Information Structures in Stablecoin Markets

TL;DR

This paper models stablecoin market stability by analyzing how information precision and large sales influence run risks, revealing that private signals can paradoxically increase stability under certain conditions.

Contribution

It introduces a global game model that incorporates both large sales and information asymmetry to explain stablecoin depegging phenomena and stability mechanisms.

Findings

Precise public knowledge reduces run probability with strong fundamentals.

Private signals can increase run risk when fundamentals are strong.

Risk components vary with information uncertainty and fundamentals.

Abstract

Stablecoins have historically depegged due from par to large sales, possibly of speculative nature, or poor reserve asset quality. Using a global game which addresses both concerns, we show that the selling pressure on stablecoin holders increases in the presence of a large sale. While precise public knowledge reduces (increases) the probability of a run when fundamentals are strong (weak), interestingly, more precise private signals increase (reduce) the probability of a run when fundamentals are strong (weak), potentially explaining the stability of opaque stablecoins. The total run probability can be decomposed into components representing risks from large sales and poor collateral. By analyzing how these risk components vary with respect to information uncertainty and fundamentals, we can split the fundamental space into regions based on the type of risk a stablecoin issuer is more prone to. We suggest testable implications and connect our model's implications to real-world applications, including depegging events and the no-questions-asked property of money.