Paper: arXiv 2505.10997

Authors: Hongzhe Wen, Songbai Li, R. S. M. Lau, Jamie Zhang

Abstract

With market capitalization exceeding USD250 billion by mid-2025, stablecoins have evolved from a crypto-focused innovation into a vital component of the global monetary structure. This paper identifies the characteristics of stablecoins from an analytical perspective and investigates the role of stablecoins in forming a hybrid monetary ecosystem where public (fiat, CBDC) and private (USDC, USDT, DAI) monies coexist. Through a number of econometric analysis models, we find that stablecoins maintain strong peg stability, while each type exhibiting distinctive responses to market variables such as trading volume and capitalization depending on the mechanisms behind. We also introduce a hybrid system design that proposes a two-layer structure, which private stablecoin issuers are backed by central bank reserves, ensuring uniformity, security, and programmability. This model takes advantages of both decentralized finance and payment innovation, while utilizing the Federal Reserve’s institutional trust. A case study on the SVB-USDC de-peg event in 2023 illustrates how such a hybrid system could have prevented panic-induced instability through transparent reserves, secured liquidity, and interoperable assets. Through examination of the Dybvig model and simulation, we conclude that a hybrid monetary model not only enhances financial inclusivity, scalability, and dollar utility in digital ecosystems, but it also strengthens systemic resilience, offering a credible blueprint for future digital dollar architectures.

Complexity vs Empirical Score

  • Math Complexity: 3.5/10
  • Empirical Rigor: 5.5/10
  • Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper provides useful descriptive statistics and time-series summaries regarding stablecoin peg stability and introduces a theoretical two-layer hybrid architecture backed by central bank reserves. However, the quantitative methodology relies on basic descriptive metrics without high-level mathematical formulations or complex backtesting.

Research Flowchart

  flowchart TD
    A["Research Goal: Analyze Stablecoin Dynamics & Design Hybrid Monetary Ecosystem"] --> B["Data & Inputs: Market Capitalization, Trading Volume & 2023 SVB-USDC De-peg Event"]
    B --> C["Econometric Analysis & Dybvig Run Model Simulations"]
    C --> D["Key Finding 1: Peg Stability Varies by Underlying Stabilization Mechanism"]
    C --> E["Key Finding 2: Proposed 2-Layer Hybrid System (CBDC Reserves + Private Stablecoins)"]
    D --> F["Outcome: Enhanced Systemic Resilience, Liquidity & Digital Dollar Architecture"]
    E --> F