What keeps stablecoins stable?

Richard K. Lyons and Ganesh Viswanath-Natraj

Journal of International Money and Finance, 2023, vol. 131, issue C

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.

Keywords: Cryptocurrency; Stablecoins; Tether; Arbitrage; Exchange rates (search for similar items in EconPapers)
JEL-codes: E5 F3 F4 G15 G18 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:131:y:2023:i:c:s0261560622001802

DOI: 10.1016/j.jimonfin.2022.102777

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