Stablecoin Economics and Speculative Attacks: A Game-Theoretic Approach

Abstract

Stablecoins serve as the backbone of many decentralized finance (DeFi) ecosystems, offering price stability in an otherwise volatile cryptocurrency market. This paper analyzes the economic design of stablecoins- both algorithmic (un- or under-collateralized) and asset-backed (collateralized)- and employs game-theoretic models to examine their susceptibility to speculative attacks. We present mathematical frameworks illustrating peg- maintenance mechanisms, discuss equilibrium conditions for stable pegging, and use real-world examples of USDC, DAI, and Terra-Luna to highlight the key success and failure factors. Policy and protocol design recommendations are provided to help mitigate risks of de-pegging and bank-run dynamics.