A redemption run is a surge of holders redeeming a backed token or fund share at the same time, each rationally, collectively faster than the assets behind it can be turned into cash. It is an event that happens to a structure, not a mechanism inside one. The tool built to survive it is a redemption gate, and the distinction matters because a run tests liquidity long before it tests solvency.
In September 2008 the Reserve Primary Fund received redemption requests worth roughly two thirds of its $62.5 billion in assets inside about 31 hours. Sizing a redemption promise against an average day is how a structure meets a number like that with no plan.
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The run is the event. The gate is the answer to it.
State the boundary in both directions, because these two terms get used interchangeably and they describe opposite things. A redemption run is holder behaviour: many holders exercising a real right at the same time, faster than the underlying assets can be liquidated in an orderly way. Nobody designs a run. A redemption gate is issuer behaviour written into the structure beforehand: a cap, a queue, a notice period or a suspension that slows the primary channel so assets can be sold in sequence rather than at whatever bid exists on the worst morning.
The practical consequence of confusing them is a structure with a gate nobody has sized, or a run nobody has modelled. Model the run first, because it sets the number. Then write the gate to that number, in the documents, before anyone needs it.
September 2008, hour by hour
The most fully documented redemption run on record sits in a federal court's memorandum opinion, with timestamps. As of 14 September 2008 the Reserve Primary Fund held $785 million face value of Lehman debt securities against total assets under management of $62.5 billion. By 8:40 the following morning, redemption requests totalled more than $5 billion. At 10:10 a.m. State Street, the fund's custodial bank, stopped funding redemption requests and suspended overdraft privileges. By 10:30 a.m. requests had more than doubled to over $10 billion, and by 1:00 p.m. they reached approximately $16.5 billion. By 3:45 p.m. the next day they totalled $40 billion, roughly two thirds of the fund's total assets.1
Two details in that sequence do most of the teaching. Requests continued climbing after the custodial bank stopped paying, because holders were queueing rather than being served. And the Lehman position was $785 million against $62.5 billion, a little over 1% of the fund. The run was not proportionate to the loss. It never is.
Three separate events, and only one of them was a gate
Unpick what actually happened, because most write ups compress it into one action. First the run, on the morning of 15 September. Second, at 10:10 that morning, a counterparty decision: the custodial bank declined to keep advancing cash.1 That is an operational halt imposed from outside, not a structural limit the fund chose. Third, the gate proper. The fund calculated its net assets at 97 cents per share and said it would suspend payment of redemption proceeds for up to seven days, and on 22 September the SEC issued a temporary order permitting the fund to suspend redemptions.2
Six days separate the peak of the run from the regulator's order. In that window the structure was operating without a written brake, dependent on a bank's discretion. Any design that leaves the same gap is relying on a counterparty to make a decision it never agreed to make.
The onchain version has no bank to stop funding
Move the same dynamic on chain and the friction that slowed 2008 disappears. There is no custodial bank to halt at 10:10 a.m., no market close, and no settlement cycle that forces a pause. The primary channel is a contract that runs at full speed, all day, for anyone.
The SEC's complaint against Terraform Labs describes the outcome in the sharpest available case: in May 2022, under selling pressure from large UST holders, UST depegged from the dollar, and without intervention the price of UST and its sister token fell to nearly zero, wiping out over $40 billion of total market value.3 The regulator's own summary of the same case puts it in one line: UST depegged and the tokens plummeted to close to zero.4 The mechanism did not slow the exit. It converted the exit into supply.
Sizing the run you have to survive
The question is not what redeems on an average day. It is what share of supply could rationally redeem within 24 hours if confidence goes, and whether the structure can service that without selling the underlying at a discount. 2008 gives a defensible stress input for anything with a daily redemption promise: two thirds of assets requested inside about 31 hours.1
Three inputs then decide the answer. The liquid tranche, meaning what can actually be converted at par today rather than what is worth par at maturity. The settlement time of everything else, honestly stated. And whether the mechanism amplifies, which is the reflexivity test: does servicing a redemption make the next redemption more likely? Where the answer is yes, no reserve size fixes it.
