TLDR stablecoins and flatcoins:

1. Stablecoins are a type of cryptocurrency that’s designed to maintain stable value, usually by pegging itself to a fiat currency, like the US dollar.
2. Stable value is useful for everyday transactions, crypto trading, remittances, and DeFi applications.
3. Major types of stablecoins include fiat-collateralized (backed by traditional currencies), crypto-collateralized (backed by other cryptocurrencies), algorithmic (using code to adjust supply), and commodity-backed.
4. Flatcoins are an emerging category focused on maintaining purchasing power stability in addition to value stability, aiming to protect against inflation by tracking underlying value instead of pegging to inflation-prone currencies.
5. Stablecoins face various risks including de-peg events, counterparty risks, smart contract vulnerabilities, and potential bank-run scenarios, with algorithmic designs showing particular vulnerability during crises.
6. The future landscape will likely include both private stablecoins and Central Bank Digital Currencies (CBDCs), with ongoing innovation in hybrid models that combine different stability mechanisms.

Stablecoins and Flatcoins

Stablecoins are cryptocurrencies designed to maintain a stable value, and they typically work by pegging to a fiat currency like the US dollar, where one stablecoin is equal to one dollar. Unlike traditional cryptocurrencies such as Bitcoin or Ether, which are notorious for price volatility, stablecoins generally remove price uncertainty for users so they can interact more freely with blockchains for everyday transactions.

The first mainstream stablecoin, Tether (USDT), was introduced in 2014 to address the volatility challenge in cryptocurrency markets. Since then, the stablecoin market has grown exponentially, reaching over $150 billion in total market capitalization by 2024. This growth reflects their critical role in the broader cryptocurrency ecosystem, where they serve as a bridge between traditional financial systems and the emerging decentralized finance (DeFi) landscape.

Stablecoins have become essential infrastructure for cryptocurrency trading, cross-border transfers, remittances, lending protocols, and yield-generating activities. As their importance grows, so does scrutiny of their mechanics, backing, and regulatory compliance.

I. Stablecoin Fundamentals

At their core, stablecoins attempt to solve the “stability problem” inherent in most cryptocurrencies. While digital assets like Bitcoin offer benefits such as censorship resistance, programmability, and global access, their price volatility creates significant friction for mainstream adoption. Stablecoins maintain price stability through various mechanisms, enabling their use as:

• Medium of exchange for daily transactions
• Store of value that preserves purchasing power
• Unit of account for pricing goods and services
• Settlement layer for financial transactions

The key characteristics that define stablecoins include:

1. Price stability mechanism: Whether through collateralization, algorithms, or other means
2. Liquidity: The ability to easily convert to other assets with minimal slippage
3. Transparency: Disclosure of backing assets and mechanisms
4. Scalability: Capability to handle increasing transaction volumes
5. Redeemability: The ability to exchange for their underlying collateral when applicable

Different stablecoin designs make tradeoffs among these characteristics to achieve their stability objectives.

II. Major Types of Stablecoins

A. Fiat-Collateralized Stablecoins

Fiat-collateralized stablecoins are the most straightforward and widely adopted category. These cryptocurrencies maintain their stability through direct backing by (primarily) US dollar reserves, held in bank accounts. For every token issued, the stablecoin issuer theoretically holds an equivalent amount of fiat currency in reserve.

How They Work:

1. Users deposit fiat currency with the stablecoin issuer
2. The issuer mints an equivalent amount of stablecoins
3. When users redeem stablecoins, the issuer burns the tokens and returns the fiat
4. The 1:1 backing creates arbitrage opportunities that help maintain the peg

Key Examples:

• USDC (USD Coin): Issued by Circle and Coinbase, USDC provides monthly attestations of its reserves.
• USDT (Tether): The largest stablecoin by market cap, though historically controversial due to questions about its reserves.
• BUSD (Binance USD): Previously issued in partnership with Paxos, now being phased out due to regulatory concerns.

