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Incentivized Third Party Collateralization for Stablecoins

Souradeep Das, Revathi Venkataraman

TL;DR

Stablecoins currently suffer from trust and stability issues across fiat-backed and crypto-backed designs. The paper proposes a third-party, crowdfunded collateral pool architecture that achieves $1:1$ collateralization and uses an incentive-aligned Money-Money Algorithm to absorb volatility. It also outlines enhancements including a secondary token, lending integration, and zero-knowledge privacy to improve stability, liquidity, and privacy. The result is a more resilient peg and greater potential for global adoption, with straightforward integration into existing Ethereum-based stablecoin ecosystems.

Abstract

Stablecoins, which are primarily intended to function as a global reserve of value are insubstantial in their design and present many failure points. The primary mechanism to enable these coins to hold on to a fixed value is by backing them with collateral. Fiat collateralized stablecoins require users to trust a centralized entity, which breaks the total concept of decentralization. Crypto collateralized stablecoins have issues involving high collateral requirements and introduces risks of auto-liquidation. In this paper we aim to propose an alternative architecture for the creation of a functional and secure stablecoin.

Incentivized Third Party Collateralization for Stablecoins

TL;DR

Stablecoins currently suffer from trust and stability issues across fiat-backed and crypto-backed designs. The paper proposes a third-party, crowdfunded collateral pool architecture that achieves collateralization and uses an incentive-aligned Money-Money Algorithm to absorb volatility. It also outlines enhancements including a secondary token, lending integration, and zero-knowledge privacy to improve stability, liquidity, and privacy. The result is a more resilient peg and greater potential for global adoption, with straightforward integration into existing Ethereum-based stablecoin ecosystems.

Abstract

Stablecoins, which are primarily intended to function as a global reserve of value are insubstantial in their design and present many failure points. The primary mechanism to enable these coins to hold on to a fixed value is by backing them with collateral. Fiat collateralized stablecoins require users to trust a centralized entity, which breaks the total concept of decentralization. Crypto collateralized stablecoins have issues involving high collateral requirements and introduces risks of auto-liquidation. In this paper we aim to propose an alternative architecture for the creation of a functional and secure stablecoin.
Paper Structure (23 sections, 4 equations, 2 figures)

This paper contains 23 sections, 4 equations, 2 figures.

Table of Contents

  1. Introduction
  2. State of Existing Problems
  3. Artificial Markets
  4. Market Manipulation
  5. An Update to the Architecture
  6. The process
  7. Incentives for Investment
  8. External Collateral provision from the Pool
  9. Explaining competition
  10. Anonymity to enforce competition
  11. Risk/Reward Gains
  12. Keeping the system alive
  13. Explaining the Money-Money Algorithm
  14. Designing the algorithm
  15. Description of the design
  16. ...and 8 more sections

Figures (2)

  • Figure 1: Collateral Pool structure
  • Figure 2: Comparing Incentives vs Investments