We model incentive security in non-custodial stablecoins and derive
conditions for participation in a stablecoin system across risk absorbers
(vaults/CDPs) and holders of governance tokens. We apply option pricing theory
to derive closed form solutions to the stakeholders’ problems, and to value
their positions within the capital structure of the stablecoin. We derive the
optimal interest rate that is incentive compatible, as well as conditions for
the existence of equilibria without governance attacks, and discuss
implications for designing secure protocols.

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