Abstract
Stablecoins—crypto tokens whose value is pegged to a real-world asset such as the US Dollar—are an important component of the DeFi ecosystem as they mitigate the impact of token price volatility. In crypto-backed stablecoins, the peg is founded on the guarantee that in case of system shutdown, each stablecoin can be exchanged for a basket of other crypto tokens worth approximately its nominal value. However, price fluctuations that affect the collateral tokens may cause this guarantee to be invalidated. In this work, we investigate the impact of the collateral portfolio’s composition on the resilience to this type of catastrophic event. For stablecoins whose developers maintain a significant portion of the collateral (e.g., MakerDAO’s Dai), we propose two portfolio optimization methods, based on convex optimization and (semi)variance minimization, that account for the correlation between the various token prices. We compare the optimal portfolios to the historical evolution of Dai’s collateral portfolio, and to aid reproducibility, we have made our data and code publicly available.
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Notes
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Although we are unaware of examples of crypto-backed stablecoins that have collapsed entirely due to price fluctuations, there have been instances in which they may have come close (e.g., Dai’s ‘Black Thursday’ event in March 2020 [22]).
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The semivariance of a random variable X is defined as \(\mathbb {E}[(X - \mathbb {E}[X])^2 {\textbf {1}}(X \le \mathbb {E}[X])]\) where \({\textbf {1}}\) is the standard indicator function.
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This is consistent, with, e.g., the Maker Risk Dashboard and [10].
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For example, the 6 s Capital asset (RWA001) was increased from an initial $1,060 on 9 March 2021 to nearly $ 1.6 million on 27 August 2021 through a “price” update.
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This is an argument in favor of a greater diversity of wrapped tokens on the Ethereum blockchain, or integrated cross-chain support as in [29].
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Acknowledgements
This work was supported by Ministry of Education (MOE) Singapore’s Tier 2 Grant Award No. MOE-T2EP20120-0003.
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Hajek, B., Reijsbergen, D., Datta, A., Keppo, J. (2024). Collateral Portfolio Optimization in Crypto-Backed Stablecoins. In: Leonardos, S., Alfieri, E., Knottenbelt, W.J., Pardalos, P. (eds) Mathematical Research for Blockchain Economy. MARBLE 2024. Lecture Notes in Operations Research. Springer, Cham. https://doi.org/10.1007/978-3-031-68974-1_5
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