Leverage and Stablecoin Pegs
49 Pages Posted: 28 Dec 2022
Date Written: December 16, 2022
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: Suggested Citation