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Decentralized Governance of Stablecoins with Closed Form Valuation

In: Mathematical Research for Blockchain Economy

Author

Listed:
  • Lucy Huo

    (Cornell University)

  • Ariah Klages-Mundt

    (Cornell University)

  • Andreea Minca

    (Cornell University)

  • Frederik Christian Münter

    (Copenhagen University)

  • Mads Rude Wind

    (Copenhagen University)

Abstract

We model incentive security in non-custodial stablecoins and derive conditions for participation in a stablecoin system across risk absorbers (vaults/CDPs) and holders of governance tokens. We apply option pricing theory to derive closed form solutions to the stakeholders’ problems, and to value their positions within the capital structure of the stablecoin. We derive the optimal interest rate that is incentive compatible, as well as conditions for the existence of equilibria without governance attacks, and discuss implications for designing secure protocols.

Suggested Citation

  • Lucy Huo & Ariah Klages-Mundt & Andreea Minca & Frederik Christian Münter & Mads Rude Wind, 2023. "Decentralized Governance of Stablecoins with Closed Form Valuation," Lecture Notes in Operations Research, in: Panos Pardalos & Ilias Kotsireas & Yike Guo & William Knottenbelt (ed.), Mathematical Research for Blockchain Economy, pages 59-73, Springer.
    • Handle: RePEc:spr:lnopch:978-3-031-18679-0_4
    DOI: 10.1007/978-3-031-18679-0_4
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