Reserve Verification: The transparency of reserves has become a central issue for fiat-collateralized stablecoins. Issuers typically employ one of three approaches:

• Full audits (least common, most rigorous)
• Attestations (third-party verification at a specific point in time)
• Self-reported reserves (least rigorous)

Regulatory Considerations: Fiat-collateralized stablecoins face increasing regulatory scrutiny, as they effectively function as privately-issued digital dollars. Key regulatory concerns include:

• Banking regulations and money transmitter licensing
• Reserve requirements and capital controls
• Consumer protection and anti-fraud measures
• Anti-money laundering (AML) and Know Your Customer (KYC) compliance

B. Crypto-Collateralized Stablecoins

Crypto-collateralized stablecoins maintain their stability through over-collateralization with other cryptocurrencies. This design eliminates the need for traditional banking relationships but introduces additional complexity and risk due to the volatility of the collateral itself.

How They Work:

1. Users deposit cryptocurrency collateral (often ETH) into a smart contract
2. The protocol issues stablecoins up to a certain collateralization ratio (typically 150%-200%)
3. If collateral value falls below the required threshold, liquidation occurs
4. Smart contracts govern the entire process without central intermediaries

Key Examples:

• DAI: Issued by MakerDAO, DAI was the first major crypto-collateralized stablecoin. It accepts multiple cryptocurrencies as collateral, including ETH, WBTC, and various stablecoins.
• LUSD (Liquity USD): A newer entrant requiring a minimum 110% collateralization ratio of ETH, with governance-minimized smart contracts.

Risk Management: These systems must handle market volatility in their collateral assets. They employ several mechanisms:

• Liquidation procedures to ensure adequate collateralization
• Stability fees charged to borrowers
• Emergency shutdown mechanisms for extreme market conditions
• Multiple collateral types to diversify risk

The primary advantage of crypto-collateralized stablecoins is their decentralization, reducing counterparty risk. However, they require over-collateralization, which creates capital inefficiency.

C. Algorithmic Stablecoins

Algorithmic stablecoins attempt to maintain their peg through automatic supply adjustments governed by algorithms rather than direct collateralization. These designs aim to create a programmatic central bank that expands and contracts the stablecoin supply based on market conditions.

How They Work:

1. When price exceeds the peg, the protocol increases token supply, reducing scarcity value
2. When price falls below the peg, the protocol reduces supply, increasing scarcity value
3. Many designs use a two-token system: a stablecoin and a volatile “share” token

Key Examples:

• Terra’s UST: A formerly prominent algorithmic stablecoin that catastrophically collapsed in 2022, losing billions in value
• FRAX: A hybrid stablecoin that combines partial collateralization with algorithmic supply control
• Ampleforth (AMPL): Uses supply rebasing rather than a fixed peg

Historic Failures: Algorithmic stablecoins have experienced several high-profile failures:

• The UST/LUNA collapse in 2022 demonstrated the “death spiral” risk where declining confidence triggers self-reinforcing liquidations
• Empty Set Dollar (ESD), Basis Cash, and other early projects faced similar challenges maintaining their pegs

These failures highlight the difficulty of creating purely algorithmic stability. Most surviving projects have moved toward hybrid models with partial collateralization.

D. Commodity-Backed Stablecoins

Commodity-backed stablecoins derive their value from physical assets, most commonly precious metals like gold. Each token represents a claim on a specific amount of the underlying commodity, typically stored in secure vaults.

