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Discussion Paper
Runs on Stablecoins
Stablecoins are digital assets whose value is pegged to that of fiat currencies, usually the U.S. dollar, with a typical exchange rate of one dollar per unit. Their market capitalization has grown exponentially over the last couple of years, from $5 billion in 2019 to around $180 billion in 2022. Notwithstanding their name, however, stablecoins can be very unstable: between May 1 and May 16, 2022, there was a run on stablecoins, with their circulation decreasing by 15.58 billion and their market capitalization dropping by $25.63 billion (see charts below.) In this post, we describe the ...
Working Paper
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Similar to the more traditional money market funds (MMFs), stablecoins aim to provide investors with safe, money-like assets. We investigate similarities and differences between these two investment products. Like MMFs, stablecoins suffer from “flight-to-safety” dynamics: we document net flows from riskier to safer stablecoins on days of crypto-market stress and estimate a discrete “break-the-buck” threshold of $1, below which stablecoin redemptions accelerate. We then focus on two specific stablecoin runs, in 2022 and 2023, showing that the same flight-to-safety dynamics also ...
Discussion Paper
The DeFi Intermediation Chain
Decentralized Finance, or DeFi, is a rapidly growing ecosystem of financial applications built on blockchain technology, primarily on the Ethereum network. These applications aim to recreate traditional financial instruments and services, such as lending, borrowing, trading, and insurance. The DeFi intermediation chain connects a series of intermediaries who find arbitrage opportunities, aggregate transactions into blocks, validate these blocks, and ultimately append them to the blockchain. In this post, we summarize results from our staff report describing how arbitrage opportunities arise ...
Working Paper
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similar to money market fund investors, stablecoin investors engage in flight-to-safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds run risk has ...
Report
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Similar to the more traditional money market funds (MMFs), stablecoins aim to provide investors with safe, money-like assets. We investigate similarities and differences between these two investment products. Like MMFs, stablecoins suffer from “flight-to-safety” dynamics: we document net flows from riskier to safer stablecoins on days of crypto-market stress and estimate a discrete “break-the-buck” threshold of $1, below which stablecoin redemptions accelerate. We then focus on two specific stablecoin runs, in 2022 and 2023, showing that the same flight-to-safety dynamics also ...
Discussion Paper
Stablecoins and Crypto Shocks
In a previous post, we described the rapid growth of the stablecoin market over the past few years and then discussed the TerraUSD stablecoin run of May 2022. The TerraUSD run, however, is not the only episode of instability experienced by a stablecoin. Other noteworthy incidents include the June 2021 run on IRON and, more recently, the de-pegging of USD Coin’s secondary market price from $1.00 to $0.88 upon the failure of Silicon Valley Bank in March 2023. In this post, based on our recent staff report, we consider the following questions: Do stablecoin investors react to broad-based ...
Working Paper
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similarly to money market fund investors, stablecoin investors engage in flight to safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds, run risk has ...
Report
Information and Market Power in DeFi Intermediation
This paper considers the “DeFi intermediation chain”—the market structure that underlies the creation and distribution of ETH, the native cryptocurrency of Ethereum—to examine how information asymmetry shapes intermediation rents. We argue that using proof-of-stake blockchain technology in DeFi leads to a novel limit to arbitrage, arising from the tension between arbitrageurs’ privacy needs and blockchain transparency. Using a new dataset which distinguishes private and public transactions in Ethereum, we find that a one percent increase in private information advantage leads to a ...