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What keeps stablecoins stable?

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  • Lyons, Richard K.
  • Viswanath-Natraj, Ganesh

Abstract

Using trades between the stablecoin treasury and private investors, we quantify how improved arbitrage design stabilizes the price of the dominant stablecoin, Tether. We identify two 2019 design reforms: migration of Tether from the Omni to the Ethereum blockchain and decentralization of issuance. These reforms increased investor access to arbitrage trading with the treasury, reducing the absolute size of peg deviations by half. Further evidence for the importance of arbitrage design is present in the stability mechanism of the stablecoin DAI and in the creation of authorized merchants for the pegged coin WBTC.

Suggested Citation

  • Lyons, Richard K. & Viswanath-Natraj, Ganesh, 2023. "What keeps stablecoins stable?," Journal of International Money and Finance, Elsevier, vol. 131(C).
    • Handle: RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622001802
    DOI: 10.1016/j.jimonfin.2022.102777
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    Cited by:

    1. Inaki Aldasoro & Giulio Cornelli & Massimo Ferrari Minesso & Leonardo Gambacorta & Maurizio Michael Habib, "undated". "Stablecoins, money market funds and monetary policy," BIS Working Papers 1219, Bank for International Settlements.
    2. Anneke Kosse & Marc Glowka & Ilaria Mattei & Tara Rice, 2023. "Will the real stablecoin please stand up?," BIS Papers, Bank for International Settlements, number 141.
    3. Saengchote, Kanis & Samphantharak, Krislert, 2024. "Digital money creation and algorithmic stablecoin run," Finance Research Letters, Elsevier, vol. 64(C).
    4. Brian Zhu, 2024. "Stablecoin Runs and Disclosure Policy in the Presence of Large Sales," Papers 2408.07227, arXiv.org.
    5. Ravi Kashyap, 2024. "The Democratization of Wealth Management: Hedged Mutual Fund Blockchain Protocol," Papers 2405.02302, arXiv.org, revised Jul 2024.
    6. Johann Lussange & Stefano Vrizzi & Stefano Palminteri & Boris Gutkin, 2024. "Modelling crypto markets by multi-agent reinforcement learning," Papers 2402.10803, arXiv.org.
    7. Matthias Hafner & Marco Henriques Pereira & Helmut Dietl & Juan Beccuti, 2023. "The four types of stablecoins: A comparative analysis," Papers 2308.07041, arXiv.org.
    8. Ravi Kashyap, 2023. "DeFi Security: Turning The Weakest Link Into The Strongest Attraction," Papers 2312.00033, arXiv.org.
    9. Philippe Bergault & Louis Bertucci & David Bouba & Olivier Gu'eant & Julien Guilbert, 2024. "Automated Market Making: the case of Pegged Assets," Papers 2411.08145, arXiv.org.
    10. Nizam, Ahmed Mehedi, 2023. "How the fiat-backed stablecoins are manipulating US money supply," MPRA Paper 117948, University Library of Munich, Germany.
    11. Shah, Anand & Bahri, Anu, 2023. "Tokenomics: How “Risky” are the Stablecoins?," MPRA Paper 119646, University Library of Munich, Germany.
    12. Beltrametti, Luca & Pittaluga, Giovanni Battista, 2023. "Monetary Policy Implications of Stablecoins and CBDCs," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 76(3), pages 453-478.
    13. Kashyap, Ravi, 2024. "The Democratization of Wealth Management: Hedged Mutual Fund Blockchain Protocol," Research in International Business and Finance, Elsevier, vol. 71(C).
    14. Ravi Kashyap, 2024. "The Blockchain Risk Parity Line: Moving From The Efficient Frontier To The Final Frontier Of Investments," Papers 2407.09536, arXiv.org.
    15. Anton Badev & Cy Watsky, 2023. "Interconnected DeFi: Ripple Effects from the Terra Collapse," Finance and Economics Discussion Series 2023-044, Board of Governors of the Federal Reserve System (U.S.).
    16. John E. Marthinsen & Steven R. Gordon, 2024. "Synthetic Central Bank Digital Currencies and Systemic Liquidity Risks," IJFS, MDPI, vol. 12(1), pages 1-17, February.
    17. Korobova, Elena & Fantazzini, Dean, 2024. "Stablecoins and credit risk: when do they stop being stable?," MPRA Paper 122951, University Library of Munich, Germany.

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    More about this item

    Keywords

    Cryptocurrency; Stablecoins; Tether; Arbitrage; Exchange rates;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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