Stablecoins 2.0: Economic Foundations and Risk-based Models

Klages‐Mundt, Ariah; Harz, Dominik; Gudgeon, Lewis; Liu, Junyou; Minca, Andreea

doi:10.2139/ssrn.3633542

Cited by 22 publications

(58 citation statements)

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“…To better exploit the advantages of the new financial services offered by DeFi, it is crucial to rely on means of exchange with a stable value [90]. Unlike common cryptocurrencies (e.g., Bitcoin, Ethereum), which are extremely volatile, stablecoins maintain almost constant value over time.…”

Section: Stablecoinsmentioning

confidence: 99%

“…The most known stable coins are Tether (USD-T) and USDC, which mainly operate on Ethereum blockchain and are managed respectively by Tether Operations and Centre Organization [91,92]. Companies that manage stablecoins are generally in charge of guaranteeing the asset's value by the deposit (through a bank or another trusted entity) of the equivalent in dollars or gold [90]. For example, to mint $1M of USDC, the same amount in dollars or assets must be locked within the trusted entity.…”

Section: Stablecoinsmentioning

confidence: 99%

“…Knowing that an asset price will be sent to a specific platform at a precise time may enable fraudulent operations. Furthermore, block-time, congestions, the exploitation of bots, and automated procedures make front-running attacks more and more feasible [90]. In legacy finance, the front-running attack is quite known, but it can be performed only by a restricted number of people (insiders) aware of pieces of knowledge that are not of the public domain [107].…”

Section: Front Running (S)mentioning

confidence: 99%

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The Blockchain Oracle Problem in Decentralized Finance - A Multivocal Approach

Caldarelli¹,

Ellul²

2021

Preprint

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Decentralized Finance (DeFi) takes the promise of blockchain a step further and aims to transform traditional financial products into trustless and transparent protocols that run without involving intermediaries. Similar to how 2017 was the year of ICOs, 2020 was the year of DeFI with more than $15 billion of total investments. The decentralized platforms utilize oracles to retrieve asset data from the external world, but their choice and management criteria are often unknown to the end-users. If oracles are poorly selected or managed, the funds of a rising number of investors are inevitably in danger. The issue known as “the oracle problem,” which makes real-world applications controversial and debated due to the loss of decentralization, had recently drawn attention to DeFi given the crescent number of related hacks that caused the loss of millions of dollars held in DeFi projects. With a multivocal approach, this paper aims to shed light on the pattern that identifies the oracle problem in DeFi and outline the most promising ways to overcome the related weaknesses. This research supports the view that the oracle problem in decentralized finance bears specific characteristics which require standardization and appropriate economic incentives to be addressed.

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Section: Stablecoinsmentioning

confidence: 99%

Section: Stablecoinsmentioning

confidence: 99%

Section: Front Running (S)mentioning

confidence: 99%

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The Blockchain Oracle Problem in Decentralized Finance - A Multivocal Approach

Caldarelli¹,

Ellul²

2021

Preprint

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“…Of course, to avoid double-spending, the real-world asset should be locked until its "avatar" is used on the blockchain. Examples of wrapped assets are the so-called stablecoins [33,34]. The stablecoins are tokens that represent fiat currencies and are particularly useful in DeFi, given the usual volatility of cryptocurrencies [35].…”

Section: Wrapped Assets and Stablecoinsmentioning

confidence: 99%

“…In principle, in order to mint stablecoins, an equivalent amount of dollars or financial assets should have been "held" by trusted entities chosen by the issuing companies [38]. For that reason, the above-mentioned stablecoins are called "custodial" due to their dependency on a third-party centralized custodian service [29,33]. The centralization of control of those currencies and the absence of evident proof of assets makes some crypto communities reluctant to consider those as properly wrapped assets [39].…”

Section: Wrapped Assets and Stablecoinsmentioning

confidence: 99%

Wrapping Trust for Interoperability: A Preliminary Study of Wrapped Tokens

Caldarelli

2021

Information

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Blockchains are traditionally blind to the real world. This implies reliance on third parties called oracles when extrinsic data are needed for smart contracts. Oracle implementation, however, is still controversial and debated due to the reintroduction of trust and a single point of failure. The blindness to the real world also makes blockchains unable to communicate with each other, preventing any form of interoperability. This limitation prevents, for example, liquidity held in Bitcoin from flowing into DeFi applications. An early approach to the interoperability issue is constituted by “wrapped tokens”, representing blockchain native tokens issued on a non-native blockchain. Similar to how oracles reintroduce trust and a single point of failure, the issuance of wrapped tokens involves third parties whose characteristics need to be considered when evaluating the advantages of “crossing-chains”. This paper provides an overview of the available wrapped tokens and the main issuing procedures. Benefits, limitations, and implications for trust are listed and discussed.

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Leveraging Ponzi‐like designs in stablecoins

Fu,

Wang,

et al. 2024

Int J Network Mgmt

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Stablecoin represents a unique subset of cryptocurrencies designed to offer price stability, achieved either through backing by specific assets or by employing algorithms that adjust their supply in response to market demand. In its landscape, algorithmic stablecoin is one special type that is not backed by any asset, and it stands to revolutionize the way a sovereign fiat operates. As implemented, algorithmic stablecoins are poorly stabilized in most cases; their prices easily deviate from the target or even fall into a catastrophic collapse and are as a result often dismissed as a Ponzi scheme. However, what is the essence of Ponzi? In this paper, we try to clarify such a deceptive concept and reveal how algorithmic stablecoin works from a higher level. We find that Ponzi is basically a financial protocol that pays existing investors with funds collected from new ones. Running a Ponzi, however, does not necessarily imply that any participant is in any sense losing out, as long as the game can be perpetually rolled over. Economists call such realization as a rational Ponzi game. We accordingly propose a rational model in the context of algorithmic stablecoin and draw its holding conditions. We apply the model and use historical data to examine if the major types of algorithmic stablecoins meet the criteria for being a rational Ponzi game.

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Stablecoins 2.0: Economic Foundations and Risk-based Models

Cited by 22 publications

References 0 publications

The Blockchain Oracle Problem in Decentralized Finance - A Multivocal Approach

The Blockchain Oracle Problem in Decentralized Finance - A Multivocal Approach

Wrapping Trust for Interoperability: A Preliminary Study of Wrapped Tokens

Leveraging Ponzi‐like designs in stablecoins

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