Hybrid Stabilization Protocol for Cross-Chain Digital Assets Using Adaptor Signatures and AI-Driven Arbitrage

TL;DR

This paper introduces a hybrid stabilization protocol for cross-chain stablecoins that combines cryptographic techniques, AI-driven arbitrage, and innovative derivatives to enhance stability, privacy, and regulatory compliance in decentralized finance.

Contribution

It proposes a novel hybrid protocol integrating stabilization futures contracts, AI-based market optimization, and zero-knowledge proofs for AML compliance, advancing decentralized stablecoin technology.

Findings

Reduces cross-chain liquidity concentration significantly.

Ensures atomicity and compliance without exposing user identities.

Enhances price stability through incentivized arbitrage and cryptographic guarantees.

Abstract

Stablecoins face an unresolved trilemma of balancing decentralization, stability, and regulatory compliance. We present a hybrid stabilization protocol that combines crypto-collateralized reserves, algorithmic futures contracts, and cross-chain liquidity pools to achieve robust price adherence while preserving user privacy. At its core, the protocol introduces stabilization futures contracts (SFCs), non-collateralized derivatives that programmatically incentivize third-party arbitrageurs to counteract price deviations via adaptor signature atomic swaps. Autonomous AI agents optimize delta hedging across decentralized exchanges (DEXs), while zkSNARKs prove compliance with anti-money laundering (AML) regulations without exposing identities or transaction details. Our cryptographic design reduces cross-chain liquidity concentration (Herfindahl-Hirschman Index: 2,400 vs. 4,900 in single-chain systems) and ensures atomicity under standard cryptographic assumptions. The protocol's layered architecture encompassing incentive-compatible SFCs, AI-driven market making, and zero-knowledge regulatory proofs. It provides a blueprint for next-generation decentralized financial infrastructure.