One Asset, Two Financial Systems: Stablecoins and the Transmission of Runs between Decentralized and Traditional Finance

Stablecoins increasingly link Treasury markets and decentralized finance, and this paper shows they do more than bridge the two: they transmit runs between them. We develop a model in which stablecoins are fully backed by Treasury bonds, pay no interest, and serve as gateway assets to DeFi lending, so that the stablecoin peg, the liquidation price of Treasury reserves, and runs on a DeFi lending protocol are jointly determined. A shock that originates inside DeFi can trigger withdrawals, stablecoin redemptions, and Treasury fire sales, turning crypto-native distress into price pressure in the U.S. Treasury market. The reverse channel is just as consequential: a shock to Treasury values can weaken the peg, strip the dollar value from stablecoin-denominated DeFi claims, and trigger a run on an otherwise sound DeFi protocol. The mechanism rests on a no-interest paradox: the fixed, non-interest-bearing design that makes a stablecoin look safe in isolation is exactly what forces it to depend on DeFi returns for its appeal, and that dependence is what lets fragility travel in both directions once the peg, reserve liquidation, and DeFi runs are solved jointly rather than fixed in advance.