What Keeps Stablecoins Stable?
79 Pages Posted: 10 Jan 2020 Last revised: 8 May 2021
Date Written: December 21, 2019
Using a rich dataset of trades between the stablecoin Treasury and private investors, we examine how arbitrage stabilizes the price of the dominant stablecoin, Tether. We identify the arbitrage mechanism through a unique natural experiment: the migration of Tether from the Omni to the Ethereum blockchain in 2019. This event led to an increase in investor access to arbitrage trades with the Tether Treasury, and reduced the absolute size of peg deviations by more than half. We also pin down the sources of stablecoin instability: Premiums are due to stablecoins' role as a safe haven; discounts derive from collateral concerns.
Keywords: cryptocurrency, stablecoins, fixed exchange rates, monetary policy, intervention
JEL Classification: E5, F3, F4, G15, G18
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