Designing Stable Coins

Abstract

Existing cryptocurrencies are too volatile to be used as currencies for daily payments. Stable coins, which are cryptocurrencies pegged to other stable financial assets such as the U.S. dollar, are desirable for payments within blockchain networks, whereby being often called the “Holy Grail of cryptocurrency.” By using the option pricing theory and the Ethereum platform that allows running smart contracts, we design several dual-class structures that are written on the ETH cryptocurrency and offer a fixed income crypto asset (class A coin), a stable coin (class A′ coin) pegged to a traditional currency, and leveraged investment instruments (class B and B′ coins). Our investigation of the values of stable coins in presence of jump risk and black-swan type events shows the robustness of the design. The design has been implemented on the Ethereum platform.

Keywords: stable coins, fixed income crypto assets, leveraged return crypto assets, smart contracts