While Stability Lasts: A Stochastic Model of Stablecoins
While Stability Lasts: A Stochastic Model of Stablecoins
The `Black Thursday' crisis in cryptocurrency markets demonstrated deleveraging risks in over-collateralized lending and stablecoins. We develop a stochastic model of over-collateralized stablecoins that helps explain such crises. In our model, the stablecoin supply is decided by speculators who optimize the profitability of a leveraged position while incorporating the forward-looking …