While Stability Lasts: A Stochastic Model of Non-Custodial Stablecoins. (arXiv:2004.01304v3 [q-fin.TR] UPDATED)

The `Black Thursday' crisis in cryptocurrency markets demonstrated
deleveraging risks in over-collateralized non-custodial stablecoins. We develop
a stochastic model that helps explain deleveraging crises in these
over-collateralized systems. In our model, the stablecoin supply is decided by
speculators who optimize the profitability of a leveraged position while
incorporating the forward-looking cost of collateral liquidations, which
involves the endogenous price of the stablecoin. We formally characterize
regimes that are interpreted as stable and unstable for the stablecoin. We
prove bounds on …

non stablecoins