Decentralized Governance of Stablecoins with Closed Form Valuation
This addresses the design of secure decentralized finance protocols for stablecoin users and developers, though it appears incremental in applying existing financial theory to this domain.
The paper tackles the problem of incentive security in non-custodial stablecoins by modeling stakeholder participation and deriving optimal interest rates and equilibrium conditions to prevent governance attacks, using option pricing theory for closed-form solutions.
We model incentive security in non-custodial stablecoins and derive conditions for participation in a stablecoin system across risk absorbers (vaults/CDPs) and holders of governance tokens. We apply option pricing theory to derive closed form solutions to the stakeholders' problems, and to value their positions within the capital structure of the stablecoin. We derive the optimal interest rate that is incentive compatible, as well as conditions for the existence of equilibria without governance attacks, and discuss implications for designing secure protocols.