Decentralized Stablecoins and Collateral Risk

81 Pages Posted: 22 Jun 2021 Last revised: 1 Sep 2021

See all articles by Roman Kozhan

Roman Kozhan

University of Warwick - Warwick Business School

Ganesh Viswanath-Natraj

University of Warwick - Warwick Business School

Date Written: June 17, 2021

Abstract

In this paper, we study the mechanisms that govern price stability of MakerDAO's DAI token, the first decentralized stablecoin. DAI works through a set of autonomous smart contracts, in which users deposit cryptocurrency collateral, typically Ethereum, and borrow a fraction of their positions as DAI tokens. Using data on the universe of collateralized debt positions, we show that DAI price covaries negatively with returns to risky collateral. The peg-price volatility is related to collateral risk, while the stability rate has little ability to stabilize the coin. The introduction of safe collateral types has led to an increase in peg stability.

Keywords: Cryptocurrency, fixed exchange rates, monetary policy, stablecoins, collateralized debt positions

JEL Classification: F31, G14, G15, G18, G23

Suggested Citation

Kozhan, Roman and Viswanath-Natraj, Ganesh, Decentralized Stablecoins and Collateral Risk (June 17, 2021). WBS Finance Group Research Paper , Available at SSRN: https://ssrn.com/abstract=3866975 or http://dx.doi.org/10.2139/ssrn.3866975

Roman Kozhan

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

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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