稳定币跑路与套利中心化（英）

WORKINGPAPER·NO.2025-76

StablecoinRunsandtheCentralizationof

Arbitrage

StablecoinRunsandtheCentralizationofArbitrageYimingMa,YaoZeng,andAnthonyLeeZhang

May2025

JELNo.G1,G2,G21,G23,G28

ABSTRACT

Stablecoinsarecryptoassetswhicharedesignedtobepeggedtothedollar,butarebackedbyimperfectlyliquidUSDassets.Weshowthatstablecoinsfeatureconcentratedarbitrage:thelargestissuer,Tether,onlyallows6agentsinanaveragemonthtoredeemstablecoinsforcash.Wearguethatissuers'choiceofarbitrageconcentrationreflectsatradeoff:efficientarbitrageimprovesstablecoinpricestabilityinsecondarymarkets,butamplifiesrunrisksbyreducinginvestors'priceimpactfromsellingstablecoins.Ourfindingsimplythatpoliciesdesignedtoimprovestablecoinpricestabilitymayhavetheunintendedconsequenceofincreasingstablecoinrunrisks.

YimingMa

ColumbiaUniversity

ColumbiaBusinessSchoolandNBER

ym2701@

YaoZeng

UniversityofPennsylvaniaTheWhartonSchool

andNBER

yaozeng@

AnthonyLeeZhang

UniversityofChicago

BoothSchoolofBusiness

anthony.zhang@

Adataappendixisavailableat

/data-appendix/w33882

1

1Introduction

Fiat-backedstablecoinsareblockchainassetswhosevalueisclaimedtobestableat$1.Suchpricesta-bilityisachievedbypromisingtobackeachstablecointokenwithatleast$1inUSdollar-denominatedassets,suchasbankdeposits,Treasuries,corporatebonds,andloans.ThesixlargestUSdollar-backedstablecoinshavegrownfrom$5.6billioninmarketcapitalizationatthebeginningof2020toover$130billionatthebeginningof2022.Thepotentialforstablecoinstobecomeawidelyacceptedmeansofpaymentthatcompeteswithfiatmoneyandbankdeposits(e.g.,

Brunnermeier,JamesandLandau

,

2019

,

Duffie

,

2019

)hasattractedactivediscussionsabouthowtomitigatepotentialriskstofinancialstabilityandwhattheoptimalregulatoryframeworkshouldbe.

1

Theidealstablecoinalwaystradesatastable$1andisfreefrompanicruns.However,thede-terminantsofandrelationshipbetweenstablecoins’runriskandpricestabilityarefarfromobvious.Stablecoinsholdilliquidassetswhilepromisingafixed$1redemptionvalue.UnlikeanMMForacommercialbank,this$1redemptionisrestrictedtoaspecificsetofinstitutionalarbitrageurs.Thevastmajorityofinvestorscanonlytradestablecoinsonsecondarymarketexchanges,similartoinvestorstradingETFsharesonsecondarymarkets.Theseinvestorstradeatthesecondarymarketprice,whichfrequentlydeviatesaboveandbelow$1dependingonthedemandandsupplypressuresinthemarket.Sincethestablecoinpriceisdeterminedinequilibrium,whenandwhywouldstablecoininvestorswanttorun?Howarestablecoinpricedeviationsrelatedtotheirrun-risk?

Weanswerthesequestionsbydevelopingaframeworkforthemarketstructureofstablecoins,showinghowissuers,arbitrageurs,andcustomersinteracttodeterminethestabilityofstablecoinpricesandthelikelihoodofpanicruns.Ourfirstcontributionistodocumentthenovelandsurprisingfactthatstablecoinsfeatureconcentratedarbitrage.Forexample,thelargeststablecoin,USDT,onlyallowsforsixarbitrageursinanaveragemonth,whereasallotherinvestorsbuyandsellstablecoinsincompeti-tivesecondarymarkets.Ourfindingofconcentratedarbitrageissurprisingbecausearbitrageurstradeagainstfluctuationsinstablecoindemand:whenthestablecoinpricefallsbelow$1,arbitrageurscanbuystablecoinsfromthesecondarymarketandredeemthemwiththeissuerfor$1,whichpushesthe

1Forexample,seeG7WorkingGroupandothers,2019,“InvestigatingtheImpactofGlobalStablecoins”;ECB,2020,“Stablecoins:Implicationsformonetarypolicy,financialstability,marketinfrastructureandpayments,andbankingsuper-visionintheeuroarea”;BIS,2020,“Stablecoins:potential,risksandregulation”;andIMF,2021,“TheCryptoEcosystemandFinancialStabilityChallenges”.

