Stablecoins may remain stable through ordinary bouts of bad news, but a severe shock can quickly turn into a much deeper selloff, according to research from Renmin University of China.
Researchers used large language model agents to study how stablecoins respond when negative information hits the market. Their tests found that selling can remain manageable at first, then accelerate once it reaches a certain level.
Small price gaps can attract arbitrage traders, who buy the stablecoin and help push it back toward $1. A larger shock can drain available liquidity and keep investors selling, making that process less effective.
Fear Can Amplify Stablecoin Depegging
The researchers found that fear, thin liquidity and heavy retail selling can reinforce one another. As more orders pile up on one side of the market, arbitrage traders may become less willing to step in.
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During the strongest shocks, the source of the risk made little difference in the experiments. The severity of the event appeared to matter more than the narrative behind it.
The March 2023 USDC crisis showed how quickly those pressures can spread. Investors sold the token after concerns emerged over its reserves, while the weekend limited access to redemptions. USDC fell below $1 before recovering its peg.
Stablecoin Risks Extend Beyond Reserves
Having enough assets to back a stablecoin may not be enough to prevent temporary price disruptions. Clear reserve disclosures and dependable redemption systems can also matter when investors rush for the exit.
The issue is becoming more important as stablecoins expand into payments. Bain expects banks share of payments revenue to decline from 80% today to 69% by 2030.
Stablecoin wallets can offer faster cross-border transfers than traditional bank accounts, adding another source of competition for banks.
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