Stablecoins promise crypto speed with cash-like steadiness. A working-paper model by economists Yiming Ma, Yao Zeng, and Anthony Lee Zhang estimates annual run probabilities around 3.3%–3.9% for large issuers, far higher than the disruption odds most readers associate with deposit-insurance-backed cash storage.

That gap matters because stablecoins now underpin large swaths of crypto trading, payments, and collateral. When a peg wobbles, liquidity dries up fast and losses can spread.

Two-Tier Design

Most stablecoins operate a primary and secondary market. Authorized dealers (arbitrageurs) in the primary market can create or redeem tokens directly with the issuer. Everyone else trades on exchanges in the secondary market, where prices fluctuate around $1. This divide is central to both day-to-day stability and crisis behavior.

Run Triggers

Several common shocks can break a peg. Credit downgrades of reserve assets force sales at bad prices. Sharp rate moves mark bond holdings down, shrinking buffers. Liquidity stress makes Treasurys or deposits slower to sell than expected. Headlines about enforcement or legal uncertainty freeze counterparties. Large institutional redemptions can start a feedback loop.

Arbitrageur Paradox

Arbitrageurs are meant to keep price near $1 by buying below peg and redeeming for cash. But the very success of this mechanism can amplify runs. With many arbitrageurs, the market absorbs sell pressure smoothly, keeping the price near $1—signaling to everyday holders that exits are still open. That “open door” can invite more selling, pushing issuers to liquidate reserves rapidly and potentially at losses.

Yiming Ma, Yao Zeng, and Anthony Lee Zhang said that making arbitrage more efficient can keep stablecoin prices closer to par in secondary markets, but it can also raise run risk by making it easier for sellers to exit with less price impact.

Concentration vs. Crowd

Consider two stylized cases. In a concentrated model with only a handful of dealers, an initial wave of selling can push the secondary price sharply below $1 because few buyers stand ready. The visible discount may discourage late sellers, slowing the stampede. In a dispersed model with hundreds of dealers, dips are shallow, so more holders decide to exit while the price still looks “good,” accelerating redemptions and reserve liquidation. Counterintuitively, broader arbitrage participation can increase run risk during stress.

Measured Risk

Model-based estimates put annual run probabilities in the low single digits for marquee stablecoins—roughly 3.3% to 3.9%. That may sound small until compared with FDIC-backed bank accounts, which are designed to make depositor access disruptions extremely rare. Over ten years, a 3.3%–3.9% annual risk implies roughly a 29%–33% cumulative chance of a major episode under simple compounding assumptions. For assets marketed as “stable,” that’s a meaningful mismatch between perception and tail risk.

Why Pegs break

Reserves are typically invested in high-quality, interest-bearing instruments—Treasurys and cash-like deposits. In calm markets, income supports operations and redemptions. Under stress, selling large blocks quickly can move prices, widen bid–ask spreads, or run into settlement frictions. If redemptions outpace the pace at which reserves can be converted to cash at par, secondary prices slip, more holders race to exit, and the loop tightens.

Rulemaking Risks

Well-intended rules can cut both ways. Requirements that tighten daily price stability (for example, more real-time pegs or broader dealer access) may unintentionally increase run dynamics by holding the “exit” wide open in a crisis. Conversely, limits that reduce intraday liquidity can cause larger visible discounts in mild shocks. The tradeoff is real: greater day-to-day tightness around $1 can mean lower resilience in extreme stress, and vice versa.

What To Monitor

Look beyond the headline peg. First, examine reserve transparency: composition, maturities, custodians, and concentration. Second, map redemption mechanics: who can redeem, in what size, on what timelines, and with what fees. Third, watch primary-dealer structure: number of dealers, their balance-sheet depth, and any reliance on a single venue. Finally, scan for upcoming token unlocks or program changes that could alter flows.

Practical Safeguards

Diversify stablecoin exposure rather than relying on a single issuer. Favor issuers with frequent, independent attestations and granular reserve disclosures. Match the stablecoin to the use case: trading collateral may tolerate different risks than payroll or savings. Keep emergency liquidity in multiple rails—bank accounts, alternative payment networks, or short-duration Treasurys—so a peg wobble doesn’t become a cash-flow crisis.

Portfolio Positioning

Size allocations with tail risk in mind. Treat stablecoins as cash-like only for operational needs; for longer-term parking, consider laddered T-bills held directly or in vehicles with clear custody. If using stablecoins for yield, evaluate how that yield is generated: lending, liquidity incentives, or off-chain instruments each carry distinct counterparty and liquidity risks that can correlate in stress.

Stress Playbook

If a peg slips, avoid reflexive panic or blind faith. Check issuer updates and reserve data, redemption queue times, and secondary-market depth across exchanges. Compare on-chain flows with order-book spreads to gauge whether pressure is localized or broad. Scale exits in increments if liquidity is thin, and avoid crossing markets where spreads are widest. After stability returns, reassess issuer concentration and operational dependencies.

Conclusion

Stablecoins deliver fast settlement and familiar pricing—until stress exposes the tradeoffs that make pegs fragile. A design that keeps prices glued to $1 in quiet times can widen the door to runs when fear hits. Treat stablecoins as tools with specific roles, not risk-free cash, and plan operational liquidity so a peg wobble does not become a cash-flow emergency.