackers to mint 120 million tokens without authorizationYU Stablecoin Depegs After Exploit Leads to Unauthorized Minting^[1]. The breach, which occurred on the Polygon network, triggered a dramatic drop in YU's value from its intended $1 peg to as low as $0.20Yala's Bitcoin-backed stablecoin YU depegs after security breach^[2]. Attackers exploited cross-chain vulnerabilities to transfer 7.71 million of the newly minted tokens to Ethereum and Solana, where they were rapidly exchanged for USDC. This influx of unbacked YU tokens created massive selling pressure in liquidity pools, exacerbating the token's collapseYala’s Bitcoin-Backed YU Stablecoin Struggles to Reclaim Peg^[3]. Despite partial recovery to between $0.78 and $0.91 on certain platforms, the peg has not been fully restored, raising concerns about the stability of over-collateralized stablecoinsYU Stablecoin Exploit: Understanding the September 2025 Incident^[4].

The incident underscores systemic vulnerabilities in stablecoin ecosystems, particularly in protocols relying on smart contracts and cross-chain bridges. Yala's response included halting its "Convert" and "Bridge" features to prevent further abuse and engaging security firms like SlowMist to investigate the breachFrom TerraUSD to YU: Why stablecoins fail to hold $1 and the risks investors can’t ignore^[5]. While the team emphasized that Bitcoin collateral remains intact, the attack highlighted how technical flaws in minting mechanisms can undermine even over-collateralized modelsStablecoin 101: Fiat‑Backed, Over‑Collateralized, Algorithmic — Risks & Lessons^[6]. Analysts noted that thin liquidity in Ethereum-based pools amplified volatility, as limited buying support failed to absorb the sudden influx of tokensStablecoin depegging risk prediction - ScienceDirect^[7].

This event echoes past stablecoin failures, including the 2022 collapse of TerraUSD (UST), an algorithmic stablecoin that lost its $1 peg due to a bank-run-like spiral triggered by algorithmic design flaws. The UST collapse erased $40 billion in value and exposed the fragility of models relying on mint-burn mechanisms and market confidence. In contrast, fiat-backed stablecoins like USDC and USDT have also faced depegging during crises, such as the 2023 Silicon Valley Bank collapse. These cases reveal that both algorithmic and fiat-backed models are susceptible to liquidity shortages, governance flaws, and external shocks.

Regulatory scrutiny of stablecoins is intensifying as the market approaches a $300 billion valuation. The YU exploit has reignited debates about the need for stricter oversight, particularly for cross-chain protocols and decentralized stablecoins. Industry experts argue that robust security audits, real-time liquidity monitoring, and transparent reserve disclosures are critical to restoring trust. For example, over-collateralized stablecoins like MakerDAO's DAI rely on liquidation mechanisms and Peg Stability Modules (PSM) to maintain their peg. However, the YU incident demonstrates that even these safeguards can fail if liquidity pools are insufficiently deep.

Investors face significant risks from stablecoin depegging, including irreversible value erosion, exposure to security exploits, and regulatory uncertainties. The YU exploit, for instance, dispersed assets across multiple blockchains, leaving investors with little recourse to recover losses. Algorithmic stablecoins, despite their decentralized appeal, remain particularly vulnerable during crises, as seen in the UST collapse. Meanwhile, fiat-backed stablecoins face scrutiny over reserve transparency and centralization risks. As the market evolves, projects are experimenting with proof-of-reserves, over-collateralization, and hybrid models to balance innovation with stability.

The YU and UST cases serve as cautionary tales for the stablecoin industry. While over-collateralized and fiat-backed models offer greater resilience than pure algorithmic designs, they are not immune to systemic risks. Investors must remain vigilant about liquidity depth, governance structures, and the track record of issuers. As regulatory frameworks like the EU's MiCA and U.S. stablecoin legislation take shape, the industry's ability to adapt to scrutiny will determine its long-term viability.