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What keeps stablecoins stable?

Author

Listed:
  • 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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    References listed on IDEAS

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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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