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

Author

Listed:
  • Barrios, John
  • Bertsch, Christoph
  • Schilling, Linda

Abstract

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.

Suggested Citation

  • Barrios, John & Bertsch, Christoph & Schilling, Linda, 2026. "One Asset, Two Financial Systems: Stablecoins and the Transmission of Runs between Decentralized and Traditional Finance," MPRA Paper 129798, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:129798
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    References listed on IDEAS

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    JEL classification:

    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Systems; Standards; Regimes; Government and the Monetary System
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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