2

stablecoinpricebackup.Inotherwords,issuerscouldsimplyauthorizemorearbitrageursandmakearbitragemoreefficienttoimprovepricestabilityinsecondarymarkets.

Second,weshowthatwhilelimitingarbitrageisharmfultostablecoinpricestability,limitingar-bitragecan,infact,reducethelikelihoodofpanicruns.Panicrunsbyinvestorsarepossibledespitestablecoinstradingoncompetitiveexchanges.Thisisbecauseissuersallowarbitrageurstoredeemsta-blecoinsfor$1inprimarymarkets,butbackthispromisebyholdingilliquidreserveassets.Ifenoughstablecoinholdersattempttosellandtheissuercannotmeetarbitrageurs’redemptionrequeststhroughreserveassetfire-sales,itisrationalforotherstablecoinholderstosell,leadingtoaself-fulfillingpanicrun.However,runsarelesslikelywhenarbitrageisinefficientbecauseinvestors’salesdecreasesecondary-marketpricesmore,discouragingotherinvestorsfromselling.Wethushighlightanewtradeofffacedbystablecoinissuers:bychoosinghowconcentratedarbitrageis,issuerstradeoffthebenefitsofarbitragetopricestabilitywiththecostsfromincreasedrunrisk.

Third,ourframeworkhasnovelimplicationsfortheeffectsofpolicyinterventionsthathavebeenproposedinvariousjurisdictions.

2

Ourresultsimplythatalthoughimprovedpricestabilityandreducedrunriskarebothdesirabletraitsofstablecoins,theyarefundamentallydifferent,andonemaycomeattheexpenseoftheother.Forexample,proposalsthatremoveissuers’abilitytodeterminearbitrageconcentrationusingthetwo-layeredmarketstructurewoulddirectlyimprovepricestability,butmayhavetheunintendedconsequenceofamplifyingrunrisk,ifnotcoupledwithothermeasuresthatreduceassetilliquidity.

Ourempiricalfindingsarebasedonanoveldatasetoffiat-backedstablecoins.Eachstablecoincreationorredemptioninvolvesastablecointransactionbetweenanissuerandanarbitrageuronapublicblockchain.Thus,toanalyzethemarketstructureofthearbitragesector,wecollecttransaction-leveldataoneachstablecoincreationandredemptioneventforthesixlargestfiat-backedstablecoins:Tether(USDT),CircleUSDCoin(USDC),BinanceUSD(BUSD),Paxos(USDP),TrueUSD(TUSD),andGeminidollar(GUSD)fromtheEthereum,Avalanche,andTronblockchains.Tocapturetradingactivitybyinvestorsandarbitrageursonsecondarymarkets,wealsoextracttradingpricesinsecondarymarketsfromthemaincryptoexchanges.Further,weobtainthecompositionofreserveassetsforUSDTandUSDC,whichreportedthesebreakdownsatvariouspointsin2021and2022.

2ProposedregulatoryframeworksforstablecoinsintheEU,UK,andUSallcontainprovisionsonhowstablecoincre-ationsandredemptionsshouldbehandled;see

EuropeanParliamentandCounciloftheEuropeanUnion

(

2023

),

Financial

ConductAuthority

(

2023

),

StablecoinTransparencyandAccountabilityforaBetterLedgerEconomy

(

STABLE

),and

GuidingandEstablishingNationalInnovationforU.S.Stablecoins

(

GENIUS

).

