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A Blessing in Disguise? DeFi Exploits and Short-Horizon Responses in U.S. Commercial Paper Spreads

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  • Tingyi Lin

Abstract

Do vulnerabilities in Decentralized Finance (DeFi) destabilize traditional short-term funding markets? While the prevailing ``Contagion Hypothesis'' posits that stablecoin reserve liquidations may transmit distress to traditional markets through fire-sale pressure, we document a short-horizon ``Flight-to-Quality'' pattern in the opposite direction. In the wake of major DeFi exploits, spreads on 3-month AA-rated commercial paper (CP) tend to narrow rather than widen. We interpret this pattern as consistent with a ``liquidity-recycling'' channel: capital leaving DeFi may be re-intermediated into traditional cash-management markets, with regulatory segmentation under SEC Rule 2a-7 making prime-eligible paper a plausible marginal destination. Because we do not directly observe daily fund-level routing into prime money market funds, this mechanism is inferred from pricing patterns and monthly holdings evidence rather than directly identified. The result is specific to exploit-driven operational shocks, this U.S. CP spread, and short event windows.

Suggested Citation

  • Tingyi Lin, 2026. "A Blessing in Disguise? DeFi Exploits and Short-Horizon Responses in U.S. Commercial Paper Spreads," Papers 2601.08263, arXiv.org, revised Mar 2026.
    • Handle: RePEc:arx:papers:2601.08263
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