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

## TL;DR

This paper models stablecoin markets, revealing deleveraging feedback effects that cause crises, and introduces new attack vectors that threaten blockchain stability and consensus, with empirical observations from past crises.

## Contribution

It provides a theoretical framework for stablecoin dynamics, identifies deleveraging spirals, and proposes new attack mechanisms exploiting liquidation processes.

## Key findings

- Deleveraging spirals cause illiquidity during crises.
- Attacks exploiting liquidation arbitrage can be profitable.
- Observed attacks during Black Thursday confirmed model predictions.

## Abstract

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. From these insights, we suggest design improvements that aim to improve long-term stability. We also introduce new attacks that exploit arbitrage-like opportunities around stablecoin liquidations. Using our model, we demonstrate that these can be profitable. These attacks may induce volatility in the `stable' asset and cause perverse incentives for miners, posing risks to blockchain consensus. A variant of such attacks also later occurred during Black Thursday, taking the form of mempool manipulation to clear Dai liquidation auctions at near zero prices, costing $8m.