Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking

75 Pages Posted: 31 Aug 2021

See all articles by Ye Li

Ye Li

Ohio State University (OSU)

Simon Mayer

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: 2021

Abstract

Stablecoins rise to meet the demand for safe assets in decentralized finance. Stablecoin issuers transform risky reserve assets into tokens of stable values, deploying a variety of tactics. To address the questions on the viability of stablecoins, regulations, and the initiatives led by large platforms, we develop a dynamic model of optimal stablecoin management and characterize an instability trap. The system is bimodal: stability can last for a long time, but once stablecoins break the buck following negative shocks, volatility persists. Debasement triggers a vicious cycle but is unavoidable as it allows efficient risk sharing between the issuer and stablecoin users.

Keywords: stablecoin, instability, regulation, debasement, big data, payment, collateral, shadow banking

JEL Classification: E410, E420, E510, E520, F310, G120, G180, G210, G310, G320, G350, L140, L860

Suggested Citation

Li, Ye and Mayer, Simon, Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking (2021). CESifo Working Paper No. 9260, Available at SSRN: https://ssrn.com/abstract=3912369 or http://dx.doi.org/10.2139/ssrn.3912369

Ye Li (Contact Author)

Ohio State University (OSU) ( email )

Blankenship Hall-2010
901 Woody Hayes Drive
Columbus, OH OH 43210
United States

Simon Mayer

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

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