The Wayback Machine - https://web.archive.org/web/20201130123019/https://dl.acm.org/doi/pdf/10.1145/3419614.3423261
ACM Digital Library home
ACM home
Advanced Search
10.1145/3419614.3423261acmconferencesArticle/Chapter ViewAccess DenialPublication PagesaftConference Proceedings
research-article

Stablecoins 2.0: Economic Foundations and Risk-based Models

Publication: AFT '20: Proceedings of the 2nd ACM Conference on Advances in Financial TechnologiesOctober 2020 Pages 59–79https://doi.org/10.1145/3419614.3423261
  • 0citation
  • 61
    • Downloads
Metrics
Total Citations0
Total Downloads61
Last 12 Months61
Last 6 weeks61
AFT '20: Proceedings of the 2nd ACM Conference on Advances in Financial Technologies
Stablecoins 2.0: Economic Foundations and Risk-based Models
Pages 59–79
PreviousChapterNextChapter

ABSTRACT

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.

Get full access to this Publication

Purchase, subscribe or recommend this publication to your librarian.

Get this Publication

References

  1. Mitsutoshi Adachi, Matteo Cominetta, Christoph Kaufmann, Anton van der Kraaij, et al. 2020. A regulatory and financial stability perspective on global stablecoins. Macroprudential Bulletin 10 (2020).Google ScholarGoogle Scholar
  2. Nader Al-Naji, Josh Chen, and Lawrence Diao. 2017. Basis: A Price-Stable Cryptocurrency with an Algorithmic Central Bank. (2017), 19 pages. https://www.basis.io/basis{_}whitepaper{_}en.pdfGoogle ScholarGoogle Scholar
  3. Guillermo Angeris and Tarun Chitra. 2020. Improved Price Oracles: Constant Function Market Makers. arXiv preprint arXiv:2003.10001 (2020).Google ScholarGoogle Scholar
  4. Guillermo Angeris, Hsien-Tang Kao, Rei Chiang, Charlie Noyes, and Tarun Chitra. 2019. An analysis of Uniswap markets. arXiv preprint arXiv:1911.03380 (2019).Google ScholarGoogle Scholar
  5. Sirio Aramonte, Fernando Avalos, et al. 2020. The recent distress in corporate bond markets: cues from ETFs. Technical Report. Bank for International Settlements.Google ScholarGoogle Scholar
  6. Kenneth Joseph Arrow. 1965. Aspects of the theory of risk-bearing. Yrjö Jahnssonin Säätiö.Google ScholarGoogle Scholar
  7. Raphael Auer and Rainer Böhme. 2020. The technology of retail central bank digital currency. Technical Report. BIS Quarterly Review, March.Google ScholarGoogle Scholar
  8. Bruce A Babcock, E Kwan Choi, and Eli Feinerman. 1993. Risk and probability premiums for CARA utility functions. Journal of Agricultural and Resource Economics (1993), 17--24.Google ScholarGoogle Scholar
  9. John Barrdear and Michael Kumhof. 2016. The macroeconomics of central bank issued digital currencies. Technical Report. Bank of England.Google ScholarGoogle Scholar
  10. Itzhak Ben-David, Francesco Franzoni, and Rabih Moussawi. 2018. Do ETFs increase volatility? The Journal of Finance 73, 6 (2018), 2471--2535.Google ScholarGoogle Scholar
  11. Bruno Biais, Christophe Bisière, Matthieu Bouvard, and Catherine Casamatta. 2019. The Blockchain Folk Theorem. Review of Financial Studies 32, 5 (2019), 1662--1715. https://doi.org/10.1093/rfs/hhy095Google ScholarGoogle Scholar
  12. Blockchain.com. 2019. The state of stablecoins. Technical Report. https://www.blockchain.com/ru/static/pdf/StablecoinsReportFinal.pdf.Google ScholarGoogle Scholar
  13. Taras Bodnar, Nestor Parolya, and Wolfgang Schmid. 2015. On the exact solution of the multi-period portfolio choice problem for an exponential utility under return predictability. European Journal of Operational Research 246, 2 (2015), 528--542. https://doi.org/10.1016/j.ejor.2015.04.039Google ScholarGoogle Scholar
  14. Anton Braverman and Andreea Minca. 2018. Networks of common asset holdings: aggregation and measures of vulnerability. The Journal of Network Theory in Finance 4, 3 (2018).Google ScholarGoogle Scholar
