Introduction

Decentralized, permissionless computer networks, such as blockchain, offer a new paradigm for financial tools and services that operate outside of traditional rent-seeking central or trust-providing authorities. The practicality and usability of these networks, known as decentralized finance (DeFi), is dependent on the availability of a decentralized, censorship-resistant, and chain-native stablecoin with unrestricted scalability.

Stablecoins are the foundation of DeFi and represent the first and only real-world use case for cryptocurrency to achieve the trillion-dollar narrative. The concept of a stablecoin is based on the idea of pegging the value of the token to a specific reference point, making it a useful medium of exchange and store of value.

We have discussed numerous risks of so-called primary stablecoin designs. Many iterations have been tried since 2012 with varying success.[1] However, a large design gap persists in systems that combine composite assets and decentralized financial services with optimized buffers to extend regions of stability for the stablecoin architecture, utilizing the DeFi crypto stack. We believe that well-designed and adequate buffer systems can help to survive transitory downward price instability, as the long-term expected return of an adequate design is always positive and superior to any custodial alternative.

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[1] Wilet, J.R. (2012). The Second Bitcoin Whitepaper; Sams, R. (2014). A note on cryptocurrency stabilisation: Seigniorage shares. Brave New Coin, 1-8.