Decentralized Stablecoins and Collateral Risk
81 Pages Posted: 22 Jun 2021 Last revised: 1 Sep 2021
Date Written: June 17, 2021
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
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