Decentralized Stablecoins and Collateral Risk
89 Pages Posted: 22 Jun 2021 Last revised: 15 Jun 2022
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 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
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