Computer Science Abstractions to Help Reason About Decentralized Stablecoin Design

Abstract

Computer science uses abstractions as a tool for reasoning. It is no surprise that computer science might have something valuable to lend to the world of decentralized stablecoin design, as it is a “computing” problem. In this paper, we examine the possibility of a decentralized and capital-efficient stablecoin using smart contracts that algorithmically trade to maintain stability. By exploiting traditional abstractions from computer science, we show that a capital-efficient algorithmic stablecoin cannot be provably stable. Additionally, we provide a formal exposition of the workings of Central Bank Digital Currencies, connecting this framing to the space of possible stablecoin designs. We then discuss several outstanding conjectures from both academics and practitioners and finally highlight the regulatory similarities between money-market funds and working stablecoins. Our work builds upon the current and growing interplay between the realms of engineering and financial services, and it also demonstrates how ways of thinking as a computer scientist can aid practitioners. We believe this research is vital for understanding and developing the future of financial technology.

Keywords

• Smart contracts
• algorithmic stablecoin
• financial stability
• DeFi
• cryptocurrency