  15. Philip N Brown. 2019. Incentives for Crypto-Collateralized Digital Assets. In Proceedings of the 3rd Annual Decentralized Conference on Blockchain and Cryptocurrency, Vol. 28. 2.Google ScholarGoogle Scholar
  16. Vitalik Buertin. Jan. 2018. Collateralized Debt Obligations for Issuer-Backed Tokens. https://ethresear.ch/t/collateralized-debt-obligations-for-issuer-backed-tokens/525.Google ScholarGoogle Scholar
  17. Dirk Bullmann, Jonas Klemm, and Andrea Pinna. 2019. In search for stability in crypto-assets: Are stablecoins the solution? ECB Occasional Paper 230 (2019).Google ScholarGoogle Scholar
  18. Y Cao, M Dai, S Kou, L Li, and C Yang. 2018. Designing stable coins. Duo Network Whitepaper, https://duo.network/papers/duo_academic_white_paper.pdf (2018).Google ScholarGoogle Scholar
  19. Hans Carlsson and Eric Van Damme. 1993. Global games and equilibrium selection. Econometrica: Journal of the Econometric Society (1993), 989--1018.Google ScholarGoogle Scholar
  20. Miles Carlsten, Harry Kalodner, Arvind Narayanan, and S. Matthew Weinberg. 2016. On the instability of Bitcoin without the block reward. In Proceedings of the ACM Conference on Computer and Communications Security, Vol. 24-28-Octo. 154--167. https://doi.org/10.1145/2976749.2978408Google ScholarGoogle Scholar
  21. Xi Chen, Christos Papadimitriou, and Tim Roughgarden. 2019. An Axiomatic Approach to Block Rewards. (2019), 124--131. arXiv:1909.10645 http://arxiv.org/abs/1909.10645Google ScholarGoogle Scholar
  22. cLabs. 2019. An analysis of the stability characteristics of Celo. Technical Report. https://celo.org/papers/Celo_Stability_Analysis.pdf.Google ScholarGoogle Scholar
  23. Coindesk. Jul. 2019. Bitfinex Repays Tether $100 Million of $700 Million Loan. https://www.coindesk.com/bitfinex-repays-tether-100-million-of-700-million-loan.Google ScholarGoogle Scholar
  24. Cointelegraph. Apr. 2019. Fractional Reserve Stablecoin Tether Only 74% Backed by Fiat Currency, Say Lawyers. https://cointelegraph.com/news/fractional-reserve-stablecoin-tether-only-74-backed-by-fiat-currency-say-lawyers.Google ScholarGoogle Scholar
  25. Cointelegraph. Oct. 2018. Crypto Exchange Bitfinex Suspends Fiat Deposits, Expects to Resume 'Within a Week'. https://cointelegraph.com/news/crypto-exchange-bitfinex-suspends-fiat-deposits-expects-to-resume-within-a-week.Google ScholarGoogle Scholar
  26. Philip Daian, Steven Goldfeder, Tyler Kell, Yunqi Li, Xueyuan Zhao, Iddo Bentov, Lorenz Breidenbach, and Ari Juels. [n.d.]. Flash Boys 2.0: Frontrunning in Decentralized Exchanges, Miner Extractable Value, and Consensus Instability. In 2020 IEEE Symposium on Security and Privacy (SP). 566--583.Google ScholarGoogle Scholar
  27. Douglas W Diamond and Philip H Dybvig. 1983. Bank runs, deposit insurance, and liquidity. Journal of political economy 91, 3 (1983), 401--419.Google ScholarGoogle Scholar
  28. Yuhao Dong and Raouf Boutaba. 2020. Melmint: trustless stable cryptocurrency. In Cryptoeconomic Systems 2020.Google ScholarGoogle Scholar
  29. Philip H Dybvig and Jaime F Zender. 1991. Capital structure and dividend irrelevance with asymmetric information. The Review of Financial Studies 4, 1 (1991), 201--219.Google ScholarGoogle Scholar
  30. Steve Ellis, Ari Juels, and Sergey Nazarov. Sep.4, 2017. ChainLink: A Decentralized Oracle Network. https://link.smartcontract.com/whitepaper.Google ScholarGoogle Scholar
  31. Ittay Eyal and Emin Gün Sirer. 2018. Majority is Not Enough: Bitcoin Mining is Vulnerable. Commun. ACM 61, 7 (June 2018), 95--102. https://doi.org/10.1145/3212998Google ScholarGoogle Scholar
