Stablecoins: Survivorship, Transactions Costs and Exchange Microstructure

TL;DR

Stablecoins exhibit significant instability and high transaction costs, with market dynamics resembling traditional financial systems, highlighting their vulnerabilities and the prominence of high-frequency trading in their markets.

Contribution

This paper provides an empirical analysis of stablecoin stability, market structure, transaction costs, and trading activity, revealing insights into their operational risks and market behavior.

Findings

Stablecoins have similar failure rates regardless of collateralization.

USD Coin, Tether, and Dai dominate Ethereum market shares with high velocity.

Transaction fees for stablecoins have increased substantially over two years.

Abstract

Stable coins are not very stable. Cash collateralized coins are more stable, but the overall failure rate is similar to tokens that are not designed to be stable. USD Coin, Tether and Dai have the largest Ethereum market shares, and they have an average velocity nearly three times higher than M1. Centralized and decentralized exchanges are the most active nodes and largest holders on the blockchain. Four of the top ten tokens have Herfindahl indices higher than the U.S. banking system. Median gas fees for Tether rose more than twelve times over the last two years, and nearly twenty times for USD Coin. Transactions of under 50,000 USD can generally be done more cheaply offchain. 24 hour exchange turnover in Tether is nearly 60 billion USD. This is comparable to the daily volume at the NYSE and eight times the daily flow in money market mutual funds. Narrow bid-ask spreads and depth have attracted HFT participation approaching 50%