How They Work:

1. The issuer purchases and stores the physical commodity
2. Tokens are minted representing ownership of a specific quantity (e.g., 1 token = 1 gram of gold)
3. Regular audits verify the physical backing
4. Users can typically redeem tokens for physical delivery (with minimum quantities)

Key Examples:

• Paxos Gold (PAXG): Each token represents one fine troy ounce of London Good Delivery gold stored in Brink’s vaults
• Tether Gold (XAUt): Backed by physical gold stored in Switzerland
• Digix Gold (DGX): One of the early gold-backed tokens on Ethereum

Unique Considerations:

• Storage and security costs affect the token economics
• Physical redemption processes usually involve minimum quantities and handling fees
• Custody and auditing procedures are critical for maintaining trust

Commodity-backed stablecoins appeal to investors seeking inflation hedges with the convenience of cryptocurrency. However, they typically have higher holding costs and more complex redemption procedures than fiat-backed alternatives.

E. Flatcoins

Flatcoins represent an emerging category focused on purchasing power stability rather than price stability relative to a fiat currency. As conceptualized by economist James Song and others, these tokens aim to maintain consistent real-world value even as fiat currencies experience inflation.

Core Concept: Unlike traditional stablecoins that peg to a potentially inflation-prone fiat currency, flatcoins attempt to maintain stable purchasing power. This approach draws from the economic concept of “scrip” – a substitute for legal tender often issued by private entities.

Song’s Theory: Song proposes cryptocurrencies can function as scrip currency backed by “latent value” - the potential economic activity and utility within a network. This theory suggests that properly designed cryptoeconomic systems can create self-sustaining value stability without direct asset backing.

Key Mechanisms:

1. Value indices: Pegging to inflation measures like CPI or a basket of goods rather than fiat currencies
2. Rebase mechanisms: Adjusting supply based on purchasing power measurements
3. Real-world data feeds: Using oracles to track price indices and economic indicators
4. Governance systems: Community control over stability parameters

Examples:

• RAI: A non-pegged stable asset that floats freely against other assets while minimizing volatility
• FLOAT: A protocol designed to create purchasing power-stable currency
• Volt Protocol: Aims to create tokens that maintain consistent purchasing power

Flatcoins address a fundamental limitation of traditional stablecoins – that stability against an inflation-prone currency like the US dollar doesn’t guarantee preservation of purchasing power. However, they face significant implementation challenges, particularly around measuring real-world value consistently.

III. Stablecoin Issuers and Business Models

A. Centralized Issuers

Centralized stablecoin issuers operate as traditional companies with identifiable management teams, corporate structures, and regulatory relationships. They typically issue fiat-backed stablecoins and generate revenue through their reserve management activities.

Corporate Structure and Governance: Most centralized issuers establish traditional corporate entities, often in jurisdictions with favorable regulatory environments. Their governance resembles fintech companies, with boards of directors, executive teams, and compliance departments.

Revenue Generation Methods:

1. Interest on reserves: Investing reserve assets in short-term treasuries, money market funds, and other interest-bearing instruments
2. Transaction fees: Charging for minting, redeeming, or transferring tokens
3. Issuance/redemption fees: Specific charges for creating or destroying tokens
4. Float income: Earning yield on unbacked portions of reserves or temporarily undeployed capital

Key Examples:

• Circle (USDC): A fintech company with regulatory licenses across multiple jurisdictions, generating revenue primarily through reserve yields
• Tether (USDT): Operated by iFinex Inc., which also owns the Bitfinex exchange, with a complex corporate structure spanning multiple jurisdictions
• Paxos: A regulated financial institution that issues stablecoins under New York state banking laws

Centralized issuers benefit from operational efficiency but introduce counterparty risk and regulatory uncertainty. Their business models have evolved toward greater transparency as regulatory scrutiny increases.

B. Decentralized Issuers

Decentralized stablecoin issuers operate through protocols governed by distributed autonomous organizations (DAOs) rather than traditional corporate entities. These systems typically issue crypto-collateralized or algorithmic stablecoins using smart contracts.