  32. Juan Garay, Aggelos Kiayias, and Nikos Leonardos. 2015. The Bitcoin Backbone Protocol: Analysis and Applications. Lecture Notes in Computer Science, Vol. 9057. Springer Berlin Heidelberg, Berlin, Heidelberg, 281--310. https://doi.org/10.1007/978-3-662-46803-6_10Google ScholarGoogle Scholar
  33. Eiland Glover and John Reitano. 2018. The Kowala Protocol: a family of distributed, self-regulating, asset-tracking cryptocurrencies. (2018). https://web.archive.org/web/20181024035504/https://www.kowala.tech/pdf/kowala-protocol-white-paper.pdfGoogle ScholarGoogle Scholar
  34. Itay Goldstein and Ady Pauzner. 2005. Demand--deposit contracts and the probability of bank runs. the Journal of Finance 60, 3 (2005), 1293--1327.Google ScholarGoogle Scholar
  35. Jonathan Goodwin. 2013. A Free Money Miracle. Mises Daily (2013). https://mises.org/library/free-money-miracleGoogle ScholarGoogle Scholar
  36. John M Griffin and Amin Shams. 2019. Is bitcoin really un-tethered? Available at SSRN 3195066 (2019).Google ScholarGoogle Scholar
  37. Lewis Gudgeon, Daniel Perez, Dominik Harz, Arthur Gervais, and Benjamin Livshits. 2020. The Decentralized Financial Crisis: Attacking DeFi. arXiv preprint arXiv:2002.08099 (2020).Google ScholarGoogle Scholar
  38. Bernardo Guimaraes and Stephen Morris. 2007. Risk and wealth in a model of self-fulfilling currency attacks. Journal of Monetary Economics 54, 8 (2007), 2205--2230.Google ScholarGoogle Scholar
  39. Dominik Harz, Lewis Gudgeon, Arthur Gervais, and William J. Knottenbelt. 2019. Balance: Dynamic Adjustment of Cryptocurrency Deposits. In Proceedings of the 2019 ACM SIGSAC Conference on Computer and Communications Security (CCS '19). ACM, New York, NY, USA. https://doi.org/10.1145/3319535.3354221Google ScholarGoogle Scholar
  40. Zhiguo He and Wei Xiong. 2012. Rollover risk and credit risk. The Journal of Finance 67, 2 (2012), 391--430.Google ScholarGoogle Scholar
  41. Marcin Kacperczyk and Philipp Schnabl. 2013. How Safe Are Money Market Funds?*. The Quarterly Journal of Economics 128, 3 (07 2013), 1073--1122. https://doi.org/10.1093/qje/qjt010 arXiv:https://academic.oup.com/qje/article-pdf/128/3/1073/30631031/qjt010.pdfGoogle ScholarGoogle Scholar
  42. Izabella Kaminska. Mar. 12, 2009. The curious case of ETF NAV deviations. Financial Times.Google ScholarGoogle Scholar
  43. Hsien-Tang Kao, Tarun Chitra, Rei Chiang, and John Morrow. 2020. An Analysis of the Market Risk to Participants in the Compound Protocol. (2020).Google ScholarGoogle Scholar
  44. Ariah Klages-Mundt. 2018. Proposal: a framework for designing better stablecoins. https://github.com/aklamun/Stablecoin_grant_proposal_122018.Google ScholarGoogle Scholar
  45. Ariah Klages-Mundt. Aug. 23, 2018. Basis/Basecoin is a Bob Rubin trade. https://link.medium.com/lKjfepv1r9.Google ScholarGoogle Scholar
  46. Ariah Klages-Mundt. Nov. 14, 2019. Vulnerabilities in Maker: oracle-governance attacks, attack DAOs, and (de)centralization. https://link.medium.com/VZG64fhmr6.Google ScholarGoogle Scholar
  47. Ariah Klages-Mundt, Lewis Gudgeon, and Daniel Perez. 2020. Rainy Day Fund Stablecoin. https://www.initc3.org/events/2020-07-26-IC3-Blockchain-Camp.html.Google ScholarGoogle Scholar
  48. Ariah Klages-Mundt and Andreea Minca. 2019. (In) Stability for the Blockchain: Deleveraging Spirals and Stablecoin Attacks. arXiv preprint arXiv:1906.02152 (2019).Google ScholarGoogle Scholar
  49. Ariah Klages-Mundt and Andreea Minca. 2020. While Stability Lasts: A Stochastic Model of Stablecoins. arXiv preprint arXiv:2004.01304 (2020).Google ScholarGoogle Scholar
  50. Jordan Lee. 2014. Nubits. (2014). https://doi.org/10.1038/483531a arXiv:9907372v1 [arXiv:cond-mat]Google ScholarGoogle Scholar
