Stablecoins: Past, Present, and Future

Abstract

Since 2018, stablecoins have become the major digital currencies facilitating payment flows across various decentralized financial platforms. While in the simplest terms, stablecoins operate as low-volatility digital cash, they are not created equal. Broadly speaking, stablecoins are dichotomized into fiat-backed or algorithmic; algorithmic refers to a diverse set of stablecoins. By reviewing a brief history and analyzing the current state of affairs for stablecoins, we discuss critical facts about stablecoins and propose strategic pathways for the future. Fiat-backed stablecoins are similar to money market funds in their function and structure. As such, the regulatory framework for money market funds should be a guiding light. From this viewpoint, the necessary conditions for the proper functioning of fiat-backed stablecoins are: transparency, full disclosure, quality auditing, and oversight. Algorithmic stablecoins are in principle synthetic cash, or a derivative instrument. As such, they are perfectly positioned to play pivotal roles in digital financial derivative (contingent claims) markets. Due to the heterogeneity of their use-cases, the appropriate regulatory framework depends heavily on the underpinning economics. Lending-related algorithmic frameworks (i.e., credit contingent claims) can benefit from economics and regulatory environments of collateralized repo markets and the like. Others can be considered through the lens of derivatives instruments—futures, options, swaps—for finding best practices and optimal strategies.

While maintaining full culpability, we would like to thank participants at Block#6 of BGIN at UZH Blockchain Center, Block#8 of BGIN, Financial Cryptography 2023, and University of Californina at Santa Barbara’s DeFi Seminar for their valuable comments.