DAO Governance Structures:

• Token-based voting on protocol parameters and upgrades
• Multi-signature approval for emergency interventions
• Delegation systems for technical expertise
• On-chain governance mechanisms for transparency

Revenue Models:

1. Protocol fees: Charging for borrowing against collateral (stability fees)
2. Liquidation fees: Penalties paid when collateral ratios fall below thresholds
3. Interest from collateral lending: Deploying locked collateral in yield-generating activities
4. Treasury management: Investing protocol-owned assets

Key Examples:

• MakerDAO (DAI): Governed by MKR token holders who vote on risk parameters, stability fees, and collateral types
• Liquity (LUSD): A minimally governed protocol where most parameters are fixed algorithmically, with revenue distributed to LQTY stakers

Decentralized issuers reduce counterparty risk and censorship vulnerability but often face greater technical complexity and slower decision-making processes. Their revenue models must balance protocol security with incentives for governance participants.

C. Flatcoin and Scrip Currency Issuers

Flatcoin issuers typically employ hybrid approaches combining aspects of both centralized and decentralized models. They focus on maintaining purchasing power stability rather than nominal price stability.

Governance Models:

• Community-governed protocols with specialized economic parameters
• Advisory boards with economics expertise
• Hybrid structures with both algorithmic and human decision-making

Backing Mechanisms:

• Real-world asset indexes
• Algorithmic supply controls based on economic data
• Network utility value measurement systems
• Basket-based approaches combining multiple stability strategies

Revenue Generation:

1. Economic growth capture through seigniorage
2. Protocol fees for accessing advanced features
3. Ecosystem service fees from applications built on the stable foundation
4. Treasury management of protocol-owned assets

Flatcoin issuers face unique challenges around measuring real-world value and implementing effective feedback mechanisms. Their business models often depend on ecosystem growth rather than direct fee generation.

IV. Economic Incentives in Ecosystems

Stablecoin ecosystems rely on carefully designed economic incentives to maintain stability and encourage participation. These incentive structures create arbitrage opportunities, profit potential, and risk management tools for various market participants.

Arbitrage Opportunities:

• Minting/redemption arbitrage: Profiting from small deviations from the peg
• Collateral optimization: Maximizing returns on locked assets
• Cross-platform arbitrage: Exploiting price differences across exchanges
• Liquidation opportunities: Participating in collateral auctions during liquidation events

Yield Generation Strategies:

• Lending stablecoins: Earning interest in DeFi protocols
• Liquidity provision: Collecting fees by supplying stablecoins to trading pairs
• Carry trades: Exploiting interest rate differences between stablecoins
• Governance participation: Earning rewards for protocol maintenance

Market Maker Incentives:

• Spread capture: Profiting from bid-ask spreads in stablecoin markets
• Volume rebates: Receiving discounts for high trading volumes
• Special issuer relationships: Privileged minting/redemption arrangements
• Integration opportunities: Building services atop stablecoin infrastructure

Flatcoin-Specific Incentives:

• Value anchoring: Rewards for maintaining connections to real-world value
• Anti-inflation mechanisms: Protection against currency debasement
• Community economic participation: Incentives for verifiable economic activity
• Data provision: Rewards for accurate economic data feeding

Well-designed incentive structures create self-reinforcing stability, with market participants automatically correcting deviations from target values. However, these systems can fail during extreme market conditions when incentives become insufficient to overcome widespread panic or technical limitations.

V. Regulatory Landscape

The regulatory environment for stablecoins continues to evolve rapidly, with significant variation across jurisdictions. As these assets grow in importance, regulators worldwide are developing frameworks to address potential risks while balancing innovation.

