Modeling and Analysis of Crypto-Backed Over-Collateralized Stable Derivatives in DeFi (2402.18119v1)
Abstract: In decentralized finance (DeFi), stablecoins like DAI are designed to offer a stable value amidst the fluctuating nature of cryptocurrencies. We examine the class of crypto-backed stable derivatives, with a focus on mechanisms for price stabilization, which is exemplified by the well-known stablecoin DAI from MakerDAO. For simplicity, we focus on a single-collateral setting. We introduce a belief parameter to the simulation model of DAI in a previous work (DAISIM), reflecting market sentiments about the value and stability of DAI, and show that it better matches the expected behavior when this parameter is set to a sufficiently high value. We also propose a simple mathematical model of DAI price to explain its stability and dependency on ETH price. Finally, we analyze possible risk factors associated with these stable derivatives to provide valuable insights for stakeholders in the DeFi ecosystem.
- H. Kołodziejczyk and K. Jarno, “Stablecoin–the stable cryptocurrency,” 2020.
- L. Ante, I. Fiedler, and E. Strehle, “The influence of stablecoin issuances on cryptocurrency markets,” Finance Research Letters, vol. 41, p. 101867, 2021.
- M. Team, “The maker protocol: Makerdao’s multi-collateral dai (mcd) system,” White paper, 2020.
- R. K. Lyons and G. Viswanath-Natraj, “What keeps stablecoins stable?” Journal of International Money and Finance, vol. 131, p. 102777, 2023.
- M. Mita, K. Ito, S. Ohsawa, and H. Tanaka, “What is stablecoin?: A survey on price stabilization mechanisms for decentralized payment systems,” in 2019 8th International Congress on Advanced Applied Informatics (IIAI-AAI). IEEE, 2019, pp. 60–66.
- A. Klages-Mundt, D. Harz, L. Gudgeon, J.-Y. Liu, and A. Minca, “Stablecoins 2.0: Economic foundations and risk-based models,” in Proceedings of the 2nd ACM Conference on Advances in Financial Technologies, 2020, pp. 59–79.
- L. Gudgeon, D. Perez, D. Harz, B. Livshits, and A. Gervais, “The decentralized financial crisis,” in 2020 crypto valley conference on blockchain technology (CVCBT). IEEE, 2020, pp. 1–15.
- T. Kothari and W. C. Gu, “Simulating stablecoin systems with latent market confidence index,” Available at SSRN 3508036, 2018.
- J. Clark, D. Demirag, and S. Moosavi, “Demystifying stablecoins: Cryptography meets monetary policy,” Queue, vol. 18, no. 1, pp. 39–60, 2020.
- Synthetix, “Synthetix: Decentralized synthetic assets,” 2023. [Online]. Available: https://www.synthetix.io
- M. Protocol, “Mirror protocol: Synthetic assets on the blockchain,” 2023. [Online]. Available: https://www.mirror.finance
- S. Bhat, A. B. Kahya, B. Krishnamachari, and R. Kumar, “Daisim: A computational simulator for the makerdao stablecoin,” in 4th International Symposium on Foundations and Applications of Blockchain 2021 (FAB 2021). Schloss Dagstuhl-Leibniz-Zentrum für Informatik, 2021.
- ANRGUSC, “Daisim 2.0,” 2024. [Online]. Available: https://github.com/ANRGUSC/DAISIM