Ma Yiming, Assistant Professor at Columbia University, will give a lecture themed Stablecoin Runs and the Centralization of Arbitrage at 10:00 a.m. on March 24.

This is the fourth lecture of the “Academic Lectures of the Department of Applied Finance”, hosted by the School of Finance, Renmin University of China (RUC). The lecture will be held in Room 515A in the Mingde Main Building. Liu Xin, Associate Professor will preside over the lecture.

Abstract: We analyze the run risk of fiat-backed stablecoins. A run on stablecoins would lead to the fire sales of US dollar assets like bank deposits, Treasuries, and corporate bonds. Our model shows that the possibility of panic runs persists even though general investors only trade stablecoins in competitive secondary markets with flexible prices. This is because stablecoins engage in liquidity transformation and the fixed price at which arbitrageurs redeem stablecoins for cash from the issuer in the primary market reinstates run incentives among secondary-market investors. We further show that stablecoin issuers use a concentrated set of arbitrageurs who act like a firewall between primary and secondary markets. Surprisingly, this centralization of arbitrage can mitigate run-risk at the expense of secondary market price dislocations, implying a tradeoff between stablecoin price stability and financial stability. We collect a novel dataset on stablecoin redemptions, trading, and reserve assets to calibrate our model. For the largest stablecoin, Tether (USDT), our estimates imply a run probability of 3.45% in March 2022.