Stablecoins 2.0: Economic Foundations and Risk-based Models
Proceedings of the 2nd ACM Conference on Advances in Financial Technologies (AFT '20)
21 Pages Posted: 15 Jul 2020 Last revised: 29 Oct 2020
Date Written: June 12, 2020
Stablecoins are one of the most widely capitalized type of cryptocurrency. However, their risks vary significantly according to their design and are often poorly understood. We seek to provide a sound foundation for stablecoin theory, with a risk-based functional characterization of the economic structure of stablecoins. First, we match existing economic models to the disparate set of custodial systems. Next, we characterize the unique risks that emerge in non-custodial stablecoins and develop a model framework that unifies existing models from economics and computer science. We further discuss how this modeling framework is applicable to a wide array of cryptoeconomic systems, including cross-chain protocols, collateralized lending, and decentralized exchanges. These unique risks yield unanswered research questions that will form the crux of research in decentralized finance going forward.
Keywords: stablecoins, non-custodial stablecoins, cryptocurrencies, cryptoeconomics, financial risk, decentralized finance, capital structure
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