Stablecoins

A stablecoin is a cryptocurrency designed to maintain a stable value, most commonly by targeting a fixed exchange rate — a peg — against a reference asset such as the United States dollar. Calcaterra, Kaal and Rao define stable cryptocurrencies as coins engineered to hold stable value, typically backed by one or more reserve assets, combining the payment properties of cryptocurrencies — instant processing and cryptographic security — with the low-volatility valuation of fiat money.

All stablecoins share the objective of trading at par with a reference asset, but they differ substantially in economic design, quality of backing, stability assumptions, and the legal protections offered to coin holders. This variation — and a record that includes both durable and catastrophically failed pegs — has produced a substantial design literature.

Volatility and the functions of money

The case for stablecoins rests on a diagnosis of why first-generation cryptocurrencies are volatile. Robert Sams argued that a deterministic supply rule of the kind used by Bitcoin forces every unanticipated change in demand for the coin to be expressed as a change in its price, and that the resulting volatility discourages use as a medium of exchange. His proposed remedy, grounded in the quantity theory of money, is an elastic supply rule that adjusts the quantity of coins in proportion to changes in their market value. Ametrano reaches a similar diagnosis: Bitcoin's fixed, deterministic and inelastic monetary policy produced dramatic deflationary price instability that established it as digital gold rather than usable currency.

Sams also identified the two hard problems that any algorithmic stabilization scheme must solve: representing the coin's market price inside the network with minimal trust (the oracle problem), and deciding how newly created supply is distributed or removed.

The design space

In a systematization of the field, Moin, Sekniqi and Sirer decompose stablecoin designs along four axes: the peg (what value is targeted), the collateral (what backs the coin), the mechanism (how the peg is defended), and price information (how the market price is measured). The US dollar dominates as a peg; alternatives include other fiat currencies, commodities, currency baskets such as the SDR, and consumer-price-index proposals — baskets insulate holders against single-country shocks but add noise and measurement problems. Complementing this taxonomy, Catalini and de Gortari identify two dimensions underpinning every stablecoin's economic design: the volatility of its reserve assets against the reference asset, which defines the holder's risk profile, and its degree of exposure to death-spiral risk.

Collateralized designs

Fiat- and commodity-backed coins such as Tether and USD Coin defend their pegs through reserve redemption: because coins can be exchanged for the underlying asset, arbitrage enforces a price floor. The cost is centralized custody in banks and vaults and difficulty scaling at full reserve; Moin et al. note that nominally fully backed reserves held in banks are functionally fractional-reserve. Catalini and de Gortari argue that fiat-backed stablecoins must hold reserves of high-quality liquid assets and operate under a framework protecting holders from credit, market and operational risk and from issuer insolvency. Crypto-collateralized designs permit decentralization but must absorb the collateral's own volatility, through over-collateralization or a dedicated volatility-absorbing mechanism; MakerDAO's Dai combines collateralized debt positions with a 150% liquidation ratio, stability fees, and dilution of the MKR token as a recapitalization backstop. Sams criticized early collateralized designs such as BitShares' bitUSD on the grounds that collateral shuffles risk rather than eliminating it — the backing asset is itself volatile — and that reserve requirements constrain supply elasticity.

Rebasing and Hayek Money

Ametrano's Hayek Money proposal, named after F. A. Hayek, pursues price stability by dynamically rebasing supply: the number of units in every wallet is adjusted pro rata, so the price of one unit stays stable while the quantity changes. The result is an elastic, non-discretionary monetary standard, but it stabilizes the unit of account rather than the holder's wealth — wallet balances still fluctuate with total market capitalization, a limitation Moin et al. also observe in the rebasing coin Ampleforth, which they describe as a stable unit of account but not a store of value. Ametrano's follow-up work extends the paradigm to a dual-asset ledger separating stable coins from seigniorage shares, linking rebasing to the next design family.

