Leverage and Stablecoin Pegs

49 Pages Posted: 28 Dec 2022

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Elizabeth C. Klee

Federal Reserve Board of Governors

Chase P. Ross

Board of Governors of the Federal Reserve System

Sharon Y. Ross

Office of Financial Research, US Department of the Treasury

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: December 16, 2022

Abstract

Money is debt that circulates with no questions asked. Stablecoins are a new form of private money that circulate with many questions asked. We show how stablecoins can maintain a constant price even though they face run risk and pay no interest. Stablecoin holders are indirectly compensated for stablecoin run risk because they can lend the coins to levered traders. Levered traders are willing to pay a premium to borrow stablecoins when speculative demand is strong. Therefore, the stablecoin can support a $1 peg even with higher levels of run risk.

Keywords: Stablecoins, Crypto, Leverage, Money

JEL Classification: G00, G10, G20, G23

Suggested Citation

Gorton, Gary B. and Klee, Elizabeth C. and Ross, Chase P. and Ross, Sharon and Vardoulakis, Alexandros, Leverage and Stablecoin Pegs (December 16, 2022). Available at SSRN: https://ssrn.com/abstract=4304954 or http://dx.doi.org/10.2139/ssrn.4304954

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

165 Whitney Ave
P.O. Box 208200
New haven, CT 06511
United States

HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Yale University - Yale Program on Financial Stability

165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States

Elizabeth C. Klee

Federal Reserve Board of Governors

Chase P. Ross

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Sharon Ross

Office of Financial Research, US Department of the Treasury ( email )

717 14th Street, NW
Washington, DC 20220
United States

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
113
Abstract Views
354
Rank
360,391
PlumX Metrics