Monetary Stabilization in Cryptocurrencies – Design Approaches and Open Questions

Abstract

The price volatility of cryptocurrencies is often cited as a major hindrance to their wide-scale adoption. Consequently, during the last two years, multiple so called stablecoins have surfaced-cryptocurrencies focused on maintaining stable exchange rates. In this paper, we systematically explore and analyze the stablecoin landscape. Based on a survey of 24 specific stablecoin projects, we go beyond individual coins for extracting general concepts and approaches. We combine our findings with learnings from classical monetary policy, resulting in a comprehensive taxonomy of cryptocurrency stabilization. We use our taxonomy to highlight the current state of development from different perspectives and show blank spots. For instance, while over 91% of projects promote 1-to-1 stabilization targets to external assets, monetary policy literature suggests that the smoothing of short term volatility is often a more sustainable alternative. Our taxonomy bridges computer science and economics, fostering the transfer of expertise. For example, we find that 38% of the reviewed projects use a combination of exchange rate targeting and specific stabilization techniques that can render them vulnerable to speculative economic attacks-an avoidable design flaw.

Cryptocurrency

“…However, also ' general purpose' tokens are marked by changes. A response to the inherent instability in prices of archetypal cryptocurrency was the advent of 'stablecoins' , which try to solve the issue of high volatility in purchasing power of Bitcoin and its descendants (Pernice, 2019). Stablecoins are tethered or pegged to fiat currencies, or 'backed' in some way with assets that have fiat currency prices.…”

“…They are thus no longer 'blank' empty signifiers, and contain some reference point that is easier to estimate and communicate. There are very different types of stablecoins, and recently several frameworks have tried to unify and abstract existing stabilisation techniques (e.g., Bullmann et al, 2019;Pernice et al, 2019;Moin et al, 2020;Sidorenko, 2019;Clark et al, 2020). A national currency can be 'tokenized' by issuing a digital promise for it on a blockchain system, and such tokenised funds might indeed be categorised as a "new form of electronic money" (Blandin et al, 2019) falling under the respective regulations for e-money, anti money laundering and counter terrorist financing regulations.…”

CloudArcade: A Blockchain Empowered Cloud Gaming System

“…Therefore, it is necessary to design a stable currency mechanism to balance the token's supply and demand to reduce the currency price fluctuation caused by speculation. Solutions in modifying the supply and demand, including collateral, interest rates, currency rate, open market operation, and coin depreciation are widely studied [17]. According to previous studies [19], changing the design of blockchain and modifying the transaction fee considering the time stamp effect can cause the currency price automatically stabilized by absorbing the positive and negative demand shocks.…”

iCurrency?

“…For some literature on inefficiency and unsustainability issues, see, e.g,[Bariviera, 2017],[Kostakis and Giotitsas, 2014],[Nadarajah and Chu, 2017],[Urquhart, 2016],[Vranken, 2017].31 For the sake of completeness, let us mention that stabilization in the context of iCurrency is not to be confused with the so-called stablecoins, which have had their own host of issues (see, e.g.,[Chung, 2018],[Irrera, 2018],[Lian, 2018],[Popper, 2018],[Robinson and Leising, 2018]). For some literature on stablecoins, see, e.g.,[Griffin and Shams, 2018],[Mita et al, 2019],[Pernice et al, 2019],[Saito and Iwamura, 2018],[Senner and Sornette, 2018],[Zhang et al, 2019].…”