What Drives the (In)stability of a Stablecoin?

TL;DR

This paper investigates the causes of stablecoin depegging using a game-theoretical model and empirical data, aiming to inform the design of more resilient stablecoins.

Contribution

It introduces a game-theoretical framework to analyze stablecoin stability and supports it with extensive empirical data from multiple blockchains.

Findings

Stablecoins exhibit different price equilibria based on their design.

Market panic can trigger depegging even in well-designed stablecoins.

Empirical data confirms the model's predictions over a one-year period.

Abstract

In May 2022, an apparent speculative attack, followed by market panic, led to the precipitous downfall of UST, one of the most popular stablecoins at that time. However, UST is not the only stablecoin to have been depegged in the past. Designing resilient and long-term stable coins, therefore, appears to present a hard challenge. To further scrutinize existing stablecoin designs and ultimately lead to more robust systems, we need to understand where volatility emerges. Our work provides a game-theoretical model aiming to help identify why stablecoins suffer from a depeg. This game-theoretical model reveals that stablecoins have different price equilibria depending on the coin's architecture and mechanism to minimize volatility. Moreover, our theory is supported by extensive empirical data, spanning $1$ year. To that end, we collect daily prices for 22 stablecoins and on-chain data from five blockchains including the Ethereum and the Terra blockchain.