Ripple Investigates Stablecoin De-Pegging: Insights from Warwick Business School’s Gillmore Centre
The $25,000 grant awarded to Warwick Business School’s Gillmore Centre for Financial Technology is set to explore the risks of stablecoin de-pegging and its implications for financial market stability. This research is timely, given the increasing relevance of stablecoins in today’s digital economy.
Understanding Stablecoin De-pegging
Stablecoin de-pegging occurs when the value of a stablecoin diverges significantly from the asset it aims to replicate, such as a fiat currency. This deviation can happen due to various market conditions or other factors.
Impact of Historical Events
A notable instance of stablecoin de-pegging occurred in May 2022, when Terra USD lost its peg, resulting in the collapse of its sister token, Luna. According to the Corporate Finance Institute, this event led to a staggering $0.5 trillion loss in the cryptocurrency market within just one week, highlighting the severe repercussions of stablecoin instability.
Research Focus at the Gillmore Centre
Dr. Viswanath Natraj, an Assistant Professor of Finance at the Gillmore Centre for Financial Technology, is spearheading this crucial research. The study will delve into several key areas:
- Cost-efficiency of decentralized foreign exchange (FX) platforms.
- The role of stablecoins in digital dollarisation.
- Comparison of protocols like Uniswap V3 with traditional over-the-counter FX markets.
Exploring Financial Stability
The research team aims to evaluate whether decentralized platforms can serve as viable alternatives to current global currency trading methods. Additionally, they will investigate the welfare implications of using digital dollars for retail customers, focusing on how stablecoins can either support or undermine financial stability, especially in emerging markets.
Mitigating Systemic Risks
According to Dr. Natraj, a deep understanding of stablecoin designs is essential for addressing systemic risks. He emphasizes that:
“Stablecoins represent a fascinating and complex intersection of finance and technology. They provide opportunities to enhance efficiency and accessibility in financial markets, yet they also pose unique challenges related to stability and regulation.”
Enhancing Market Confidence
The research will also assess how real-time audits of stablecoin reserves—utilizing technologies like Chainlink oracles—can bolster market confidence and help reduce the risk of speculative attacks. Moreover, the study will investigate how Proof of Reserve (PoR) systems can enhance transparency and mitigate the risk of de-pegging events.
Stablecoins in Emerging Economies
Furthermore, the research will explore the application of stablecoins in emerging economies such as Turkey and Argentina, where they are increasingly used as tools to bypass capital controls and hedge against inflation.
This comprehensive study aims to provide valuable insights for policymakers and market participants, ensuring a better understanding of the evolving landscape of stablecoins in financial markets.
