Designing Stable Coins

47 Pages Posted: 7 Jun 2021

See all articles by Yizhou Cao

Yizhou Cao

Tau Strategy

Min Dai

The Hong Kong Polytechnic University; National University of Singapore

Steven Kou

Boston University

Lewei Li

FinBook

Chen Yang

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering and Engineering Management

Date Written: May 30, 2021

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

Suggested Citation

Cao, Yizhou and Dai, Min and Kou, Steven and Li, Lewei and Yang, Chen, Designing Stable Coins (May 30, 2021). Available at SSRN: https://ssrn.com/abstract=3856569 or http://dx.doi.org/10.2139/ssrn.3856569

Yizhou Cao

Tau Strategy ( email )

Singapore

Min Dai

The Hong Kong Polytechnic University ( email )

National University of Singapore ( email )

Singapore

Steven Kou

Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
6173583318 (Phone)

Lewei Li

FinBook ( email )

Singapore

Chen Yang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Systems Engineering and Engineering Management ( email )

Hong Kong
China

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