Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/245441 
Year of Publication: 
2021
Series/Report no.: 
CESifo Working Paper No. 9260
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
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.
Subjects: 
stablecoin
instability
regulation
debasement
big data
payment
collateral
shadow banking
JEL: 
E41
E42
E51
E52
F31
G12
G18
G21
G31
G32
G35
L14
L86
Document Type: 
Working Paper
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