Current Regulatory Approaches by Region:

United States:

• Multiple agencies claim jurisdiction (SEC, CFTC, OCC, FinCEN)
• Proposed legislation includes the Stablecoin TRUST Act and various Federal Reserve frameworks
• Money transmitter licensing requirements at the state level
• Banking charter considerations for issuers

European Union:

• Markets in Crypto-Assets (MiCA) regulation provides specific stablecoin provisions
• E-money classification for many stablecoin arrangements
• Reserve requirements and operational standards
• Consumer protection focus

Asia-Pacific:

• Singapore’s Payment Services Act creating specific stablecoin frameworks
• Japan’s recognition of stablecoins as digital money
• China’s prohibition of non-official digital currencies
• Hong Kong’s opt-in licensing regime

Key Regulatory Concerns:

1. Financial stability: Systemic risk from large-scale stablecoin usage
2. Consumer protection: Ensuring proper disclosures and redemption rights
3. Monetary sovereignty: Potential impact on central bank monetary policy
4. Payment system integrity: Settlement finality and operational resilience
5. Financial crime: AML/KYC compliance and sanctions enforcement

Regulatory Perspectives on Flatcoins:

Flatcoins and scrip-based currencies face a complex regulatory landscape:

• Often classified based on their specific mechanisms rather than their purchasing power stability goals
• Potentially subject to commodity regulations if pegged to baskets of goods
• Legal precedents from historical private currencies and complementary currency systems
• Experimental status creates regulatory uncertainty in many jurisdictions

The regulatory approach to stablecoins is still developing, with policy debates centered on whether to treat them as bank deposits, securities, commodities, or payment systems. Most jurisdictions are moving toward greater oversight, stricter reserve requirements, and more transparent reporting standards.

VI. Risks and Challenges

Stablecoins face various risks that can threaten their stability, user confidence, and long-term viability. Understanding these risks is essential for users, issuers, and regulators.

Depeg Events and Historical Examples

A “depeg” occurs when a stablecoin significantly deviates from its target value. Notable examples include:

• USDT’s 2017 drop to $0.92: Following concerns about banking relationships
• UST’s 2022 collapse: A catastrophic spiral from $1 to near zero, wiping out over $40 billion in value
• DAI’s 2020 deviations: During the “Black Thursday” market crash, briefly falling to $0.88
• USDC’s 2023 fluctuation: Dropping to $0.87 following Silicon Valley Bank’s collapse

These events highlight how different stability mechanisms perform under stress, with algorithmic designs showing particular vulnerability to confidence crises.

Counterparty Risks in Centralized Stablecoins

Centralized stablecoins introduce several counterparty risks:

1. Reserve bank failure: As demonstrated by the Silicon Valley Bank impact on USDC
2. Issuer insolvency: Potential mismanagement of reserves or business operations
3. Regulatory action: Government intervention against issuers or banking partners
4. Technical failures: Security breaches or operational problems
5. Redemption suspension: Issuers halting convertibility during crises

These risks highlight the trust assumptions inherent in centralized stablecoin models and the importance of reserve diversification and transparency.

Smart Contract Issues in Decentralized Stablecoins

Decentralized stablecoins depend on smart contracts that may contain vulnerabilities:

• Code exploits: As seen in numerous DeFi protocol hacks
• Oracle manipulation: Incorrect price feeds leading to improper liquidations or minting
• Governance attacks: Malicious proposals if governance is too centralized
• Economic design flaws: Unforeseen incentive misalignments during market stress
• Network congestion: Blockchain limitations preventing timely liquidations or stability operations

These technical risks require robust security practices, formal verification, and comprehensive testing.

Bank Run Scenarios

All stablecoin designs must address the potential for “bank runs”—mass redemptions that can stress or break their stability mechanisms:

• Reserve liquidity mismatches: When backing assets cannot be liquidated quickly enough
• Collateral cascade effects: Rapid liquidations driving down collateral values
• Market depth limitations: Insufficient liquidity to process large redemption volumes
• Contagion risks: Panic spreading from one stablecoin to others

Mitigations include redemption gates, liquidity buffers, diversified reserves, and transparent communication strategies.

Flatcoin-Specific Risks

Flatcoins and scrip-based currencies face additional unique challenges:

• Latent value measurement: Difficulty quantifying the backing “network value”
• Oracle reliance: Dependence on external data feeds for real-world value indices
• Adoption barriers: Complexity in explaining purchasing power stability versus price stability
• Economic feedback loops: Potential instability in economic activity verification
• Information lags: Delays in accessing inflation or economic data

These novel designs face heightened uncertainty due to limited historical precedents and testing in various market conditions.

