What Keeps Stablecoins Stable?
71 Pages Posted: 10 Jan 2020 Last revised: 21 Nov 2022
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: Suggested Citation