Monetary Stabilization in Cryptocurrencies - Design Approaches and Open Questions

• Published in: 2019 Crypto Valley Conference on Blockchain Technology (CVCBT) pp. 47 - 59
• Main Authors: Pernice, Ingolf G.A., Henningsen, Sebastian, Proskalovich, Roman, Florian, Martin, Elendner, Hermann, Scheuermann, Bjorn
• Format: Conference Proceeding
• Language: English
• Published: IEEE 01.06.2019
• Subjects: blockchain; cryptocurrencies; Cryptography; Currencies; Exchange rates; monetary stabilization; Stability analysis; Supply and demand; Taxonomy; volatility
• DOI: 10.1109/CVCBT.2019.00011

The price volatility of cryptocurrencies is often cited as a major hindrance to their wide-scale adoption. Consequently, during the last two years, multiple so called stablecoins have surfaced - cryptocurrencies focused on maintaining stable exchange rates. In this paper, we systematically explore and analyze the stablecoin landscape. Based on a survey of 24 specific stablecoin projects, we go beyond individual coins for extracting general concepts and approaches. We combine our findings with learnings from classical monetary policy, resulting in a comprehensive taxonomy of cryptocurrency stabilization. We use our taxonomy to highlight the current state of development from different perspectives and show blank spots. For instance, while over 91% of projects promote 1-to-1 stabilization targets to external assets, monetary policy literature suggests that the smoothing of short term volatility is often a more sustainable alternative. Our taxonomy bridges computer science and economics, fostering the transfer of expertise. For example, we find that 38% of the reviewed projects use a combination of exchange rate targeting and specific stabilization techniques that can render them vulnerable to speculative economic attacks - an avoidable design flaw.