Systemic Risk to Broader Crypto Markets

As stablecoins grow in importance, they create potential systemic risks:

• Trading pair dependency: Most crypto trading occurs against stablecoins
• Liquidity concentration: Stablecoins represent significant portions of DeFi liquidity
• Settlement layer reliance: Many protocols depend on stablecoins for value transfer
• Correlation risk: Stress in one stablecoin affecting confidence in others

These interconnections mean that stablecoin failures can have cascading effects throughout cryptocurrency markets.

VII. Use Cases and Applications

Stablecoins serve a growing range of applications across both cryptocurrency ecosystems and traditional finance.

Payment Systems and Remittances

Stablecoins offer several advantages for payments and remittances:

• 24/7 operation: Unlike traditional banking systems with business hour limitations
• Borderless transfers: Global transactions without correspondent banking friction
• Reduced costs: Lower fees than traditional remittance services, particularly for larger amounts
• Programmability: Conditional payments, recurring transfers, and multi-signature approval

Key implementations include:

• Circle’s payment APIs for merchant integration
• Tether’s dominance in emerging market remittance corridors
• Integration with cryptocurrency exchanges for fiat on/off-ramping

DeFi Applications

Decentralized Finance heavily relies on stablecoins for:

• Lending and borrowing: Platforms like Aave and Compound use stablecoins as primary lending assets
• Liquidity provision: Stablecoin pairs form the backbone of many decentralized exchanges
• Derivatives collateral: Margin for trading synthetic assets and options
• Yield farming: Basis for many yield generation strategies
• Insurance pools: Capital reserves for crypto insurance protocols

Stablecoins enable DeFi to offer financial services with predictable units of account, critical for loan agreements and financial contracts.

Trading Pairs and Liquidity

In cryptocurrency markets, stablecoins serve essential functions:

• Base trading pairs: Most cryptocurrencies trade against USDT, USDC, or other stablecoins
• Price discovery: Providing consistent valuation benchmarks
• Risk management: Allowing traders to exit volatile positions without fiat conversion
• Market making: Facilitating efficient price formation and tight spreads
• Arbitrage operations: Enabling price consistency across platforms

The dominance of stablecoin trading pairs has largely replaced direct fiat pairs on many exchanges, improving efficiency and accessibility.

Savings and Yield Products

Stablecoins have become foundational for cryptocurrency savings products:

• Interest-bearing accounts: Centralized platforms offering yields on stablecoin deposits
• Automated yield strategies: Protocols that optimize returns across multiple lending platforms
• Stablecoin staking: Earning protocol rewards for providing stability
• Fixed-rate products: Tokenized bonds and fixed-term deposits
• Tranched risk products: Structures offering different risk-return profiles

These products appeal to users seeking yields higher than traditional banking offers, though typically with greater risk.

Cross-Border Commerce

Stablecoins address several challenges in international business:

• Settlement time reduction: From days to minutes compared to traditional systems
• Currency corridor liquidity: Creating efficient paths between currencies
• Sanction-resistant trade finance: Alternative rails for legitimate commerce in regions with banking limitations
• Smart contract escrow: Programmable trade agreements with conditional release
• Documentation and compliance automation: Integrating KYC/AML directly into transaction flows

B2B applications are growing particularly rapidly as businesses seek efficiency improvements in cross-border payments.

Flatcoin-Specific Applications

Flatcoins and scrip currencies offer unique use cases:

• Local economic development: Community-focused currencies tied to local productivity
• Inflation-resistant savings: Preserving purchasing power during currency debasement
• Economic resilience networks: Systems that can operate during broader financial instability
• Productive capacity tokenization: Representing future production ability rather than current assets
• Value-stable ecosystem foundations: Building more predictable economic systems

Song’s scrip currency theory suggests particular value in communities with productive capacity but limited access to traditional financing or stable currencies.

