Real-time Risk Metrics for Programmatic Stablecoin Crypto Asset-Liability Management (CALM)

Paper: arXiv 2401.13399

Authors: Marcel Bluhm, Adrian Cachinero Vasiljević, Sébastien Derivaux, Søren Terp Hørlück Jessen

Abstract

Stablecoins have turned out to be the “killer” use case of the growing digital asset space. However, risk management frameworks, including regulatory ones, have been largely absent. In this paper, we address the critical question of measuring and managing risk in stablecoin protocols, which operate on public blockchain infrastructure. The on-chain environment makes it possible to monitor risk and automate its management via transparent smart-contracts in real-time. We propose two risk metrics covering capitalization and liquidity of stablecoin protocols. We then explore in a case-study type analysis how our risk management framework can be applied to DAI, the biggest decentralized stablecoin by market capitalisation to-date, governed by MakerDAO. Based on our findings, we recommend that the protocol explores implementing automatic capital buffer adjustments and dynamic maturity gap matching. Our analysis demonstrates the practical benefits for scalable (prudential) risk management stemming from real-time availability of high-quality, granular, tamper-resistant on-chain data in the digital asset space. We name this approach Crypto Asset-Liability Management (CALM).

Complexity vs Empirical Score

• Math Complexity: 3.5/10
• Empirical Rigor: 6.5/10
• Quadrant: Street Traders — practical and empirical, lighter on theory

Why this score: The paper introduces an innovative Crypto Asset-Liability Management (CALM) framework leveraging real-time on-chain data for stablecoins. While mathematical complexity is light, the empirical application using DAI on-chain metrics offers practical insight for real-time programmatic risk automation.

Research Flowchart

  flowchart TD
    A["Research Question: How to measure & manage stablecoin risk in real-time?"] --> B["Data Inputs: Granular, tamper-resistant on-chain data"]
    B --> C["CALM Framework: Develop capitalization & liquidity metrics"]
    C --> D["Case Study Analysis: Apply CALM framework to MakerDAO (DAI)"]
    D --> E["Key Findings: Real-time monitoring enables automated smart-contract risk management"]
    E --> F["Recommendations: Implement automatic capital buffers & dynamic maturity matching"]