3

Wedocumentseveralstylizedfactsaboutstablecoinarbitrage.First,wefindthatarbitrageisgen-erallyfairlyconcentrated,thoughthedegreeofconcentrationvariessignificantlyacrossstablecoins.USDTonlyhassixarbitrageursredeemingstablecoinsduringtheaveragemonth,andthelargestar-bitrageuraccountsfor66%ofthetotalredemptionactivity.Incontrast,arbitrageatUSDCismorecompetitive,with521redeemingarbitrageursinanaveragemonth.Further,stablecointradingpricesinsecondarymarketsfrequentlydeviatefrom$1.Wenotethatthesepricedeviationsarenotanalo-goustoMMFs’“breakingthebuck”noraretheyanindicatorofruns.Rather,stablecoinstradebelow(above)$1whenselling(buying)pressureinsecondarymarketsisnotfullyabsorbedbyarbitragetrade,consistentwith

LyonsandViswanath-Natraj

(

2021

).

Wefindthatstablecoinswithfewerarbitrageurshavelargeraveragepricedeviationsinsecondarymarkets.Forexample,themediandiscountatUSDTis11bps,whilethemediandiscountatUSDCislessthan1bps.Thegapbetweentheaveragediscountsislargerat54bpsforUSDTand1bpsforUSDC.Thisfindingisconsistentwiththelimitstoarbitrageliteratureshowingthatimperfectarbitragehurtspriceefficiency(e.g.,

ShleiferandVishny

,

1997

,

GrombandVayanos

,

2002

).However,italsoleavesopenthequestionofhowstablecoinissuerschoosethearbitrageconcentrationtheyallow.Afterall,ifapprovingmorearbitrageursimprovespricestabilityinsecondarymarkets,whydon’tallstable-coinissuersallowforfreeentryandperfectlyefficientarbitrage?Atthesametime,howisthechoiceofarbitrageconcentrationrelatedtotheliquidityofreserveassetsgiventhatUSDTalsohasmoreilliquidassetsaspartoftheirreserveassetsthanUSDC?

Wedevelopatractablemodelofthetwo-layeredmarketstructureofstablecoins,yieldinganalyticalsolutionsonbothstablecoinpriceandrunrisk.Inthebaselinemodel,stablecoininvestorsdecidewhethertoholdstablecoinstocaptureanexogenouslong-termholdingbenefit.Investorscanalsoprematurelyselltheirstablecoinsinthesecondarymarkettocashout,butonlyarbitrageursareallowedtocreateorredeemstablecoinswiththeissuerforafixed$1.Arbitrageurshaveinventorycosts,sothattheremustbeawedgebetweensecondarymarketpricesandredemptionvaluesforarbitrageurstoact.

Theissuermeetsarbitrageurredemptionsbyprematurelyliquidatingilliquidreserveassetsatadis-count,whichisultimatelywhytheriskofpanicrunsbystablecoininvestorsremains.TheconventionalviewmayimplythatlikeETFs,stablecoinsarenotrunnablebecauseofexchangetrading,wherethetradingpriceinsecondarymarketsfallsasmoreinvestorssell,creatinganaturalstrategicsubstitutabil-ity.Inthecaseofstablecoins,arbitrageursarepromisedafixedin-cashredemptionpricebytheissuer.

4

Theissuer’scostlysalesofilliquidassetstomeetarbitrageurs’redemptionsat$1implythatstablecoininvestorsmayendupwithlessvaluablestablecoinsinthefuture.Consequently,stablecoins’fixedprimarymarketpricereintroducesstrategiccomplementarityamongsecondarymarketinvestors.

Importantly,whatisuniqueaboutthetwo-layeredstablecoinmarketstructureisthatinvestors’propensityto“run”onthestablecoinisinfluencedbytheefficiencyofthearbitragesector.Ourcorefindingisthatincreasingarbitrageefficiencyactuallyincreasesrunrisk.Thisisbecausemoreefficientarbitragelowersthepriceimpactforinvestorswhosellinthesecondarymarket.Amorefavorablesellingpriceimplieslowerstrategicsubstitutabilityandincentivizespanic-selling.

