What Keeps Stablecoins Stable?

71 Pages Posted: 10 Jan 2020 Last revised: 21 Nov 2022

See all articles by Richard K. Lyons

Richard K. Lyons

University of California, Berkeley; National Bureau of Economic Research (NBER)

Ganesh Viswanath-Natraj

Warwick Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2019


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

JEL Classification: E5, F3, F4, G15, G18

Suggested Citation

Lyons, Richard K. and Viswanath-Natraj, Ganesh, What Keeps Stablecoins Stable? (December 21, 2019). Journal of International Money and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3508006 or http://dx.doi.org/10.2139/ssrn.3508006

Richard K. Lyons

University of California, Berkeley ( email )

Haas School of Business
Berkeley, CA 94720
United States
510-642-1059 (Phone)
510-643-1420 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ganesh Viswanath-Natraj (Contact Author)

Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom
CV4 7AL (Fax)

HOME PAGE: http://https://ganeshvnatraj.netlify.com

Do you have negative results from your research you’d like to share?

Paper statistics

Abstract Views
PlumX Metrics