Institutional Backing and Crypto Volatility: A Hybrid Framework for DeFi Stabilization

TL;DR

This study demonstrates that cryptocurrencies with institutional backing (HyFi) tend to have lower price volatility, especially during turbulent market periods, highlighting the stabilizing effect of institutional oversight in DeFi ecosystems.

Contribution

It provides empirical evidence that HyFi-like cryptocurrencies backed by institutions are less volatile than decentralized ones, emphasizing the role of institutional architecture in DeFi stability.

Findings

HyFi assets exhibit lower price risk than decentralized cryptocurrencies.

The stabilizing effect of HyFi increases during high market volatility.

Decentralization correlates with higher volatility, especially in stressed markets.

Abstract

Decentralized finance (DeFi) lacks centralized oversight, often resulting in heightened volatility. In contrast, centralized finance (CeFi) offers a more stable environment with institutional safeguards. Institutional backing can play a stabilizing role in a hybrid structure (HyFi), enhancing transparency, governance, and market discipline. This study investigates whether HyFi-like cryptocurrencies, those backed by institutions, exhibit lower price risk than fully decentralized counterparts. Using daily data for 18 major cryptocurrencies from January 2020 to November 2024, we estimate panel EGLS models with fixed, random, and dynamic specifications. Results show that HyFi-like assets consistently experience lower price risk, with this effect intensifying during periods of elevated market volatility. The negative interaction between HyFi status and market-wide volatility confirms their stabilizing role. Conversely, greater decentralization is strongly associated with increased volatility, particularly during periods of market stress. Robustness checks using quantile regressions and pre-/post-Terra Luna subsamples reinforce these findings, with stronger effects observed in high-volatility quantiles and post-crisis conditions. These results highlight the importance of institutional architecture in enhancing the resilience of digital asset markets.