Nevertheless,constrainingarbitrageisnotwithoutcosts.Tounderstandhowthestablecoinissueroptimallydecidesonarbitrageefficiency,weextendourbaselinemodelbyaddingnoisetraders,whosetradesinducemorevarianceinstablecoinpriceswhenarbitrageislessefficient.Stablecoinissuersthusfaceatradeoff:arbitrageefficiencyisbeneficialforpricestability,butalsoincreasesrunrisks.Thistradeoffimpliesthatarbitrageefficiencycanbeadouble-edgedswordandthatsomelimitstoarbitragemaybeoptimal.

Therehasbeenheightenedattentionontheoptimalregulationofstablecoinsacrossseveraljuris-dictions.IntheUS,forexample,the

StablecoinTransparencyandAccountabilityforaBetterLedger

Economy

(

STABLE

)andthe

GuidingandEstablishingNationalInnovationforU.S.Stablecoins

(

GE-

NIUS

)wereproposedintheHouseofRepresentativesandtheSenate,respectively.Regulatorsandmarketparticipantswouldlikestablecoinstobothhavelowrunrisksandstableprices.Ourframeworkhighlightsthatthesetwodesirablegoalsaredistinctfromeachotheranddrivenbydifferenteconomicforces.Inparticular,wehighlightthetradeoffbetweenpricestabilityandfinancialstabilityandshowthatsomepoliciesmayattainonegoalattheexpenseoftheother.Inthissection,weapplyourmodelpredictionstoshedlightonwhattheproposedregulationofstablecoins’redemptions,reserves,andinterestpaymentsimplyforpricestabilityandfinancialstability.

Ourresultsprovideimportantinsightsonoptimalstablecoinregulation.Theseinsightsareespe-ciallyrelevantbecausedifferentjurisdictionshaverecentlyproposeddifferentsetsofstablecoinreg-ulationsthatdonotalwaysagreewitheachother.First,someproposalsrequirestablecoinissuerstoprovideunconstraineddirectredemptionstoallinvestors,essentiallyeliminatingthecurrenttwo-layeredmarketstructure.Suchpolicieswouldindeedbenefitpricestabilitythroughmorecompetitivearbitrage.However,totheextentthatstablecoinsareallowedtocontinuedoingliquiditytransforma-

5

tion,ourmodelsuggeststhatmoreefficientarbitragewouldalsoamplifytheriskofpanicruns.Incontrast,imposingredemptionfeesonarbitrageurswouldreducerunriskthroughconstrainingarbi-trage,butattheexpenseofpricestability.Second,manypolicyproposalsimposerestrictionsonhowsafeandliquidstablecoinissuers’reserveassetscanbe.Ourresultssuggestthatreserveassetpoliciesshouldbecoordinatedwithpoliciesgoverningredemptions,sincethesefactorsjointlydeterminethedualoutcomesofpricestabilityandrunrisk.Third,weshowthatallowingfordividendpaymentsfurtherimprovesstablecoinpricestabilityandmaylowerrunrisks.Takentogether,wehighlightthatwhilepricestabilityandlowrunriskarebothdesirablefeaturesofstablecoins,theyarefundamentallydistinctandresponddifferentlytopolicyinterventions.

Finally,wecalibrateourglobalgamesmodelforthelargesttwofiat-backedstablecoins,USDTandUSDC,toprovideanestimateoftheirrunriskandtheextenttowhichpolicyinterventionswouldinfluencethisrisk.Wemeasuretheoverallilliquidityofreserveportfoliosusingcollateralhaircuts.WethenestimatetheprobabilityatwhichthereserveassetpayoffdoesnotmaterializeusingCDSspreads.Wefurtherproxyforthelong-termbenefitofholdingthestablecoinusingthereturntolendingoutthestablecoin.Finally,wechoosetheslopeofinvestors’stablecoindemandandthecostofpricevariancetomostcloselymatchtheslopeofinvestors’demandandtheslopeofarbitrageurs’demandinthedata.OurmodelestimatesimplyaneconomicallysignificantriskofrunsatbothUSDTandUSDC.USDT’sfragilitystemsfromitshigherliquiditytransformation,whileUSDCisvulnerableduetolessconcentratedarbitrage.Usingourcalibratedmodel,wealsoevaluatetheextenttowhichallowingissuerstomakedividendpaymentscoulddecreaserunrisksandincreasepricestability.

