The research is funded by the University of California, Berkeley’s Centre for Responsible Decentralized Intelligence, and will involve collaboration between Warwick’s own Dr Ganesh Viswanath-Natraj, Ripple Research, and the University Blockchain Research Initiative (UBRI), the $50 million research division of Ripple.
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The $25,000 grant has been provided to Warwick Business School’s Gillmore Centre for Financial Technology to look into the risks of stablecoin de-pegging and its impact on financial market stability.
Stablecoin depegging can be defined as when a stablecoin’s value deviates significantly from the value of the asset it is supposed to maintain, like a fiat currency, often due to market conditions or other factors.
When Terra USD depegged in May 2022 and soon after, sister token Luna collapsed, the cryptocurrency market lost $0.5 trillion in a week, according to the Corporate Finance Institute. This event is the perfect example of what can happen when a stablecoin fails to maintain its peg.
Assistant Professor of Finance at the Gillmore Centre for Financial Technology, Dr Viswanath Natraj’s research, will examine critical aspects of the stablecoin ecosystem, focusing on the cost-efficiency of decentralised FX platforms and the role of stablecoins in digital dollarisation.
The team will then compare protocols such as Uniswap V3 to traditional over-the-counter FX markets to evaluate whether decentralised platforms present a viable alternative to what underpins global currency trading today.
The study will also examine the welfare implications of retail customers using digital dollars to hold their savings and the conditions under which stablecoins contribute to or undermine financial stability in emerging markets.
Dr Viswanath Natraj believes that understanding the sustainability of stablecoin designs is needed to mitigate systemic risks.
“Stablecoins represent a fascinating and complex intersection of finance and technology. While they offer opportunities to enhance efficiency and accessibility in financial markets, they also introduce unique challenges related to stability and regulation. This research aims to examine these complexities and provide valuable insights for policymakers and market participants alike.
“Given the increasing scrutiny of stablecoin reserve management practices by regulators worldwide, we will assess how real-time audits of reserves, facilitated by technologies such as Chainlink oracles, can enhance market confidence and reduce the likelihood of speculative attacks. This study will also explore how Proof of Reserve (PoR) systems improve transparency and mitigate the potential for de-pegging events.
“We will also investigate the role of stablecoins in digital dollarisation and their use in emerging economies such as Turkey and Argentina, where they serve as a means to circumvent capital controls and hedge against inflation.”
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