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Abstract
Stablecoins are designed to maintain parity with a reference asset, yet predominant designs are centralized and susceptible to run risk. Using MakerDAO’s DAI, the largest decentralized stablecoin issued through autonomous smart contracts, we study the trade-off between decentralization and price stability when collateral is risky and held on-chain. We develop a framework in which users issue DAI against volatile crypto collateral, and peg deviations arise from collateral risk and limits to arbitrage. The Peg Stability Module (PSM) anchors the peg by allowing conversion between DAI and fiat-backed stable collateral at par, but increases reliance on centralized assets. Empirically, expected ETH returns co-vary with the DAI price and ETH-backed issuance, while the PSM sharply reduces peg deviations. Taken together, the findings show that there is an inherent trade-off between decentralization and price stability.
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 für Informatik, 2022. 📄 PDF