Decentralized Governance of Stablecoins with Closed Form Valuation

Lucy Huo, Ariah Klages-Mundt, Andreea Minca (), Frederik Christian Münter and Mads Rude Wind
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Lucy Huo: Cornell University
Ariah Klages-Mundt: Cornell University
Andreea Minca: Cornell University
Frederik Christian Münter: Copenhagen University
Mads Rude Wind: Copenhagen University

A chapter in Mathematical Research for Blockchain Economy, 2023, pp 59-73 from Springer

Abstract: Abstract We model incentive security in non-custodial stablecoins and derive conditions for participation in a stablecoin system across risk absorbers (vaults/CDPs) and holders of governance tokens. We apply option pricing theory to derive closed form solutions to the stakeholders’ problems, and to value their positions within the capital structure of the stablecoin. We derive the optimal interest rate that is incentive compatible, as well as conditions for the existence of equilibria without governance attacks, and discuss implications for designing secure protocols.

Keywords: Stablecoins; DeFi; Governance; Capital structure; Closed form valuation (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnopch:978-3-031-18679-0_4

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DOI: 10.1007/978-3-031-18679-0_4

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