Understand Volatility of Algorithmic Stablecoin: Modeling, Verification and Empirical Analysis

Zhao, Wenqi; Li, Hui; Yuan, Yuming

doi:10.1007/978-3-662-63958-0_8

Cited by 7 publications

(7 citation statements)

References 12 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…14 Saengchote (2021) analyzes this "bank run" of algorithmic stablecoins using the case of Iron Finance, showing that a large number of redeem transactions, particularly "profitable redemptions," occurred on the blockchain when the stablecoin (IRON) fell from $1 to $0.5. 9 Similar analyses by Adams and Ibert (2022) on IRON and Zhao et al (2021) on Basis Cash also demonstrate that de-pegging is an inseparable problem for algorithmic stablecoins. 15,16 It is worth noting that the de-pegging of stablecoins can be triggered by various factors, such as a bear market and high negative price volatility, a lack of reserves, a loss of trust leading to a bank run, and design flaws in token economics.…”

Section: Introductionmentioning

confidence: 69%

“…9 Similar analyses by Adams and Ibert (2022) on IRON and Zhao et al (2021) on Basis Cash also demonstrate that de-pegging is an inseparable problem for algorithmic stablecoins. 15,16 It is worth noting that the de-pegging of stablecoins can be triggered by various factors, such as a bear market and high negative price volatility, a lack of reserves, a loss of trust leading to a bank run, and design flaws in token economics. While these other factors are still important, many empirical studies have pointed out that flawed token economic structures can be a "destined for doom" scheme for algorithmic stablecoins, which can be triggered by arbitrage trading between on-chain redemption and the external markets.…”

Section: Introductionmentioning

confidence: 69%

See 1 more Smart Citation

A Token Economics Explanation for the De-Pegging of the Algorithmic Stablecoin: Analysis of the Case of Terra

Cho

2023

ledger

View full text Add to dashboard Cite

The collapse of Terra's algorithmic stablecoin UST shocked the cryptocurrency market. This study investigates the underlying causes of the de-pegging event through an in- depth analysis of the token economics of the Terra blockchain. Using on-chain data, this study identifies a misalignment in the economic incentive structure of the blockchain protocol as a key contributor to the de-pegging. It is found that an undercompensation of UST when it was redeemed played a significant role in the de-pegging event, with the UST price on cryptocurrency exchanges following the redeemed value of UST that users could obtain by swapping UST for LUNA and selling it on the market. The results highlight the importance of properly designing the incentive structure of blockchain protocols to ensure their sustainability and security.

show abstract

Section: Introductionmentioning

confidence: 69%

Section: Introductionmentioning

confidence: 69%

A Token Economics Explanation for the De-Pegging of the Algorithmic Stablecoin: Analysis of the Case of Terra

Cho

2023

ledger

View full text Add to dashboard Cite

show abstract

“…As for stabilization, the par value of an algorithmic stablecoin is basically preserved by expanding supply when the price is too high and contracting supply when the price is too low. There are two major designs in algorithmic stablecoins 8 , namely, Rebase and Seigniorage Shares. Rebase 9 is an algorithm that automatically adjusts the money supply in response to the market demand on a routine basis.…”

Section: Figure 1 Historical Datamentioning

confidence: 99%

“…Clements R. 23 studies the inherent fragility in algorithmic stablecoins and claims that they are built to fail. Zhao et al 8 conduct an empirical analysis to explain the volatility of algorithmic stablecoins.…”

Section: Related Workmentioning

confidence: 99%

Leveraging Ponzi-like Designs in Stablecoins

Wang

et al. 2023

Preprint

View full text Add to dashboard Cite

Stablecoin is a medium of exchange with stable value in the world of decentralized finance (DeFi). In which, algorithmic stablecoins are one special type of stablecoins that are not backed by any asset. They stand to revolutionize the way a sovereign fiat operates. As implemented, algorithmic stablecoins are poorly stabilized in most cases; their prices easily deviate from the target or even fall into a catastrophic collapse, and are as a result often dismissed as a Ponzi scheme. However, what is the essence of Ponzi? In this paper, we try to clarify such a deceptive concept and reveal how algorithmic stablecoins work from a higher level. We find that Ponzi is basically a financial protocol that pays existing investors with funds collected from new ones. Running a Ponzi, however, does not necessarily imply that any participant is in any sense losing out, as long as the game can be perpetually rolled over. Economists call such realization as a rational Ponzi game. We thereby propose a rational model in the context of algorithmic stablecoins and draw its holding conditions. We apply the model to examine: whether or not the algorithmic stablecoin is a rational Ponzi game. Accordingly, we discuss two types of algorithmic stablecoins (Rebase & Seigniorage Shares) and dig into the historical market performance of a number of impactful projects to demonstrate the effectiveness of our model.

show abstract

“…In the U.S., most stablecoins are considered "convertible virtual currency" meaning that they serve as substitutes for a specific reference asset [1]. In the case where a stablecoin is not convertible for an underlying reference asset, it achieves its desired fixed value using a seigniorage algorithm, which buys and sells in the open market to maintain this value [2]. In either case, due to external market forces, it is easy to see that a stablecoin's price may deviate considerably from its desired value-an event referred to as a depegging.…”

Section: Introduction 1stablecoins and Cryptocurrencymentioning

confidence: 99%

A Multivariate Hawkes Process Model for Stablecoin-Cryptocurrency Depegging Event Dynamics

Oxenhorn¹

2022

Preprint

View full text Add to dashboard Cite

Stablecoins-digital assets pegged to a specific currency or commodity value-are heavily involved in transactions of major cryptocurrencies [1]. The effects of deviations from their desired fixed values (depeggings) on the cryptocurrencies for which they are frequently used in transactions are therefore of interest to study. We propose a model for this phenomenon using a multivariate mutually-exciting Hawkes process, and present a numerical example applying this model to Tether (USDT) and Bitcoin (BTC).

show abstract

Understand Volatility of Algorithmic Stablecoin: Modeling, Verification and Empirical Analysis

Cited by 7 publications

References 12 publications

A Token Economics Explanation for the De-Pegging of the Algorithmic Stablecoin: Analysis of the Case of Terra

A Token Economics Explanation for the De-Pegging of the Algorithmic Stablecoin: Analysis of the Case of Terra

Leveraging Ponzi-like Designs in Stablecoins

A Multivariate Hawkes Process Model for Stablecoin-Cryptocurrency Depegging Event Dynamics

Contact Info

Product

Resources

About