The future of stablecoin

With the emergence of cryptoeconomy, there is a real demand for an alternative form of money. Major cryptocurrencies such as Bitcoin and Ethereum have thus far failed to achieve mass adoption. Catherine Gu examines the paradigm of algorithmic design of stablecoins, focusing on incentive structure and decentralized governance, to evaluate the role of stablecoin as a future medium of exchange.

It’s been a decade since the first decentralized cryptocurrency, Bitcoin, was created in 2009. Today, it’s estimated that over 1,600 cryptocurrencies are in circulation with a combined market capitalization of well over $289 billion. The two obvious questions we should consider are why fiat currencies such as US dollar are inadequate in today’s economy and why, despite the unprecedented public attention on cryptocurrencies and blockchains, even the most well-known ones (e.g., BTC and ETH) have thus far failed to be accepted into mass adoption. To answer the question of why money is inadequate, it’s important to recognize the fundamental shortcomings of a centralized monetary system: there are expensive transaction fees and long delays associated with each wire transfer; further, even within a single jurisdiction, there are ceilings as to how much money can be instantly transferred, both within accounts and between different banks. So what constitutes money? Money is a store of value, a unit of account and most crucially a medium of exchange. Popular mediums such as the US dollar fulfill all these roles, whereas coins such as bitcoin and ether have deterministic aggregate supplies embedded in the protocol. Unanticipated changes in demand for cryptocurrencies therefore frequently feeds into volatile prices. This offers an important explanation as to why decentralized cryptocurrencies have thus far failed to make themselves widely adopted into the real economy. To incentivize people to adopt any cryptocurrency as money, they need to be guaranteed stability in the currency’s purchasing power as a medium of exchange, for contract payments of people’s salaries, for debt lending, for purchase of goods and services. There’s a real demand for an alternative form of money as people transact and consume in both the virtual and the real economies. The purpose of a stablecoin is to bring price stability into a decentralized, protocol-governed system. The goal is to design an algorithmic central bank that can automatically adjust price fluctuations to ensure stable purchasing power of the currency and its convertibility into other forms of medium of exchange, such as the US dollar or crypto coins across different blockchains. There are currently over 60 known stablecoin projects in development, including the most recent, JPM Coin. These projects can roughly be categorized into three types: fiat collateralized, crypto collateralized, and growth collateralized. Catherine Gu examines the protocol design of stablecoin, discussing the distinct incentive design and governance structure of some of the most advanced projects (MakerDao, Tether). Along the way, she shares her research at Stanford and discusses simulation challenges and the future of stablecoin as one of the most important fintech developments of our generation.