Stablecoins 2.0: Economic Foundations and Risk-based Models
This work addresses risk assessment for stablecoin users and developers, offering a foundational framework that is incremental in synthesizing existing models.
The paper tackles the problem of poorly understood risks in stablecoins by providing a theoretical foundation and risk-based models, characterizing risks in both custodial and non-custodial systems and unifying economic and computer science models.
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.