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Decentralized Governance of Stablecoins with Closed Form Valuation

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  • Lucy Huo
  • Ariah Klages-Mundt
  • Andreea Minca
  • Frederik Christian Munter
  • Mads Rude Wind

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 Munter & Mads Rude Wind, 2021. "Decentralized Governance of Stablecoins with Closed Form Valuation," Papers 2109.08939, arXiv.org, revised Jul 2022.
    • Handle: RePEc:arx:papers:2109.08939
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    References listed on IDEAS

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    4. Bullmann, Dirk & Klemm, Jonas & Pinna, Andrea, 2019. "In search for stability in crypto-assets: are stablecoins the solution?," Occasional Paper Series 230, European Central Bank.
    5. Dybvig, Philip H & Zender, Jaime F, 1991. "Capital Structure and Dividend Irrelevance with Asymmetric Information," The Review of Financial Studies, Society for Financial Studies, vol. 4(1), pages 201-219.
    6. Sam M. Werner & Daniel Perez & Lewis Gudgeon & Ariah Klages-Mundt & Dominik Harz & William J. Knottenbelt, 2021. "SoK: Decentralized Finance (DeFi)," Papers 2101.08778, arXiv.org, revised Sep 2022.
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    Cited by:

    1. Zhimeng Yang & Ariah Klages-Mundt & Lewis Gudgeon, 2023. "Oracle Counterpoint: Relationships between On-chain and Off-chain Market Data," Papers 2303.16331, arXiv.org, revised Jul 2023.

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