Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking

Ye Li, Simon Mayer and Simon Mayer

No 9260, CESifo Working Paper Series from CESifo

Abstract: Stablecoins rise to meet the demand for safe assets in decentralized finance. Stablecoin issuers transform risky reserve assets into tokens of stable values, deploying a variety of tactics. To address the questions on the viability of stablecoins, regulations, and the initiatives led by large platforms, we develop a dynamic model of optimal stablecoin management and characterize an instability trap. The system is bimodal: stability can last for a long time, but once stablecoins break the buck following negative shocks, volatility persists. Debasement triggers a vicious cycle but is unavoidable as it allows efficient risk sharing between the issuer and stablecoin users.

Keywords: stablecoin; instability; regulation; debasement; big data; payment; collateral; shadow banking (search for similar items in EconPapers)
JEL-codes: E41 E42 E51 E52 F31 G12 G18 G21 G31 G32 G35 L14 L86 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cba, nep-isf, nep-mon and nep-pay
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_9260

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