This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. ASSA Annual Meeting
  3. 2022
  4. Preliminary Program
  5. DeFi and CBDCs
« Back to Results

DeFi and CBDCs

Paper Session

Sunday, Jan. 9, 2022 10:00 AM - 12:00 PM (EST)

Hosted By: American Finance Association
  • Chair: Cesare Fracassi, University of Texas-Austin

How Central Bank Digital Currency Design Choices Impact Monetary Policy Pass-Through and Market Composition

Rodney Garratt
,
University of California-Santa Barbara
Haoxiang Zhu
,
Massachusetts Institute of Technology
Jiaheng Yu
,
Massachusetts Institute of Technology

Abstract

We explore the implications of introducing a central bank digital currency (CBDC) through commercial banks that differ in size. We focus on two design features of CBDCs: the interest rate and payment convenience. These features correspond to the "store of value" and "medium of exchange" properties of currencies. Payment convenience is an under-explored aspect of CBDC design which interacts with the monetary benefits of interest payments. Raising the interest rate on the CBDC may enhance monetary policy pass-through but have negative consequences on market composition. In contrast, raising the CBDC convenience value levels the playing field for competition between banks, but can weaken the transmission of monetary policy. A CBDC with sufficiently high convenience value can strengthen the transmission of monetary policy.

Decentralized Exchanges

Alfred Lehar
,
University of Calgary
Christine A. Parlour
,
University of California-Berkeley

Abstract

Uniswap is one of the largest decentralized exchanges with a liquidity balance of over 3 billion USD and daily trading volume of over 700 million USD. It is designed as a system of smart contracts on the Ethereum blockchain, and is a new model of liquidity provision, so called automated market making. We collect and analyze data on all 19 million Uniswap interactions from 2018 to the current time. For this new market, we analyze returns to liquidity provision and returns. We document return chasing in liquidity provision and cross-sectional heterogeneity in returns to liquidity.

Money Creation in Decentralized Finance: A Dynamic Model of Stablecoins and Crypto Shadow Banking

Ye Li
,
Ohio State University
Simon Mayer
,
Erasmus University

Abstract

Stablecoins are at the center of debate surrounding decentralized finance. We develop a dynamic model to analyze the instability mechanism of stablecoins, the complex incentives of stablecoin issuers, and regulatory proposals. The model rationalizes a variety of stablecoin management strategies commonly observed in practice and characterizes an instability trap: Stability can last for a long time, but once debasement happens following negative shocks to the issuer's reserves, price volatility persists. Capital requirement improves price stability but still fails to eliminate debasement. Restricting the riskiness of reserve assets can surprisingly destabilize price. Finally, we show that data privacy regulation has an unintended benefit of reducing the price volatility of stablecoins issued by data-driven platforms (e.g., Facebook).

Discussant(s)
Michael Kumhof
,
Bank of England
Andreas Park
,
University of Toronto-Mississauga
Matthieu Bouvard
,
Toulouse School of Economics
JEL Classifications
  • G1 - Asset Markets and Pricing