VIII. Comparative Analysis

The diverse stablecoin ecosystem offers different solutions for different needs, with important tradeoffs across designs.

Stablecoins vs Flatcoins: Key Differences

Characteristic	Traditional Stablecoins	Flatcoins
Stability target	Fixed price (usually 1 USD)	Purchasing power
Inflation protection	Limited/None	Core design goal
Regulatory clarity	Moderate and improving	Limited
Technical complexity	Varies by design	Generally higher
Adoption barriers	Relatively low	Higher due to novel concepts
Crisis resilience	Dependent on specific design	Theoretical advantage during fiat crises

Use Case Appropriateness

Different designs suit different applications:

• Fiat-collateralized stablecoins: Best for trading, commerce, and regulated applications requiring high liquidity
• Crypto-collateralized stablecoins: Ideal for DeFi integration and censorship-resistant applications
• Algorithmic stablecoins: Suitable for experimental and governance-focused systems
• Commodity-backed stablecoins: Appropriate for inflation hedging and asset diversification
• Flatcoins: Best suited for long-term value preservation and economic development applications

Implementation Complexity

Stablecoin designs vary dramatically in implementation difficulty:

• Fiat-collateralized: Primarily operational and regulatory challenges
• Crypto-collateralized: Smart contract security and liquidation mechanism design
• Algorithmic: Complex economic modeling and incentive alignment
• Commodity-backed: Physical asset management and auditing processes
• Flatcoins: Economic data integration and value measurement systems

This complexity affects development timelines, security risks, and governance requirements.

Governance Requirements

Different designs necessitate different governance approaches:

• Centralized stablecoins: Corporate governance and regulatory compliance teams
• Decentralized stablecoins: On-chain governance systems and parameter adjustment mechanisms
• Algorithmic stablecoins: Economic councils and algorithm designers
• Flatcoins: Data validation systems and economic indicator governance

Governance design significantly impacts a stablecoin’s ability to adapt to changing market conditions and regulatory environments.

IX. Future of Stablecoins and Flatcoins

The stablecoin landscape continues to evolve rapidly, with several key trends shaping its future.

Central Bank Digital Currencies vs. Private Stablecoins

Central Bank Digital Currencies (CBDCs) and private stablecoins will likely coexist in complementary roles:

• CBDCs: Government-backed, integrated with existing banking systems, potential programmability limitations
• Private stablecoins: Greater innovation, cross-border functionality, programmability, and DeFi integration

Rather than replacing stablecoins, CBDCs may create new opportunities for hybrid systems combining aspects of both approaches.

Innovation in Stability Mechanisms

Ongoing research is advancing stability approaches:

• Mixed collateral models: Combining multiple stability strategies to reduce specific risks
• Real-world asset integration: Using tokenized securities, real estate, and other assets as backing
• Advanced algorithmic designs: Learning from previous failures to create more robust non-collateralized systems
• Oracle network improvements: Better connecting off-chain data with on-chain systems
• Zero-knowledge proof applications: Privacy-preserving verification of reserves and transactions

These innovations aim to address current limitations in capital efficiency, transparency, and resilience.

Scalability and Adoption Challenges

For broader adoption, stablecoins must overcome several barriers:

• Regulatory compliance: Adapting to evolving global regulations while maintaining innovation
• User experience: Simplifying wallets, transaction processes, and recovery mechanisms
• Infrastructure reliability: Ensuring consistent performance during peak demand
• Educational gaps: Helping users understand the risks and benefits of different designs
• Interoperability: Creating seamless experiences across blockchains and traditional systems

Addressing these challenges requires collaboration between issuers, developers, regulators, and educational initiatives.

