Working Paper: NBER ID: w30796
Authors: Gary B. Gorton; Elizabeth C. Klee; Chase P. Ross; Sharon Y. Ross; Alexandros P. Vardoulakis
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; run risk; leverage; private money; financial stability
JEL Codes: G0; G1; G10
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| stablecoin demand (E41) | leverage (G24) |
| speculative demand (E41) | stablecoin lending rates (E43) |
| speculative demand (E41) | stablecoin price stability (E42) |
| volatility (E32) | reserve adjustments (G22) |
| stablecoin redemptions (E42) | real economy (E29) |
| volatility (E32) | stablecoin price stability (E42) |