Ouranalysisofstablecoinsbelongsbroadlytothegrowingliteratureofdigitalcurrenciesandtheirregulations(e.g.,

Brunnermeier,JamesandLandau

,

2019

,

Duffie

,

2019

).

3

WhileBitcoinandmostothercryptocurrenciesexhibitvolatileandcorrelatedprices(

Hu,ParlourandRajan

,

2019

),thedefiningfeatureofstablecoinsistheirrelativepricestabilityat$1andthustheirpotentialtobecomeameansofpayment.Ouroverallcontributionistopointouthowincreasingpricestabilitycanactuallyincreaserunrisks,whichhasimportantimplicationsforregulatingstablecoins.

Weshowthatthetradeoffbetweenstablecoins’pricestabilityandrunriskisdeterminedbyarbitrageefficiency:constraintstoarbitrageworsenpricestabilitybutalsoreducefinancialfragility.Thefactthatinefficientarbitragedecreasespriceefficiencyhasbeenshowninseminalpapersby

ShleiferandVishny

3Alsosee

Harvey,RamachandranandSantoro

(

2021

),

John,KoganandSaleh

(

2022

)and

MakarovandSchoar

(

2022

)fordetailedsurveysofthemarketstructuresofvariouscryptocurrenciesanddecentralizedfinance.

6

(

1997

)and

GrombandVayanos

(

2002

).Closelyrelatedtous,

GrombandVayanos

(

2018

)analyzehowconstrainedarbitrageursexploitpricediscrepanciesacrosssegmentedmarkets,

Bryzgalova,Pavlova

andSikorskaya

(

2023

)showthatarbitrageursfaceentrycostsandchoosetospecializeinsomemarkets,resultinginconcentratedarbitrageanalogoustoourfindings,and

Davila,GravesandParlatore

(

2024

)provideacomprehensivestudyonthesocialvalueofclosinganarbitrageopportunity.Wefocusonatwo-layermarketstructureinwhichwehighlightanovelimplicationoflimitstoarbitrage:moreefficientarbitrageimprovespricestability,butmayunintentionallyincreaserunrisks.

Ouranalysisofstablecoinrunsbuildsonalargeliteratureonpanicrunsandliquiditytransformation(e.g.,

DiamondandDybvig

,

1983

,

AllenandGale

,

1998

,

BernardoandWelch

,

2004

,

Goldsteinand

Pauzner

,

2005

).IthasalsobeenshownthatMMFsaresubjecttopanicrunsbecausetheirsharesareredeemedbyinvestorsatafixedprice(

KacperczykandSchnabl

,

2013

,

Sunderam

,

2015

,

Parlatore

,

2016

,

Schmidt,TimmermannandWermers

,

2016

),whileclosed-endfundsandETFsaretypicallyviewedaslessrunnablebecausetheirsharesaretradableatmarketprices(

Jacklin

,

1987

,

Allenand

Gale

,

2004a

,

Farhi,GolosovandTsyvinski

,

2009

,

Koont,Ma,PastorandZeng

,

2021

).Ourcontributionistoincorporatethetwo-layermarketstructureofstablecoinsandarealisticarbitragemechanismintoarunmodel,whilekeepingittractableandyieldingclosed-formsolutionsonboththestablecoinpriceandrunrisk.

4

Indoingso,ourmodelcapturestheuniquecombinationofETFsandMMFsinthedesignofstablecoinsandshedslightonmodelingsimilarfinancialintermediariesinfuturework.

Inthecontextofstablecoins,mostcloselyrelatedtousis

LyonsandViswanath-Natraj

(

2021

),whoarethefirsttoshowthatUSDT’screationandredemptionactivityrespondtosecondarymarketpricedeviations.

Gorton,Klee,Ross,Ross,andVardoulakis

(

2023

)showthatstablecoins’useinleveragedtradingofothercrypto-assetshelpsmaintaintheirpricestability.

Uhlig

(

2022

)and

Liu,Makarovand

Schoar

(

2023

)providecomprehensiveanalysisofrunsonalgorithmicstablecoinsduringtheTerra-Lunacrashin2022,while

AdamsandIbert

(

2022

)analyzeearlieralgorithmicstablecoin.

