Money Creation in Decentralized Finance: A Dynamic Model of Stablecoin and Crypto Shadow Banking

Arbeitspapier

Stablecoins rise to meet the demand for safe assets in decentralized finance. Stablecoin issuers transform risky reserve assets into tokens of stable values, deploying a variety of tactics. To address the questions on the viability of stablecoins, regulations, and the initiatives led by large platforms, we develop a dynamic model of optimal stablecoin management and characterize an instability trap. The system is bimodal: stability can last for a long time, but once stablecoins break the buck following negative shocks, volatility persists. Debasement triggers a vicious cycle but is unavoidable as it allows efficient risk sharing between the issuer and stablecoin users.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 9260

Classification and Topics

• Classification: Wirtschaft ; Demand for Money ; Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems ; Money Supply; Credit; Money Multipliers ; Monetary Policy ; Foreign Exchange ; Asset Pricing; Trading Volume; Bond Interest Rates ; General Financial Markets: Government Policy and Regulation ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Capital Budgeting; Fixed Investment and Inventory Studies; Capacity ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill ; Payout Policy ; Transactional Relationships; Contracts and Reputation; Networks ; Information and Internet Services; Computer Software
• Subject: stablecoin ; instability ; regulation ; debasement ; big data ; payment ; collateral ; shadow banking

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Li, Ye ; Mayer, Simon
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/245441
• Last update: 10.03.2025, 11:44 AM CET