Understanding the Hidden Run Risk and Financial Stability Challenges

For more than a decade, stablecoins have offered the promise of the benefits of cryptocurrency with the stability of the U.S. dollar—an ideal stablecoin would always be worth $1. 

However, as Congress considers historic legislation related to these assets, worth more than $250 billion as of August 2025, research reveals a problem with their models: the more effort they make to maintain their dollar peg, the more vulnerable they may be to catastrophic runs.

The Promise and Perils of Stablecoins

The Trump administration has prioritized stablecoin legislation, predicting these tokens would “ensure American dollar dominance internationally.” However, an NBER study reveals a fundamental problem at the heart of stablecoin design. The same mechanisms that keep stablecoin prices at $1 can make them more prone to panic runs, not less. In short, the findings challenge conventional wisdom that more competition in markets provides more stability by revealing a previously unrecognized tradeoff between the daily price stability that stable coins demand and the ability to come back from a crisis.

Here is a table showing some of the major players in the industry, with their level of concentration, which we discuss below:

Understanding the Structure of Stablecoin Risks

Unlike your bank account, you can’t directly cash out most stablecoins with their issuers. Instead, there’s a two-tiered system:

• Primary market: A small group of authorized dealers (called arbitrageurs) can redeem stablecoins for cash directly from issuers like Tether or Circle.
• Secondary market: Everyone else trades stablecoins on exchanges, where prices can fluctuate above and below $1 depending on supply and demand.

Triggers for a Stablecoin Sell-Off

The researchers modeled various common triggers that could spark a crisis:

• Credit downgrades of reserve assets (corporate bonds, bank deposits)
• Interest rate changes affecting bond portfolios
• Regulatory uncertainty or enforcement actions
• Market stress is affecting asset liquidity
• Major redemption requests from institutional holders

The Role of Arbitrageurs in Stablecoin Stability

Arbitrageurs act as intermediaries who buy stablecoins when others sell, helping maintain the $1 price. But the research reveals a crucial twist: Having more arbitrageurs keeping the dollar peg doesn’t mean less risk—it means more. It’s helpful to remember two points about stablecoins that prove crucial for the study:

1. Unlike other assets, which go up and down with supply and demand, stablecoins have a maximum price ($1.00) near which the arbitrageurs are meant to keep the price.
2. Stablecoin firms back stablecoins with what, in the moment, will prove perilously illiquid holdings such as Treasurys. As redemptions come in, these need to be sold off after a certain point.

With that in mind, the researchers pointed out what would happen should there be a run on the two biggest stablecoins:

Tether (USDT, just six dealers on average):

• When panic selling starts, there are too few dealers to absorb all the selling pressure.
• Prices drop dramatically (say, to 95 cents).
• Seeing the big price drop, other investors might decide it’s a bad idea to sell at such a low price (however, panic selling is, by nature, irrational, and history is littered with market panics).

Circle (USDC, with 521 dealers on average):

• When panic selling starts, hundreds of dealers jump in to buy.
• Prices stay close to $1 (maybe only dropping to 99 cents).
• Other investors see the broader calamity that caused the sell-off and decide that, since its value is holding near $1 (their best-case scenario when selling anyway), it’s best to get out now, greenlighting further selling.

An analogy financial experts often use for market runs is a building’s emergency exit. In this case, here’s how the analogy works:

• Too few exits (USDT): During normal times, people crowd near exits, causing delays. But during emergencies, the bottleneck actually prevents mass stampedes because people see the crowd and hesitate.
• Lots of exits (USDC): There’s a smoother daily flow, but during emergencies, everyone can leave quickly, potentially turning minor incidents into building-wide evacuations.

In other words, the paradox is that arbitrageurs, by doing their job in the market, could cause the sell-off and drop in stablecoin prices they were meant to prevent. By holding the exit doors open, they invite the stampede.

Assessing the Probability of Stablecoin Runs

The study’s model puts numbers on the scale of the hidden risk:

• USDT: 3.9% estimated annual run probability
• USDC: 3.3% estimated annual run probability

As the researchers note, “Both Tether and Circle have significant run risk” despite their different approaches. “Tether has more illiquid assets, but Circle has less concentrated arbitrage, which amplifies run risk.”

Why does this matter? The typical approach to addressing this problem would be to require more arbitrageurs, as too few insiders might not have the necessary resources to prevent a devastating run. However, it turns out that simply increasing the number of arbitrageurs also creates significant risks. What’s more, there’s no way out of this tradeoff: either you have price stability—as stablecoins promise in their very name—or you have less resilience should a crisis hit.

Final Thoughts on Stablecoin Risks

Research reveals that not only are stablecoins far riskier than their names suggest, but in a 10-year period, you’d have about a one in three chance of a major run on assets. Given their central role in the $3.87 trillion crypto ecosystem and the paradox that potential solutions to address their inherent risks could make them even more fragile, this means any system that includes crypto assets is built on foundations far shakier than many people realize.

Worse, as they grow in market value, the study shows, the more dangerous this hidden instability becomes.