‘Pile N Dump’ Volatility Indicator for Stablecoins

Stablecoins are the class of cryptocurrencies that are designed and expected to track value of a fiat currency, popularly the US Dollar. They aim to provide a means of transaction with low and acceptable price/value fluctuations, thereby engineering a means of stable value exchange, a fundamental necessity for any business in an economy. Their success implies their potential worldwide adoption as an alternative payment system, while failure of individual stablecoin projects are frontiers for improvements and fundamental breakthroughs. The field of financial stablecoins, tools and products based on decentralisation are encompassed as DeFi (Decentralised Finance). By virtue of decentralisation, stablecoins theoretically obviate the need for a third party intermediary. Yet, by the same virtue, stablecoins lack the additional stabilisation toolkit available to centrally backed fiat currency; contemporary examples include feedback loops, also known as ‘death spirals’. Moreover, being novel and with less than a decade of operational history, the quantitative metrics to evaluate stability and methods to achieve stability are fast developing but naïve fields of DeFi. To address these pitfalls and primal gulf in understanding stablecoin price instability, this paper empirically analyses multiple factors capable of influencing price stability of stablecoins. These factors consist of 1- rapid buying/selling of coins in a network, 2- rapid change in demand for protocol tokens, 3- non-linear price fluctuations. Lastly, notable instances of these factors predicting instability in stablecoins highlight the potential commercial use case of these approaches to safeguard a portfolio leveraging DeFi stablecoins; payment systems can also leverage these insights and tools to select the optimal stablecoin for any use case. In this body of work, 16 stablecoins were analysed: ALUSD, AMPL, BAC, BUSD, DAI, FEI, FRAX, GUSD, HUSD, LUSD, MIM, SUSD, TUSD, USDC, USDP, UST. Based on the statistical and empirical findings presented, the mechanisms of stablecoin volatility and death-spiral were quantified and thereby described as ‘Pile N Dump’.