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Stablecoins are Killing It #2- Ganesh Viswanath-Natraj Slides

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Stablecoins are Killing It #2- Ganesh Viswanath-Natraj Slides

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Ganesh Viswanath-Natraj Slides is a Professor at the University of Warwick Business School. He presented this deck as part of "Stablecoins Are Killing It, Episode #2, May 6, 2020.

Ganesh Viswanath-Natraj Slides is a Professor at the University of Warwick Business School. He presented this deck as part of "Stablecoins Are Killing It, Episode #2, May 6, 2020.

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Stablecoins are Killing It #2- Ganesh Viswanath-Natraj Slides

  1. 1. Stablecoins are Killing It Ganesh Viswanath- Natraj Warwick Business School May 6, 2020 Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 1
  2. 2. Roadmap of Talk Research on stablecoins 1. Stability mechanisms 2. Fundamentals of stablecoin premiums and discounts Do stablecoins have an inflationary impact on Bitcoin? Future of stablecoins 1. Stablecoin derivatives 2. Alternative payments 3. Libra vs CBDCs A discussion of the Libra whitepaper 2.0 Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 2
  3. 3. Research on Stablecoins Current working paper on stablecoins (Lyons and Viswanath-Natraj (2019)) asks two questions: Q1: How is the peg maintained given the absence of a central bank? Answer: Demand Driven Arbitrage Flows to stabilize the Peg Q2: Why do stablecoins have a two-sided distribution? Answer: stablecoins exhibit a premium to the Dollar during periods of risk in cryptocurrency markets, and trade at a discount in response to liquidity pressures and speculation on the lack of collateral. Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 3
  4. 4. Q1: How is the peg maintained given the absence of a central bank? Flows from Treasury to Secondary Market are positively associated with deviations from the peg ∆ = p − 1 > 0 0.94 0.96 0.98 1.00 1.02 Price (USD) 200 100 0 100 200 FlowstoSecondaryMarket(USDMillion) Treasury-Exchange Flows and TetherUSD Price Tether Treasury Investor Secondary Market 1 $ (1 + ∆)$ 1 USDT 1 USDT Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 4
  5. 5. Investor Access ↑ with Tether on Ethereum Blockchain Introduction of Tether to Ethereum Blockchain in April 2019 led to increased access of investors to directly deposit dollars with the Treasury 2018-01 2018-04 2018-07 2018-10 2019-01 2019-04 2019-07 2019-10 2020-01 2020-04 Date 0 5 10 15 20 25 30 NumberofUniqueAddresses Number of Unique Addresses- by Blockchain Omni Etherscan Tron Tether Treasury Bitfinex Exchange Exchange $ Deposit USDT USDT USDT Tether Treasury Exchange Exchange $ Deposit USDT $ Deposit USDT Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 5
  6. 6. Q2: Why do stablecoins have a two-sided distribution? stablecoins trade at a discount due to a speculative attack, and at a premium due to stablecoins role as a safe haven. 2017-10 2018-01 2018-04 2018-07 2018-10 2019-01 2019-04 2019-07 Date 0.875 0.900 0.925 0.950 0.975 1.000 1.025 1.050 USD Price: USDTUSD Safe Haven Effect Speculative Attack Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 6
  7. 7. Stablecoin premiums during March 12th, 2020 Bitcoin fell by approximately 50% on March 12th, with increased congestion as investors liquidated to store of value 2020-02-29 2020-03-01 2020-03-05 2020-03-09 2020-03-13 2020-03-17 2020-03-21 2020-03-25 2020-03-29 Date 0.99 1.00 1.01 1.02 1.03 1.04 1.05 Price(USD) Price USDT 2020-02-29 2020-03-01 2020-03-05 2020-03-09 2020-03-13 2020-03-17 2020-03-21 2020-03-25 2020-03-29 Date 0.985 0.990 0.995 1.000 1.005 1.010 1.015 1.020 1.025 Price(USD) Price USDC 2020-02-29 2020-03-01 2020-03-05 2020-03-09 2020-03-13 2020-03-17 2020-03-21 2020-03-25 2020-03-29 Date 0.990 0.995 1.000 1.005 1.010 1.015 1.020 1.025 1.030 Price(USD) Price PAX 2020-02-29 2020-03-01 2020-03-05 2020-03-09 2020-03-13 2020-03-17 2020-03-21 2020-03-25 2020-03-29 Date 1.00 1.02 1.04 1.06 1.08 1.10 Price(USD) Price BUSD 2020-02-29 2020-03-01 2020-03-05 2020-03-09 2020-03-13 2020-03-17 2020-03-21 2020-03-25 2020-03-29 Date 0.99 1.00 1.01 1.02 1.03 1.04 Price(USD) Price TUSD 2020-02-29 2020-03-01 2020-03-05 2020-03-09 2020-03-13 2020-03-17 2020-03-21 2020-03-25 2020-03-29 Date 1.00 1.02 1.04 1.06 1.08 1.10 Price(USD) Price DAI Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 7
