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Real-time Risk Metrics for Programmatic Stablecoin Crypto Asset-Liability Management (CALM)

Author

Listed:
  • Marcel Bluhm

    (The Block)

  • Adrian Cachinero Vasiljevi'c

    (Steakhouse Financial Limited)

  • S'ebastien Derivaux

    (Steakhouse Financial Limited)

  • S{o}ren Terp H{o}rluck Jessen

    (Balloonist ApS)

Abstract

Stablecoins have turned out to be the "killer" use case of the growing digital asset space. However, risk management frameworks, including regulatory ones, have been largely absent. In this paper, we address the critical question of measuring and managing risk in stablecoin protocols, which operate on public blockchain infrastructure. The on-chain environment makes it possible to monitor risk and automate its management via transparent smart-contracts in real-time. We propose two risk metrics covering capitalization and liquidity of stablecoin protocols. We then explore in a case-study type analysis how our risk management framework can be applied to DAI, the biggest decentralized stablecoin by market capitalisation to-date, governed by MakerDAO. Based on our findings, we recommend that the protocol explores implementing automatic capital buffer adjustments and dynamic maturity gap matching. Our analysis demonstrates the practical benefits for scalable (prudential) risk management stemming from real-time availability of high-quality, granular, tamper-resistant on-chain data in the digital asset space. We name this approach Crypto Asset-Liability Management (CALM).

Suggested Citation

  • Marcel Bluhm & Adrian Cachinero Vasiljevi'c & S'ebastien Derivaux & S{o}ren Terp H{o}rluck Jessen, 2024. "Real-time Risk Metrics for Programmatic Stablecoin Crypto Asset-Liability Management (CALM)," Papers 2401.13399, arXiv.org.
    • Handle: RePEc:arx:papers:2401.13399
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    References listed on IDEAS

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    1. Douglas Arner & Raphael Auer & Jon Frost, 2020. "Stablecoins: risks, potential and regulation," Financial Stability Review, Banco de España, issue Autumn.
    2. Douglas Arner & Raphael Auer & Jon Frost, 2020. "Stablecoins: risks, potential and regulation," Revista de Estabilidad Financiera, Banco de España, issue Autumn.
    3. Douglas Arner & Raphael Auer & Jon Frost, 2020. "Stablecoins: potential, risks and regulation," BIS Working Papers 905, Bank for International Settlements.
    4. Douglas Arner & Raphael Auer & Jon Frost, 2020. "Stablecoins: risks, potential and regulation," Financial Stability Review, Banco de España, issue NOV.
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