Arbitrage Breakdown and Runs on Stablecoins: Evidence From The Terra Collapse.

Stablecoins, designed to maintain dollar parity through arbitrage, provide a natural setting to study this mechanism under stress. I exploit the Terra collapse to provide the first order-book level evidence on the microstructure of a stablecoin run, and develop an AR(1) based measure of arbitrage effectiveness. The measure identifies arbitrage breakdown 48 hours before the public depeg, when blockchain frictions and collapsing collateral prevented peg correction despite profitable opportunities.

Within hours, bid-side liquidity vanished across major centralized exchanges, and order books could no longer clear sell flow. Findings support the arbitrage–run tradeoff of Ma, Zeng, and Zhang (2023).