Decentralized Stablecoin Design

Abstract

We examine the possibility of a decentralized and capital-efficient stablecoin using smart contracts that algorithmically trade to maintain stability. We explore what new functionality decentralized stablecoins offer and address several outstanding conjectures in the space. We find that such an algorithmic stablecoin cannot be provably stable. Finally, we also provide a formal exposition of the workings of Central Bank Digital Currencies, connect this to the space of possible stablecoin designs, and then outline several striking regulatory similarities between money-market funds and working stablecoins. Our work highlights the current and growing interplay between the realms of engineering and financial services and demonstrates how theoretical results in computing can help inform practitioners

Keywords: DeFi, Cryptocurrency

JEL Classification: G15, F33, G18, G19