  51. Alexander Lipton, Aetienne Sardon, Fabian Schär, and Christian Schüpbach. 2020. 10. Stablecoins, Digital Currency, and the Future of Money. In Building the New Economy (0 ed.). https://wip.mitpress.mit.edu/pub/17h9tjq7 https://wip.mitpress.mit.edu/pub/17h9tjq7.Google ScholarGoogle Scholar
  52. Loi Luu. 2017. PeaceRelay: Connecting the many Ethereum Blockchains. (2017). https://medium.com/@loiluu/peacerelay-connecting-the-many-ethereum-blockchains-22605c300ad3Google ScholarGoogle Scholar
  53. Loi Luu. 2020. BTC Parachain Specification: Staked Relayers. (2020). https://interlay.gitlab.io/polkabtc-spec/spec/staked-relayers.htmlGoogle ScholarGoogle Scholar
  54. Richard K Lyons and Ganesh Viswanath-Natraj. 2020. What Keeps Stablecoins Stable? Technical Report. National Bureau of Economic Research.Google ScholarGoogle Scholar
  55. MakerDAO. 2020. MakerDAO. https://makerdao.com/en/.Google ScholarGoogle Scholar
  56. MakerDAO. 2020. MakerDAO GraphQL API. https://developer.makerdao.com/dai/1/graphql/.Google ScholarGoogle Scholar
  57. Semyon Malamud. 2016. A dynamic equilibrium model of ETFs. (2016).Google ScholarGoogle Scholar
  58. Andreu Mas-Colell, Michael Dennis Whinston, Jerry R Green, et al. 1995. Microeconomic theory. Vol. 1. Oxford university press New York.Google ScholarGoogle Scholar
  59. Patrick McCorry, Alexander Hicks, and Sarah Meiklejohn. 2018. Smart Contracts for Bribing Miners. In Financial Cryptography and Data Security. FC 2018., Vol. 10958. Springer Berlin Heidelberg, 3--18. https://doi.org/10.1007/978-3-662-58820-8_1Google ScholarGoogle Scholar
  60. Michael McLeay, Amar Radia, and Ryland Thomas. 2014. Money creation in the modern economy. Bank of England Quarterly Bulletin (2014), Q1.Google ScholarGoogle Scholar
  61. Meter. 2020. Meter Whitepaper. https://www.meter.io/.Google ScholarGoogle Scholar
  62. Makiko Mita, Kensuke Ito, Shohei Ohsawa, and Hideyuki Tanaka. 2019. What is Stablecoin?: A Survey on Price Stabilization Mechanisms for Decentralized Payment Systems. arXiv preprint arXiv:1906.06037 (2019).Google ScholarGoogle Scholar
  63. Amani Moin, Kevin Sekniqi, and Emin Gun Sirer. 2020. SoK: A classification framework for stablecoin designs. In Financial Cryptography.Google ScholarGoogle Scholar
  64. Stephen Morris and Hyun Song Shin. 1998. Unique equilibrium in a model of self-fulfilling currency attacks. American Economic Review (1998), 587--597.Google ScholarGoogle Scholar
  65. Stephen Morris and Hyun Song Shin. 2000. Global Games: Theory and Applications. Cowles Foundation Discussion Papers 1275R. Cowles Foundation for Research in Economics, Yale University. https://ideas.repec.org/p/cwl/cwldpp/1275r.htmlGoogle ScholarGoogle Scholar
  66. Nexus Mutual. 2020. A Decentralized Alternative to Insurance. https://nexusmutual.io/.Google ScholarGoogle Scholar
  67. Stewart C Myers and Nicholas S Majluf. 1984. Corporate financing and investment decisions when firms have informationthat investors do not have. Journal of Financial Economics 13, 2 (1984), 187--221.Google ScholarGoogle Scholar
  68. Jeremy Ney and Nicolas Xuan-Yi Zhang. 2020. Central Bank Digital Currencies and the Long-Term Advancement of Financial Stability. In Cryptoeconomic Systems 2020.Google ScholarGoogle Scholar
  69. Opyn. 2020. Opyn protection. https://opyn.co/.Google ScholarGoogle Scholar
  70. Cecilia Parlatore. 2016. Fragility in money market funds: Sponsor support and regulation. Journal of Financial Economics 121, 3 (2016), 595--623.Google ScholarGoogle Scholar
  71. Ingolf GA Pernice, Sebastian Henningsen, Roman Proskalovich, Martin Florian, Hermann Elendner, and Björn Scheuermann. 2019. Monetary Stabilization in Cryptocurrencies--Design Approaches and Open Questions. In 2019 Crypto Valley Conference on Blockchain Technology (CVCBT). IEEE, 47--59.Google ScholarGoogle Scholar
