(In)Stability for the Blockchain: Deleveraging Spirals and Stablecoin Attacks

Understand

We develop a model of stable assets, including non-custodial stablecoins backed by cryptocurrencies.

• Such stablecoins are popular methods for bootstrapping price stability within public blockchain settings.
• We derive fundamental results about dynamics and liquidity in stablecoin markets, demonstrate that these markets face deleveraging feedback effects that cause illiquidity during crises and exacerbate collateral drawdown, and characterize stable dynamics of the system under particular conditions.
• The possibility of such `deleveraging spirals' was first predicted in the initial release of our paper in 2019 and later directly observed during the `Black Thursday' crisis in Dai in 2020.