NEW YORK, NY — Stablecoins are designed to hold a steady one-dollar value and are increasingly used for trading, payments, and sending money across borders. But new research from Columbia Business School finds that the way many stablecoins are built to avoid sudden sell-offs can also leave them more exposed to volatile prices.
In the paper Stablecoin Runs and the Centralization of Arbitrage, Columbia Business School Professor, Yiming Ma, and her co-authors, Yao Zeng, Professor of Business at the University of Pennsylvania, and Anthony Lee Zhang, Professor of Business at the University of Chicago, examine how stablecoins keep their prices close to one dollar and what happens when that system is put under pressure. The research finds that many of the largest stablecoins rely on a small group of authorized institutions to maintain their dollar peg through arbitrage. This design stems from a clear tradeoff: it helps reduce run risk during periods of stress but at the expense of stable prices in normal market conditions. Price stability is a crucial element for any successful means of payment.
“Stablecoins are often described as digital cash, but they operate more like financial intermediaries,” said Yiming Ma, the Regina Pitaro Associate Professor of Business at Columbia Business School. “Our findings show that financial stability should not be the only criterion for stablecoins — and in some cases, the tools that keep run risk low may actually cause instability in stablecoin prices.”
To conduct the study, the researchers built a transaction-level dataset covering the six largest U.S. dollar–backed stablecoins — USDT, USDC, BUSD, USDP, TUSD, and GUSD — using publicly available blockchain records from Ethereum, Tron, and Avalanche. They tracked every arbitrage event, when authorized intermediaries exchange stablecoins directly with issuers for U.S. dollars, and used transaction timestamps, amounts, and wallet addresses to measure how many intermediaries were active and how concentrated arbitrage was over time. The team then paired this primary-market data with price and trading information from major crypto exchanges to examine how deviations from the $1 peg relate to arbitrage concentration and run risk.
The analysis found that arbitrage in stablecoin markets is often highly centralized. In some cases, only a small number of institutions are allowed to redeem stablecoins directly for dollars in a given month, while most users trade only on open exchanges. This centralized setup makes investors’ selling more costly and discourages large-scale sell-offs, but it also causes stablecoin prices to fluctuate more on open exchanges. Such price volatility is detrimental for stablecoins’ adoption as a global payment instrument.
Key findings from the research include:
- Stablecoin stability often depends on a small group of institutions: A limited number of authorized players are responsible for keeping prices close to $1.
- Price stability can come at the expense of financial stability: Systems that discourage investors to rush for the exit during stress can also amplify day-to-day price swings.
- Financial stability can also come at the expense of price stability: Policies focused only on price stability may increase financial risk if they are not paired with safeguards on reserve assets.
“Stablecoins are used around the world, so their stability doesn’t stop at national borders,” said Yiming Ma. “Even if a stablecoin follows U.S. rules, it can only work as a reliable global payment tool if other countries are coordinating how arbitrage and reserves are regulated. Our research shows that without that coordination, rules meant to make stablecoins safer in one place can end up creating new risks elsewhere.”
