Leverage and Stablecoin Pegs

Gary B. Gorton, Elizabeth C. Klee, Chase P. Ross, Sharon Y. Ross, and Alexandros P. Vardoulakis

♦ Stablecoins are a new form of private money. They are fragile but largely trade at par. How? We present a model and empirical work to examine a novel source of demand for stablecoins contributing to their stability. Stablecoin owners are indirectly compensated for run risk by lending their coins to crypto speculators. The stablecoin can then support its $1 peg, but this arrangement links crypto speculation to traditional financial markets where stablecoins invest their reserves.

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