Seigniorage shares

Sams's canonical algorithmic design splits the system into two tokens: stable coins and volatile shares. When demand grows, new coins are minted and distributed to shareholders as seigniorage; when demand contracts, newly minted shares are auctioned for coins, which are burned. Because shares are claims on future seigniorage, the peg is backed by expectations: Sams himself noted that if confidence in future coin-demand growth collapses, contraction auctions can fail and the peg breaks. Moin et al. catalogue the family's variants, including the dual-coin system Carbon, Basis's triple-token tranching of bonds and shares, and Saga's algorithmic market maker.

Managed issuance with consensus-enforced rules

For centrally issued coins, Mell proposes a hybrid model: a managed cryptocurrency maintained through distributed consensus, in which a currency administrator can perform management operations but consensus-enforced rules prevent arbitrary actions and enforce transparency. This removes the need for users to blindly trust the managing entity, occupying a middle ground between fully decentralized cryptocurrencies and opaque private ledgers, and offers a blueprint for auditable, rule-constrained issuer powers — minting, freezing, policy changes — of the kind relevant to fiat-backed stablecoins and CBDC-like designs.

Peg robustness and failure modes

The literature converges on a clear fragility gradient. Moin et al. observe that purely algorithmic, uncollateralized coins are cheap to operate but derive their value solely from issuer reliability and holder beliefs — when these stablecoins fail, they tend to do so swiftly and catastrophically. NuBits, an early example, lost its peg in early 2018, falling to roughly $0.30 and never recovering. Dual-coin seigniorage systems carry two structural risks: the volatility-absorbing token typically meets the SEC's definition of a security, and the design depends on holders who believe demand will eventually grow — with no collateral, nothing supports the price if no one buys the secondary token during a downturn.

These warnings preceded the largest failure in the category. Analyzing Terra before its collapse, Moin et al. noted that Luna both absorbed Terra's volatility and served as the staking token, and that the protocol raised fees when Terra's price fell, discouraging use precisely when demand was already weak. A post-mortem of the May 2022 de-pegging finds it was driven by a misaligned incentive structure: UST redeemers were undercompensated, and UST's exchange price tracked the value obtainable by redeeming it for LUNA and selling. Such designs sit at the extreme of the death-spiral exposure that Catalini and de Gortari identify as a critical dimension of stablecoin economic design.

Stablecoins on Radix

The radix.wiki overview of decentralized finance (DeFi) describes stablecoins as tokens that maintain stable value through fiat-collateralized reserves, crypto-collateralized reserves, or algorithmic formulas, naming DAI, Tether (USDT) and USD Coin (USDC) as general examples. Within the Radix ecosystem, Stabilis — a decentralized financial ecosystem comprising the ILIS DAO and the STAB Protocol — is listed as an active project, while EtherealDAO, which was developing the EtherealUSD stablecoin protocol on Radix, has closed. Collateralized lending and borrowing protocols such as Root Finance and Weft Finance provide adjacent infrastructure for collateral-based designs.

References

1. Craig Calcaterra, Wulf A. Kaal, Vadhindran K. Rao (2019). Stable Cryptocurrencies: First Order Principles. Stanford Journal of Blockchain Law & Policy, Vol. 3.
2. Christian Catalini, Alonso de Gortari (2021). On the Economic Design of Stablecoins. SSRN Working Paper No. 3899499.
3. Robert Sams (2015). A Note on Cryptocurrency Stabilisation: Seigniorage Shares. Self-published white paper (first version 2014).
4. Ferdinando M. Ametrano (2016). Hayek Money: The Cryptocurrency Price Stability Solution. SSRN Working Paper No. 2425270 (first posted 2014).
5. Amani Moin, Kevin Sekniqi, Emin Gün Sirer (2019). SoK: A Classification Framework for Stablecoin Designs. arXiv:1910.10098; also in Financial Cryptography and Data Security 2020.
6. Peter Mell (2019). Managed Blockchain Based Cryptocurrencies with Consensus Enforced Rules and Transparency. IEEE TrustCom; arXiv:1906.11042.
7. Cho, J. (2023). A Token Economics Explanation for the De-Pegging of the Algorithmic Stablecoin: Analysis of the Case of Terra. Ledger, 8.