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Intelligent design: Stablecoins (in)stability and collateral during market turbulence

Author

Listed:
  • De Blasis, Riccardo

  • Galati, Luca

  • Webb, Alexander

  • Webb, Robert I.

Abstract

How does stablecoin design affect market behavior in turbulent periods? Stablecoins attempt to maintain a “stable†peg to the US dollar, but do so with wildly varying structural designs. The spectacular collapse of the TerraUSD (UST) stablecoin and linked Terra (LUNA) token in May 2022 precipitated a series of reactions across major stablecoins, with some experiencing falls in value and others gaining value. Using a BEKK model, we examine the reaction to this exogenous shock and find significant contagion effects from the UST collapse, likely partially due to herding behavior among traders. We test the varying reactions among stablecoins and find that stablecoin design differences affect the direction, magnitude, and duration of the response to shocks. Implications for stablecoin developers, exchanges, traders, and regulators are discussed.

Suggested Citation

  • De Blasis, Riccardo & Galati, Luca & Webb, Alexander & Webb, Robert I., 2022. "Intelligent design: Stablecoins (in)stability and collateral during market turbulence," Economics & Statistics Discussion Papers esdp22088, University of Molise, Department of Economics.
    • Handle: RePEc:mol:ecsdps:esdp22088
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    Cited by:

    1. Perez Riaza, Baptiste & Gnabo, Jean-Yves, 2025. "From depegs to jumps: The role of stablecoin instabilities in crypto market dynamics," Journal of International Money and Finance, Elsevier, vol. 155(C).
    2. Galati, Luca & Webb, Alexander & Webb, Robert I., 2024. "Financial contagion in cryptocurrency exchanges: Evidence from the FTT collapse," Finance Research Letters, Elsevier, vol. 67(PA).
    3. Almeida, Lucas Mussoi & Perlin, Marcelo Scherer & Müller, Fernanda Maria, 2025. "Pricing efficiency in cryptocurrencies: The case of centralized and decentralized markets," Journal of Economics and Business, Elsevier, vol. 133(C).
    4. Michael Cary, 2024. "Herding and investor sentiment after the cryptocurrency crash: evidence from Twitter and natural language processing," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 10(1), pages 1-23, December.
    5. Lee, Yi-Hsi & Chiu, Yu-Fen & Hsieh, Ming-Hua, 2025. "Stablecoin depegging risk prediction," Pacific-Basin Finance Journal, Elsevier, vol. 90(C).
    6. Gregory, Gadzinski & Vito, Liuzzi, 2024. "ChatGPT: A canary in the coal mine or a parrot in the echo chamber? Detecting fraud with LLM: The case of FTX," Finance Research Letters, Elsevier, vol. 70(C).
    7. Galati, Luca & Perdichizzi, Salvatore, 2025. "From zero to hero: Memecoins’ spillover effects in cryptocurrency markets," Economics Letters, Elsevier, vol. 253(C).
    8. De Blasis, Riccardo & Galati, Luca & Grassi, Rosanna & Rizzini, Giorgio, 2024. "Information flow in the FTX bankruptcy: A network approach," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 655(C).
    9. Galati, Luca & Capalbo, Francesco, 2024. "Silicon Valley Bank bankruptcy and Stablecoins stability," International Review of Financial Analysis, Elsevier, vol. 91(C).
    10. Ahmed Mahrous & Maurantonio Caprolu & Roberto Di Pietro, 2025. "Stablecoins: Fundamentals, Emerging Issues, and Open Challenges," Papers 2507.13883, arXiv.org.
    11. Riccardo De Blasis & Luca Galati & Rosanna Grassi & Giorgio Rizzini, 2024. "Information Flow in the FTX Bankruptcy: A Network Approach," Papers 2407.12683, arXiv.org, revised May 2025.
    12. Gregory, Gadzinski & Alessio, Castello & Vito, Liuzzi & Patrice, Sargenti, 2024. "Break a peg! A study of stablecoin co-instability," International Review of Financial Analysis, Elsevier, vol. 96(PA).

    More about this item

    Keywords

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    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F61 - International Economics - - Economic Impacts of Globalization - - - Microeconomic Impacts
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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