5Aldasoro,

Ahmed,andDuley

(

2023

)analyzestheeffectofdisclosureaboutreserveassetqualityonstablecoinruns,while

Bertsch

(

2023

)modelstheeffectofstablecoinadoptiononfragility.Ourcontributiontothestablecoinsliteratureistoshowhowarbitrageconcentrationwithinthetwo-layeredmarketstructure

4Technically,ourresultssharesimilarfeatureswithafewotherrecentdevelopmentsofrunmodelswherethereisstrategicsubstitutabilityfrombothsidesoftheactionspace(e.g.,

Allen,Carletti,GoldsteinandLeonello

,

2018

,

He,Krish-

namurthy,andMilbradt

,

2019

,

Kashyap,Tsomocos,andVardoulakis

,

2023

)andthesolutionisguaranteedbythesingle-crossingproperty(

Athey

,

2001

).

5Also,takingahistoricalperspective,

Frost,Shin,Wierts

(

2020

),

GortonandZhang

(

2021

),and

Gorton,RossandRoss

(

2022

)comparestablecoinstodepositsissuedbythebankingsectorpre-deposit-insurance.

7

shapespriceinstabilityandrunrisks.Thisaspectofstablecoindesignisrelativelyunderstudiedintheacademicliteraturebuthasimportantimplicationsforstablecoinregulation.

Moregenerally,severalotherpapershaveexploredrisksassociatedwithstablecoinsotherthanpanicruns.

Eichengreen,Nguyen,andViswanath-Natraj

(

2023

)constructmeasuresofstablecoinde-valuationriskusingspotandfuturesprices.

LiandMayer

(

2021

)developadynamicmodeltocharac-terizetheendogenoustransitionbetweenstableandunstablepriceregimes,focusingonthefeedbackbetweendebasementandthecollapseofdemandforstablecoinsasmoney.

d’Avernas,Maurin,and

Vandeweyer

(

2022

)provideaframeworktoanalyzehowpricestabilitycanbemaintaineddependingontheissuer’scommitmenttostablecoinsupply.

RoutledgeandZetlin-Jones

(

2022

)considerthedesignofexchangeratepoliciesinmaintainingpricestability.

Barthelemy,GardinandNguyen

(

2021

),

Liao

andCaramichael

(

2022

),

Flannery

(

2023

),and

Kim

(

2022

)analyzethepotentialimpactoffiat-backedstablecoinactivitiesontherealeconomy,while

BaughmanandFlemming

(

2023

)arguethatthecom-petitivepressureofstablecoinsonUSDassetsislimited.

Anaduetal.

(

2023

)showthatinvestorsshiftfromriskiertosaferstablecoinsduringperiodsofstresssimilartotheflight-to-safetybehaviorofMMFinvestors.

KozhanandViswanath-Natraj

(

2021

)analyzecollateralriskatDAI,whichisastablecoinovercollateralizedbyriskycryptoassets,while

GriffinandShams

(

2020

)showthatUSDTwasusedtofacilitatebitcoinspeculationandlikelysubjecttoriskofunder-collateralization.Complementarytothesepapers,wefocusonstablecoinsasfinancialintermediariesengagedinliquiditytransformation,thearbitrageefficiencybetweenprimaryandsecondarymarkets,andtheresultingrelationshipbetweenpricestabilityandrunrisk.

Therestofthepaperproceedsasfollows.Section

2

describesinstitutionaldetailsofthestable-coinmarketandSection

3

explainsthedataweuse.Section

4

documentsseveralempiricalfactsthatmotivateourmodelinSection

5

.Section

6

showsthepolicyimplicationsfromourresults.Section

7

explainsthemodelcalibrationandSection

8

concludes.

2InstitutionalDetails

Stablecoinsareblockchainassetswhosevalueisclaimedtobestableat$1.Blockchainassetscanbeself-custodial:ausercanusecryptowalletsoftware,suchasMetamask,tohold,send,andreceivestablecoinsdirectly.Thesestablecoinsarenotstoredwithanytrustedintermediary:rather,a“private

8

key”–alongnumericcode,generallykeptonlyontheuser’shardwaredevice–isusedtoprovetotheblockchainnetworkthattheuserownsherstablecoins,andtodirectthenetworktotakeactionssuchastransferringstablecoinstootherwallets.Othershavenoaccesstoindividuals’privatekeyssotheycannottakefundsfromindividuals’wallets.

