Decentralized Governance of Stablecoins with Closed Form Valuation

Understand

We model incentive security in non-custodial stablecoins and derive conditions for participation in a stablecoin system across risk absorbers (vaults/CDPs) and holders of governance tokens.

• We apply option pricing theory to derive closed form solutions to the stakeholders' problems, and to value their positions within the capital structure of the stablecoin.
• We derive the optimal interest rate that is incentive compatible, as well as conditions for the existence of equilibria without governance attacks, and discuss implications for designing secure protocols.