  72. Nicholas Platias and Marco DiMaggio. 2019. Terra money: stability stress test. Technical Report. https://agora.terra.money/t/stability-stress-test/55.Google ScholarGoogle Scholar
  73. John W Pratt. 1978. Risk aversion in the small and in the large. In Uncertainty in Economics. Elsevier, 59--79.Google ScholarGoogle Scholar
  74. J. Rennison, P. Stafford, C. Smith, and R. Wigglesworth. Mar. 23, 2020. 'Great liquidity crisis' grips system as banks step back. Financial Times.Google ScholarGoogle Scholar
  75. Jean-Charles Rochet and Xavier Vives. 2004. Coordination failures and the lender of last resort: was Bagehot right after all? Journal of the European Economic Association 2, 6 (2004), 1116--1147.Google ScholarGoogle Scholar
  76. G. Samman and A. Masanto. 2019. The state of stablecoins. Technical Report. Reserve, https://reserve.org/stablecoin-report.Google ScholarGoogle Scholar
  77. Robert Sams. 2015. A Note on Cryptocurrency Stabilisation: Seigniorage Shares. (2015). https://github.com/rmsams/stablecoins/blob/master/paper.pdfGoogle ScholarGoogle Scholar
  78. Raghu Nandan Sengupta, Aparna Gupta, and Joydeep Dutta. 2016. Decision sciences: theory and practice. Crc Press.Google ScholarGoogle Scholar
  79. Sargent Thomas. 1987. Macroeconomic theory.Google ScholarGoogle Scholar
  80. Itay Tsabary and Ittay Eyal. 2018. The Gap Game. In Proceedings of the 2018 ACM SIGSAC Conference on Computer and Communications Security - CCS '18. ACM Press, New York, New York, USA, 713--728. https://doi.org/10.1145/3243734.3243737 arXiv:arXiv:1805.05288v2Google ScholarGoogle Scholar
  81. yEarn. 2020. yInsure. https://yinsure.finance/.Google ScholarGoogle Scholar
  82. Alexei Zamyatin, Mustafa Al-Bassam, Dionysis Zindros, Eleftherios Kokoris-Kogias, Pedro Moreno-Sanchez, Aggelos Kiayias, and William J. Knottenbelt. 2019. SoK: Communication Across Distributed Ledgers. Cryptology ePrint Archive, Report 2019/1128. https://eprint.iacr.org/2019/1128.Google ScholarGoogle Scholar
  83. Alexei Zamyatin, Dominik Harz, Joshua Lind, Panayiotis Panayiotou, Arthur Gervais, and William J. Knottenbelt. 2019. XCLAIM: Trustless, Interoperable, Cryptocurrency-Backed Assets. In Proceedings of the IEEE Symposium on Security & Privacy, May 2019. 1254--1271. https://doi.org/10.1109/SP.2019.00085Google ScholarGoogle Scholar
  84. Fan Zhang, Ethan Cecchetti, Kyle Croman, Ari Juels, and Elaine Shi. 2016. Town Crier: An Authenticated Data Feed for Smart Contracts. In Proceedings of the 2016 ACM SIGSAC Conference on Computer and Communications Security (Vienna, Austria) (CCS '16). Association for Computing Machinery, New York, NY, USA, 270--282. https://doi.org/10.1145/2976749.2978326Google ScholarGoogle Scholar
  85. Zixuan Zhang, Michael Zargham, and Victor M. Preciado. 2020. On modeling blockchain-enabled economic networks as stochastic dynamical systems. Applied Network Science 5, 1 (19 Mar 2020), 19. https://doi.org/10.1007/s41109-020-0254-9Google ScholarGoogle Scholar
  86. Micah Zoltu. Dec. 9, 2019. How to turn $20M into $340M in 15 seconds. https://link.medium.com/k8QTaHzmr6.Google ScholarGoogle Scholar

Index Terms

(auto-classified)
  1. Stablecoins 2.0

      Comments

      Login options

      Check if you have access through your login credentials or your institution to get full access on this article.

      Sign in

      Full Access

      Get this Publication

      • Article Metrics

        • Downloads (Last 12 months)61
        • Downloads (Last 6 weeks)61

        Other Metrics

        View Author Metrics
      View Table of Contents
      About Cookies On This Site

      We use cookies to ensure that we give you the best experience on our website.

      Learn more

      Got it!