Relativetootherblockchainassetslikebitcoins,thedefiningfeatureofstablecoinsis(relative)pricestability.Thelargeststablecoinissuersattempttoachievepricestabilitybypromisingtobackeachstablecointokenbyatleast$1inoff-blockchainUSdollarassets.Thesefiat-backedstablecoinshaveexperiencedarapidexpansionoverthelastfewyears.Withintwoyears,thetotalassetsizeofthesixlargestfiat-biasedstablecoinshasgrownfrom$5.6billionatthebeginningof2020toexceed$130billionatthebeginningof2022(Figure

3

).ThelargesttwostablecoinsareTether(USDT)andCircleUSDCoin(USDC)whichmadeupmorethan50%ofthetotalmarketsizeat$76.4billioninJanuary2022.BinanceUSD(BUSD),Paxos(PUSD),TrueUSD(TUSD),andGeminidollar(GUSD)aresignificantlysmallerinsize.

Intheremainderofthissection,weprovideanoverviewoftheusesofstablecoinsandthestablecoinmarketstructure.

2.1UsesofStablecoins

Stablecoinsareafairlylow-costwaytotransactandholdUS-dollarassets.IfasenderincountryAsendsfundstoareceiverincountryB,shecanpurchasestablecoinsonacryptoexchangeusingfiatcurrencyincountryA,withdrawthesestablecoinstohercryptowallet,andsendthemtothewalletofthereceiverincountryB.Thereceivercanthendepositthesefundstoacryptoexchangeinhiscountry,sellthestablecoinsforfiat,andthenwithdrawthefiatcurrency.Sendingstablecoinsfromonecryptowallettoanotherisrelativelyfastandlow-cost.

6

AsofJanuary2023,sendingstablecoinsontheEthereumblockchainfinalizesinunderaminuteandcostsaround$1USDpertransaction,independentoftheamountofstablecoinssent.Stablecoinscanalsobeusedasastoreofvalue;theycanbeheldincryptowalletsindefinitelyatnocost.

Asaresult,whilestablecoinsarecostliertousethanwell-functioningbankingservicesindevelopedcountries,theyarecompetitivewhentraditionalfinancialinfrastructurefunctionspoorly.Forexample,

6Thefirstandthirdstepsinthisprocessmayincurfeesanddelaysfromconvertingfiattoandfromcryptousinglocalcryptoexchanges,whichmayvaryacrossexchangesandcountries.

9

stablecoinsarebeingusedinsettingswheretransactionsmustcrossnationalborders,capitalcontrols,andfinancialrepressionareprevalent,inflationishigh,ortrustinfinancialintermediariesislow.

7

Stablecoinsarealsousedtotransactwithotherblockchainsmartcontracts.Forexample,marketparticipantscanusestablecointokenstopurchaseotherblockchaintokens,suchasETH,MKR,orUNI,usinganautomatedmarketmakerprotocolsuchasUniswap.Marketparticipantscanalsolendstablecointokensonlendingandborrowingprotocols,suchasAaveandMaker,allowingthemtoreceivepositiveinterestrates,andalsousetheseassetsascollateraltoborrowotherassets.Inaway,stablecoinsprovideasafestoreofvalueandamediumofexchangefortheblockchainecosystem.

2.2MarketStructure

Stablecointokensarecreated(“minted”)orredeemed(“burned”)intheprimarymarketwithUSdollarcashasshownontheleft-handsideofFigure

4

.Tocreateastablecointoken,anarbitrageursends$1totheissuer,andtheissuerthensendsastablecointokenintothemarketparticipant’scryptowallet.Analogously,toredeemastablecointoken,foreachstablecointokenthatthemarketparticipantsendstotheissuer’scryptowallet,theissuersends$1,forexample,throughabanktransfer,intothemarketparticipant’sbankaccount.Theprimarymarketforstablecoinsresemblesamoneymarketfundinthetraditionalfinancialsystem.