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Abstract
We analyze the mechanisms governing the price stability of MakerDAO’s DAI, the first decentralized stablecoin. DAI is issued through overcollateralized debt positions (CDPs), where users borrow against cryptocurrency collateral. We show how peg-price deviations arise in equilibrium due to speculators’ price pressure and limits to arbitrage. Using CDP-level data, we distinguish speculators from arbitrageurs and demonstrate how these constraints impact price stability. Introducing stable collateral and a direct conversion mechanism between DAI and stable collateral alleviates arbitrage frictions, improving peg stability while highlighting the inherent trade-off between decentralization and arbitrage design.
Conference Proceedings
Kozhan, Roman, and Ganesh Viswanath-Natraj. “Fundamentals of the MakerDAO Governance Token.” In 3rd International Conference on Blockchain Economics, Security and Protocols (Tokenomics 2021), pp. 11–1. Schloss Dagstuhl–Leibniz-Zentrum fĂĽr Informatik, 2022. đź“„ PDF