  8. 8. Do Stablecoins Inflate Crypto Markets? In a VoxEU article with Rich Lyons https://voxeu.org/article/ stable-coins-dont-inflate-crypto-markets, we test for the effects of stablecoin issuance on cryptocurrency asset prices We trace the aggregate issuance of Tether from the Tether Treasury to the secondary market. Using our measure of flows to the secondary market, we observe no statistically significant effect on crypto asset prices (BTC and ETH) Our results support alternative hypotheses: namely that (i) stablecoins act as a decentralized system of exchange rate pegs and (ii) stablecoin premiums are due to stablecoins’ role as a safe asset Our results do not rule out the occurrence of price manipulation in crypto markets. However, based on aggregate issuance data, there is no systematic effect. Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 8
  9. 9. Do Stablecoins Inflate Crypto Markets? Our results contrast with those of Griffin and Shams (GS) paper ”Is Bitcoin Really Un-Tethered?”. We use aggregate flows from the Treasury to the secondary market GS condition on periods of high flow from Tether to exchanges and BTC to a wallet in Bitfinex, and identify a BTC whale that used Tether as a vehicle currency to purchase BTC What’s the right flow measure to use? 1. Aggregate flows are a more unbiased measure of the impact of Tether on BTC markets. 2. GS measure of flows may correspond to (i) periods of high volatility in BTC markets, or (ii) periods of high premiums in Tether. The million dollar question is: did the BTC whale collude with Tether/Bitfinex? Our analysis cannot answer this question! Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 9
  10. 10. Future of Stablecoins This is an exciting time to be in stablecoins as a practitioner and as a researcher! I identify three areas of development in stablecoins. 1. Stablecoin Derivatives: Addition of forward markets to increase stability of the creation/redemption mechanisms, increased arbitrage capital =⇒ increased stability of peg 2. Alternative payments: Move away from vehicle currency in crypto markets to remittance payments, trade credit etc. Can provide store of value/medium of exchange properties for countries with lack of payments infrastructure and high inflation of sovereign currency. Residents in developing countries may use stablecoins to evade capital controls. 3. Libra vs CBDCs: rise of global stablecoins that offer retail payment services, privately issued, in case of Libra, or publicly issued, in caes of CBDC. Modern day equivalent to free banking vs central banking. Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 10
  11. 11. Libra- a new paradigm of currencies Libra whitepaper 2.0 allows for single currency stablecoins (eg. LibraUSD) Multi-Layered system to distribute Libra token: 1. Designated Dealers (DD) that deposit dollars with Libra Treasury to create newly minted Libra tokens 2. Virtual Service Asset Providers (VSAP) that distribute tokens from DD to retail platforms 3. Retail Payment Providers distribute tokens to individuals for daily payments. Can include VSAPs and ”unhosted wallets” What white paper does well: Significant emphasis on maintaining security in payments systems, with transaction limits on ”unhosted” wallets and Financial Intelligence Unit (FIU) to detect suspicious activity What they don’t do enough: But the whitepaper neglects some key considerations of system stability and emergency liquidity operations... Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 11
  12. 12. Libra- a new paradigm of currencies In an article with Barry Eichengreen https://voxeu.org/article/libra-still-needs-more-baking, we raise the following concerns: Financial Instability: Small countries are vulnerable to widescale adoption of an alternative stablecoin currency, eg. if residents choose LibraUSD, domestic central bank can lose seigniorage, and control of monetary policy. Capital Buffer and Reserves: Assumes significant contributions will be made by DDs and other financial institutions. Suggests reserves will be invested in cash or cash equivalents, i.e. Treasury securities. But would smaller country Treasury securities be ”cash equivalent”? Lender of Last Resort: Federal Reserve under section 13 (3) provides emergency backstop operations. It is not clear if Libra as a single entity has access to Federal Reserve emergency liquidity in the event of a run on its currency. Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 12
  13. 13. Thank You! Ganesh Viswanath- Natraj Warwick Business School Stablecoins are Killing It 12

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