What belongs in the documents before launch
Four things, written down while nothing is happening. The trigger, expressed as a measurable condition rather than a judgement call. The named decision maker, because in a stress week the argument about who decides costs more time than the decision. The limit itself, whether that is a daily cap, a queue, a notice period or a suspension. And the disclosure path, meaning what holders are told and when.
A gate written into the documents before launch is a design. The same gate improvised during a stress week reads as a default, even when the mechanics are identical, and holders price the difference immediately. None of this is a comment on whether any particular instrument is safe to hold. It is the difference between a structure that has an answer and one that is about to invent one.
Common questions
What is a redemption run?
It is a surge of holders redeeming at the same time, faster than the assets backing the token or fund can be liquidated in an orderly way. Each redemption is legitimate; the problem is arrival rate. A run tests liquidity before it tests solvency, which is why a fully backed structure can still fail one if the backing settles slowly.
What is the difference between a redemption run and a redemption gate?
The run is the event and the gate is the mechanism built to survive it. A run is holder behaviour that happens to a structure. A gate is an issuer limit written into the documents in advance: a cap, a queue, a notice period or a suspension. Model the run first, because it sets the size the gate has to be, then write the gate down before it is needed.
What happened to the Reserve Primary Fund in 2008?
It held $785 million of Lehman debt against $62.5 billion in assets. After Lehman filed, redemption requests passed $5 billion by 8:40 a.m. on 15 September and reached $40 billion by the next afternoon, roughly two thirds of the fund.1 The fund valued its shares at 97 cents and suspended redemption payments, and on 22 September the SEC issued a temporary order permitting the suspension.2
How fast can a redemption run happen?
Faster than most reserve models assume. In 2008 requests worth roughly two thirds of a $62.5 billion fund arrived in about 31 hours, and they kept climbing after the custodial bank stopped funding them at 10:10 a.m. on the first morning.1 On chain there is no custodial bank, no market close and no settlement cycle, so the arrival rate is bounded only by block times.
See RWA Tokenomics Design for how this applies in practice.
Sources
- In re The Reserve Fund Securities and Derivative Litigation, Memorandum Opinion, No. 09 MD 2011 (PGG) / 09 Civ. 4346 (S.D.N.Y.)
U.S. District Court for the Southern District of New York, via the U.S. Securities and Exchange Commission, 2009
Court adopted findings with timestamps: $785 million face value of Lehman debt against $62.5 billion in assets on 14 September 2008; redemption requests over $5 billion at 8:40 a.m. on 15 September, State Street ceasing to fund redemptions and suspending overdraft privileges at 10:10 a.m., over $10 billion at 10:30 a.m., approximately $16.5 billion at 1:00 p.m., and $40 billion by 3:45 p.m. on 16 September, roughly two thirds of assets under management. - Responses to Questions About The Reserve Fund and Money Market Funds
U.S. Securities and Exchange Commission, Division of Investment Management, 2008
Staff FAQ confirming the fund calculated net assets at 97 cents per share and would suspend payment of redemption proceeds for up to seven days, and that on 22 September the SEC issued a temporary order permitting the suspension. Cited here for the date and mechanism of the gate, six days after the run. - SEC v. Terraform Labs Pte Ltd. and Do Hyeong Kwon, Complaint, No. 1:23-cv-01346 (S.D.N.Y.)
U.S. Securities and Exchange Commission, 2023
Filed 16 February 2023. Paragraphs 6 to 9 record the May 2022 depeg under selling pressure from large UST holders and over $40 billion of market value wiped out. Cited as the holder driven exit event, distinct from any mechanism response. - SEC Charges Terraform and CEO Do Kwon with Defrauding Investors (press release 2023-32)
U.S. Securities and Exchange Commission, 2023
Regulator's own summary of the May 2022 depeg and the collapse of the tokens to close to zero.
Last reviewed 2026-08
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