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Stablecoins: Does design affect stability?

Author

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  • Gadzinski, Gregory
  • Castello, Alessio
  • Mazzorana, Florie

Abstract

Stablecoins recently emerged as a solution to mitigate cryptocurrency's volatility while preserving their advantages. Nowadays, various types of stablecoins with different protocol designs coexist. Whilst “custodial” stablecoins are secured by fiat money locked in funds, “non-custodial" stablecoins rely on cryptocurrency collateralization and/or algorithms to stabilize their value. The contribution of the article is twofold: we define new categories of stablecoins depending on the protocol architecture; secondly, using community detection analysis, we assess if price dynamics are affected by theoretical designs. Our results show that stablecoins’ price dynamics do not seem to depend on protocol design: some non-custodial stablecoins, including algorithmic ones, display similar dynamics than successful well-established custodial based tokens.

Suggested Citation

  • Gadzinski, Gregory & Castello, Alessio & Mazzorana, Florie, 2023. "Stablecoins: Does design affect stability?," Finance Research Letters, Elsevier, vol. 53(C).
    • Handle: RePEc:eee:finlet:v:53:y:2023:i:c:s1544612322007875
    DOI: 10.1016/j.frl.2022.103611
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    References listed on IDEAS

    as
    1. Kristoufek, Ladislav, 2021. "Tethered, or Untethered? On the interplay between stablecoins and major cryptoassets," Finance Research Letters, Elsevier, vol. 43(C).
    2. Giudici, Paolo & Leach, Thomas & Pagnottoni, Paolo, 2022. "Libra or Librae? Basket based stablecoins to mitigate foreign exchange volatility spillovers," Finance Research Letters, Elsevier, vol. 44(C).
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    4. Grobys, Klaus & Junttila, Juha & Kolari, James W. & Sapkota, Niranjan, 2021. "On the stability of stablecoins," Journal of Empirical Finance, Elsevier, vol. 64(C), pages 207-223.
    5. Antonio Briola & David Vidal-Tom'as & Yuanrong Wang & Tomaso Aste, 2022. "Anatomy of a Stablecoin's failure: the Terra-Luna case," Papers 2207.13914, arXiv.org, revised Sep 2022.
    6. Klaudia Jarno & Hanna Kołodziejczyk, 2021. "Does the Design of Stablecoins Impact Their Volatility?," JRFM, MDPI, vol. 14(2), pages 1-14, January.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Stablecoins; Protocol designs; Custodial; Collateralization; Algorithmic; Clusters; Communities;
    All these keywords.

    JEL classification:

    • C19 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Other
    • C49 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Other
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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