The Cost of Ignoring Run Dynamics in Stablecoin Design

Static price feeds create a fatal lag during volatility. A 20% price drop on-chain can trigger liquidation cascades before the oracle updates, destroying the collateral buffer.

• Problem: Oracle latency creates a risk-free arbitrage for attackers.
• Solution: Use high-frequency, decentralized oracles (e.g., Pyth, Chainlink Low-Latency) with sub-second updates and validity proofs.

Designs like Terra's UST assumed demand for the governance token (LUNA) was exogenous. In a run, the burning mechanism created a negative feedback loop, where selling pressure on one asset directly increased the supply of the other.

• Problem: Coupled tokenomics turn a price drop into a supply explosion.
• Solution: Decouple stability mechanisms from speculative asset demand. Use diversified, exogenous collateral or over-collateralization with a safety buffer (e.g., MakerDAO's >150% minimum).

Protocols assume deep, sticky liquidity in AMM pools (e.g., Curve 3pool). During a crisis, liquidity depth evaporates as LPs flee to safety, causing slippage to skyrocket and breaking the peg.

• Problem: TVL is a fair-weather metric; real liquidity is panic-sensitive.
• Solution: Incentivize diversified, resilient liquidity through veTokenomics, emergency PSM (Peg Stability Module) pools with high-quality assets, and circuit breakers.

Emergency parameter changes (e.g., adjusting fees, collateral ratios) require a slow, multi-day governance vote. By the time a fix is approved, the protocol is already insolvent.

• Problem: Democratic security is too slow for financial crises.
• Solution: Implement circuit breaker roles with limited, time-bound emergency powers (e.g., Maker's Governance Security Module) and real-time risk monitoring dashboards.

The 2021 collapse proved that algorithmic designs with reflexive feedback loops are inherently unstable. The "death spiral" is not a bug but a feature of flawed run dynamics.

• Key Flaw: TITAN token was the sole collateral backstop; its price collapse directly reduced the system's ability to redeem IRON.
• Key Lesson: A stablecoin's stability mechanism must be exogenous and non-reflexive to survive a panic.

Maker's Peg Stability Module (PSM) is a masterclass in run dynamics. It creates a deep, non-volatile liquidity pool (e.g., USDC) that acts as a shock absorber.

• Key Benefit: During de-pegs, arbitrageurs can mint/burn DAI against the PSM at 1:1, providing immediate, low-slippage exit liquidity.
• Key Benefit: It decouples DAI's short-term peg stability from the volatile performance of its primary (ETH-based) collateral vaults.

Frax's Algorithmic Market Operations (AMOs) optimize capital efficiency but create hidden liquidity mismatches. During a run, the system must rapidly unwind complex DeFi positions to meet redemptions.

• Key Flaw: Liquidity is often locked in yield strategies (e.g., Curve pools, lending markets), creating latency and potential slippage during mass exits.
• Key Lesson: Real-time, unencumbered liquidity must be modeled as the primary constraint, not an afterthought.

Ethena's sUSDe explicitly models run dynamics via its custody and hedging framework. It treats the staked derivative as a liability that must be instantly redeemable.

• Key Benefit: Delta-neutral backing via short ETH futures positions theoretically isolates the stablecoin's value from underlying collateral volatility.
• Key Benefit: The "Internet Bond" narrative creates a sticky yield that disincentivizes rapid exits, altering user behavior to favor holding.

UST's fatal flaw was using subsidized demand (20% APY) to bootstrap adoption, which attracted purely mercenary capital. This created a convexity of risk: the larger the system grew, the more devastating the inevitable run.

• Key Flaw: The stability mechanism (LUNA mint/burn) could not scale to meet redemption demands during a coordinated, cross-exchange attack.
• Key Lesson: Sustainable demand must be organic (utility-driven), not subsidized. Yield is a liability, not a feature.

Due diligence must move beyond TVL and APY. The critical question is: "What happens when 30% of holders want out in 24 hours?"

• Key Metric: Model the velocity of collateral liquidation. How fast can the protocol convert its assets into the base currency to meet redemptions?
• Key Metric: Audit the incentive alignment of keepers/arbitrageurs. Are they financially motivated to restore the peg, or to exacerbate the depeg for profit?