Some Simple Economics of Stablecoins

34 Pages Posted: 20 Dec 2021 Last revised: 22 Apr 2022

See all articles by Christian Catalini

Christian Catalini

Massachusetts Institute of Technology (MIT) - Sloan School of Management; Diem Association and Diem Networks US; National Bureau of Economic Research (NBER)

Alonso de Gortari

Princeton University

Nihar Shah

Novi Financial, Inc.

Multiple version iconThere are 2 versions of this paper

Date Written: December 15, 2021

Abstract

Stablecoins have the potential to drastically increase competition and innovation in financial services by reducing our reliance on traditional intermediaries. But they also introduce new challenges, as regulators rely on intermediaries to ensure financial stability, market integrity, and consumer protection. Because they operate at the interface between traditional banking and cryptocurrencies, stablecoins also represent an ideal setting for understanding the key trade-offs cryptocurrencies involve, and insights from robust stablecoin design and regulation are highly relevant for related innovations in decentralized finance (DeFi), non-fungible tokens (NFTs), and Web3 protocols. We describe the key stablecoin design choices from reserve composition to stability mechanism, legal claim against the issuer, non-interference with macroeconomic stability, and interoperability with public sector payment rails and central bank digital currencies (CBDCs). Last, we cover the key benefits of stablecoins in the context of real-time, low-cost programmable payments, financial inclusion, and decentralized finance.

Keywords: cryptocurrency, Bitcoin, blockchain, stablecoins, CBDC, digital currency

Suggested Citation

Catalini, Christian and de Gortari, Alonso and Shah, Nihar, Some Simple Economics of Stablecoins (December 15, 2021). MIT Sloan Research Paper No. 6610-21, Available at SSRN: https://ssrn.com/abstract=3985699 or http://dx.doi.org/10.2139/ssrn.3985699

Christian Catalini (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Diem Association and Diem Networks US ( email )

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Alonso De Gortari

Princeton University ( email )

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Nihar Shah

Novi Financial, Inc. ( email )

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