medium · FRM Part 2 Current Issues

Which statement MOST precisely identifies the reflexive mechanism that turned a modest de-peg into a self-reinforcing 'death spiral'?

1. The arbitrage that should restore the peg relies on minting the volatile sister token to absorb selling pressure; once confidence drops, that minting dilutes and collapses the sister token's price, destroying the very backstop value the mechanism depends on and amplifying redemptions.
2. The collapse occurred because the stablecoin's fiat reserves were held in long-duration Treasury bonds that declined in value as interest rates rose, so a reserve shortfall mechanically broke the peg once redemption demand exceeded the cash available for immediate settlement.
3. Over-collateralization with the sister token meant the system held comfortably more than 100% backing at all times, so the de-peg should have self-corrected automatically through arbitrage, and the collapse can only be explained by an exchange abruptly and unilaterally halting redemptions.
4. The death spiral arose purely from a smart-contract exploit that let an anonymous attacker quietly mint an unlimited quantity of stablecoins, an isolated operational failure entirely unrelated to the underlying economic design of the peg mechanism itself.

Sign up free to see the explanation and track your rank →