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Monetary Stabilization in Cryptocurrencies - Design Approaches and Open Questions

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Listed:
  • Ingolf G. A. Pernice
  • Sebastian Henningsen
  • Roman Proskalovich
  • Martin Florian
  • Hermann Elendner
  • Bjorn Scheuermann

Abstract

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.

Suggested Citation

  • Ingolf G. A. Pernice & Sebastian Henningsen & Roman Proskalovich & Martin Florian & Hermann Elendner & Bjorn Scheuermann, 2019. "Monetary Stabilization in Cryptocurrencies - Design Approaches and Open Questions," Papers 1905.11905, arXiv.org.
  • Handle: RePEc:arx:papers:1905.11905
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    File URL: http://arxiv.org/pdf/1905.11905
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