What Keeps Stablecoins Stable?

79 Pages Posted: 10 Jan 2020 Last revised: 8 May 2021

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 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

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)

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Ganesh Viswanath-Natraj (Contact Author)

Warwick Business School ( email )

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

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

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