The arbitrage-run tradeoff in stablecoins
In this paper Yiming Ma, Yao Zeng, and Anthony Lee Zhang attempt to answer two questions: “Since the stablecoin price is determined in equilibrium, when and why would stablecoin investors want to run? How are stablecoin price deviations related to their run-risk?”
The authors compiled a novel dataset covering the six largest fiat-backed stablecoins (USDT, USDC, BUSD, USDP, TUSD, GUSD) using transaction-level blockchain data from Ethereum, Avalanche, and Tron networks. They extracted primary market creation/redemption data and secondary market trading prices from major crypto exchanges.
- Theoretical framework: Ma et al. develop a tractable model based on Diamond-Dybvig (1983) that incorporates stablecoins’ unique two-layered market structure. The model features competitive stablecoin investors, a limited number of arbitrageurs, and analyzes the interaction between primary markets (issuer-arbitrageur) and secondary markets (investor trading).
- Calibration exercise: The authors calibrated their model to real data from USDT and USDC, estimating run probabilities and evaluating policy interventions using parameters derived from repo haircuts, CDS spreads, and lending rates.
Key findings
- Concentrated arbitrage structure
The research reveals surprisingly concentrated arbitrage across stablecoins. USDT allows only 6 arbitrageurs per month on average, with the largest controlling 66% of redemption activity, while USDC operates with 521 arbitrageurs monthly. - The price stability vs. run risk tradeoff
The study identifies a fundamental tradeoff between price stability and financial stability:
– More efficient arbitrage (more arbitrageurs) improves price stability but increases run risk
– Less efficient arbitrage (fewer arbitrageurs) worsens price stability but reduces run risk - Empirical evidence of the tradeoff
Stablecoins with fewer arbitrageurs experience larger price deviations: USDT shows a median discount of 11 basis points compared to less than 1 basis point for USDC. - Quantified run risks
The calibrated model estimates economically significant run probabilities: 2.495% for USDT and 2.134% for USDC in September 2021, with USDT’s higher fragility stemming from greater liquidity transformation and USDC’s vulnerability from less concentrated arbitrage. - Policy implications
The research demonstrates that common regulatory proposals may have unintended consequences:
– Unconstrained redemptions would improve price stability but amplify run risk
– Dividend payments to investors could reduce run risk while improving price stability
– Redemption fees would reduce run risk at the cost of price stability
Stablecoin Runs and the Centralization of Arbitrage
Authors: Yiming Ma, Yao Zeng, Anthony Lee Zhang
From: Columbia University, University of Chicago, University of Pennsylvania
Stablecoins vs. tokenized deposits
This article by Stephen G. Cecchetti and Kermit L. Schoenholtz presents a detailed comparison between stablecoins and JPMorganChase’s experimental tokenized deposit (JPMD), revealing stark differences across 15 key features.
Stablecoins face several fundamental weaknesses:
- No interest payments from issuers
- No government insurance or guarantees
- Limited central bank access
- Price volatility that violates the “singleness” principle
- Transparency in transactions on public blockchains
- Cross-border regulatory complexity
JPMD and similar bank-issued tokenized deposits offer compelling benefits:
- Financial security: FDIC insurance, central bank access, and backing by JPMorganChase’s entire $4 trillion balance sheet provide institutional-grade security.
- Programmable functionality: Smart contract capabilities enable conditional payments, automated recurring payments, and embedded compliance features.
- Network effects: JPMorganChase’s ecosystem of tens of millions of customers creates powerful network externalities, making internal settlements more liquid and cost-effective.
- Multi-currency support: Unlike predominantly dollar-based stablecoins, tokenized deposits can operate across multiple currencies, facilitating international transactions.
- Regulatory compliance: Established governance frameworks and multi-jurisdictional experience provide superior data protection and compliance capabilities.
The article concludes that while stablecoins may continue serving crypto-specific use cases, tokenized deposits will likely dominate mainstream payment systems outside the crypto world. This represents a significant shift from the original crypto vision of decentralized finance toward a hybrid model where traditional banking institutions maintain their competitive advantage through technological innovation.
Are stablecoins really the future of payments?
By: Stephen G. Cecchetti, Kermit L. Schoenholtz – Brandeis University, New York University
