What Keeps Stablecoins Stable?

72 Pages Posted: 10 Jan 2020 Last revised: 20 Jul 2020

See all articles by Richard K. Lyons

Richard K. Lyons

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

Ganesh Viswanath-Natraj

University of Warwick - Warwick Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2019


We take this question to be isomorphic to, "What Keeps Fixed Exchange Rates Fixed?" and address it with analysis familiar in exchange rate economics. Using a rich dataset of trades between the stablecoin Treasury and private investors, we examine how peg-sustaining arbitrage stabilizes the price of the dominant stablecoin, Tether. In conventional fixed-rate regimes, the central bank stabilizes the peg through management of foreign reserves. In contrast, stablecoin pegs are managed through the actions of private investors, who deposit (withdraw) dollars with the Tether Treasury when the stablecoin trades at a premium (discount), a change in the relative supply that drives peg prices back toward one. We identify the arbitrage mechanism through a unique natural experiment: the migration of Tether from the Omni to the Ethereum blockchain. This event led to an increase in investor access to arbitrage trades with the Tether Treasury. Consistent with our mechanism, this reduced the absolute size of peg deviations by more than half. We also pin down which fundamentals drive the two-sided distribution of peg-price deviations: Premiums are due to stablecoins' role as a safe haven, exhibiting, for example, premiums greater than 100 basis points during the COVID-19 crisis of March 2020; discounts derive from liquidity effects and collateral concerns.

Keywords: cryptocurrency, stablecoins, fixed exchange rates, monetary policy, intervention

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

Suggested Citation

Lyons, Richard K. and Viswanath-Natraj, Ganesh, What Keeps Stablecoins Stable? (December 21, 2019). 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)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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

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