Leverage and Stablecoin Pegs

Gary Gorton, Elizabeth Klee, Chase Ross, Sharon Y. Ross and Alexandros P. Vardoulakis

No 30796, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Money is debt that circulates with no questions asked. Stablecoins are a new form of private money that circulate with many questions asked. We show how stablecoins can maintain a constant price even though they face run risk and pay no interest. Stablecoin holders are indirectly compensated for stablecoin run risk because they can lend the coins to levered traders. Levered traders are willing to pay a premium to borrow stablecoins when speculative demand is strong. Therefore, the stablecoin can support a $1 peg even with higher levels of run risk.

JEL-codes: G0 G1 G10 (search for similar items in EconPapers)
Date: 2022-12
New Economics Papers: this item is included in nep-fmk, nep-mon and nep-pay
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