New NBER Working Paper Examines How Markets Value Stablecoin Safety and Liquidity
Key Takeaways
- •The study finds that stablecoin deposit premiums move in tandem with Treasury premiums, reflecting investors' valuation of the safety and liquidity services stablecoins provide.
- •Empirical analysis of hundreds of DeFi lending pools across multiple protocols, tokens, and blockchains supports all three model predictions.
- •Major stablecoin issuers such as Tether and Circle hold substantial U.S. Treasury reserves, creating a direct link between stablecoin dynamics and the Treasury market.
- •Safety shocks including de-pegging events, such as the May 2022 TerraUSD collapse, reduce the premium investors are willing to accept for stablecoin deposits.
- •Despite their borderless and permissionless accessibility advantages, stablecoin deposits remain as fragile as other forms of privately produced safe assets.
A new NBER working paper by Murillo Campello, Angela Gallo, Lira Mota, and Tammaro Terracciano investigates the demand for safety and liquidity within the cryptocurrency ecosystem, focusing on how investors value stablecoin deposits relative to traditional safe assets.
The researchers develop a framework in which a representative investor allocates liquidity across stablecoin deposits in decentralized finance (DeFi) lending pools and conventional safe assets, such as money market fund (MMF) shares. Money market funds occupy a central role in traditional cash management, yet they have themselves experienced periodic fragility — most notably when the Reserve Primary Fund "broke the buck" during the 2008 financial crisis, prompting a U.S. government backstop. The model generates three principal predictions:
- Co-movement with Treasury premiums: The stablecoin deposit premium moves in tandem with the Treasury premium when investors place value on the safety and liquidity services that stablecoins provide.
- Treasury supply effects: Increases in the supply of U.S. Treasuries reduce the stablecoin deposit premium.
- Safety and liquidity shocks: Declines in the perceived safety and liquidity of stablecoin deposits — triggered, for example, by de-pegging events or hacker attacks — reduce the premium investors are willing to accept.
To test these predictions, the authors draw on granular data encompassing hundreds of DeFi lending pools across multiple protocols, tokens, and blockchains. Their empirical findings support all three predictions.
The paper concludes that investors treat stablecoin deposits as money-like instruments that are both borderless and permissionless, offering unique accessibility advantages. However, the authors emphasize that these instruments remain as fragile as other forms of privately produced safe assets, underscoring the inherent tension between the convenience of decentralized liquidity and its susceptibility to disruption.
Stablecoins are digital tokens designed to maintain a stable value, typically pegged to a fiat currency such as the U.S. dollar, and have become a foundational component of DeFi infrastructure by enabling lending, borrowing, and trading without traditional financial intermediaries. The largest stablecoin issuers — including Tether (USDT) and Circle (USDC) — back their tokens with reserves that include substantial holdings of U.S. Treasury securities, creating a direct link between stablecoin dynamics and the Treasury market that the paper examines. The de-pegging events referenced in the paper's third prediction include episodes such as the May 2022 collapse of TerraUSD (UST), which erased tens of billions of dollars in market value within days and reverberated across DeFi protocols.
The authors are affiliated with leading academic institutions. More information about each researcher is available through their NBER profiles.
Source: Marginal Revolution