Decentralized Stablecoins and Collateral Risk

89 Pages Posted: 22 Jun 2021 Last revised: 15 Jun 2022

See all articles by Roman Kozhan

Roman Kozhan

University of Warwick - Warwick Business School

Ganesh Viswanath-Natraj

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 and borrow a fraction of their positions as DAI tokens. Using data on the universe of collateralized debt positions, we show that peg volatility is related to collateral risk. The DAI price covaries negatively with returns to risky collateral, even after controlling for safe-haven demand and the mechanical impact of collateral liquidations. 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)

Warwick Business School ( email )

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

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

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