Stablecoins 2.0: Economic Foundations and Risk-based Models

TL;DR

This paper develops a comprehensive risk-based theoretical framework for stablecoins, analyzing their economic structures and risks, and unifies models across economics and computer science to guide future research in decentralized finance.

Contribution

It introduces a unified modeling framework for stablecoins, characterizing their unique risks and applying it to various cryptoeconomic systems, advancing the theoretical understanding of stablecoin risks.

Findings

Distinct risks identified for custodial and non-custodial stablecoins

Unified model framework linking economics and computer science models

Guides future research on risks in decentralized finance systems

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.