A Vision for Scrip Cryptocurrency Evolution

Song’s economic theory suggests several development paths for cryptocurrencies as scrip:

• Productive capacity tokenization: Representing the latent value of production networks
• Community economic resilience: Building localized stability mechanisms tied to real productivity
• Hybrid value anchoring: Combining traditional asset backing with network value measures
• Economic activity verification systems: Validating real-world productivity that backs value
• Adaptive monetary policy tools: Creating responsive systems that adjust to economic conditions

This vision presents cryptocurrencies not merely as speculative assets or payment systems, but as fundamental economic coordination tools.

Potential for Hybrid Models

The most promising developments may combine elements from different approaches:

• Partially-collateralized algorithmic systems: Reducing collateral requirements while maintaining stability
• Regulated decentralized stablecoins: Combining compliance with censorship resistance
• Multi-currency baskets: Reducing dependency on single fiat currencies
• Flatcoin principles in traditional stablecoins: Incorporating purchasing power measures into existing designs
• Tokenized real-world assets as backing: Using productive assets rather than idle capital as collateral

These hybrid approaches may offer the best balance of stability, efficiency, and innovation.

Final Thoughts

Stablecoins have evolved from a niche solution for cryptocurrency traders to a critical infrastructure layer for the emerging digital economy. Their diverse designs reflect different priorities and tradeoffs among stability, decentralization, capital efficiency, and regulatory compliance.

Traditional stablecoins pegged to fiat currencies have achieved significant adoption due to their simplicity and familiarity. Meanwhile, flatcoins and scrip-based approaches offer innovative solutions to the long-term purchasing power problem, potentially creating truly stable stores of value rather than just stable prices.

The stablecoin ecosystem continues to mature through both success and failure. The collapse of projects like Terra’s UST provided painful but valuable lessons about algorithmic design limitations. Regulatory developments are gradually providing clearer frameworks, though significant uncertainty remains in many jurisdictions.

Looking forward, stablecoins will likely play increasingly important roles in both cryptocurrency markets and traditional finance. Their ability to combine the programmability of digital assets with the price stability needed for everyday financial activities positions them as a crucial bridge between traditional and decentralized systems.

As Song’s work on scrip currencies suggests, we may be only beginning to explore the potential for digitally-native stable value systems. The continued evolution of these technologies promises to reshape our understanding of money itself—not just as a medium of exchange or store of value, but as a flexible tool for coordinating economic activity and preserving purchasing power in an increasingly digital world.

Glossary

Algorithmic Stablecoin: A cryptocurrency that maintains price stability through automatic supply adjustments governed by algorithms rather than direct collateralization.

Collateralization Ratio: The value of assets backing a stablecoin relative to the stablecoin’s market capitalization, often expressed as a percentage.

Depeg Event: When a stablecoin deviates significantly from its intended target value, often during market stress or due to loss of confidence.

Flatcoin: A cryptocurrency designed to maintain stable purchasing power rather than a stable price against a fiat currency, often using inflation measures as reference.

Latent Value: In James Song’s economic theory, the potential economic activity and utility within a network that can back a cryptocurrency’s value.

Liquidation: The process of selling collateral assets when a collateralization ratio falls below the required threshold, used to maintain the stability of crypto-collateralized stablecoins.

Mint and Redeem: The process of creating new stablecoins (minting) and converting them back to their underlying collateral (redeeming).

Oracle: A mechanism that provides external data to blockchain networks, such as price feeds or economic indicators crucial for stablecoin operation.

Over-collateralization: Requiring more collateral value than the stablecoin value being issued, providing a safety buffer against market volatility.

Peg: The target value that a stablecoin aims to maintain, typically 1:1 with a fiat currency like the US dollar.

Purchasing Power: The value of money expressed in terms of the goods and services it can buy, rather than its nominal exchange rate.

Reserve Assets: The pool of assets held to back a stablecoin, which may include cash, treasuries, commercial paper, cryptocurrencies, or other value stores.

Scrip Currency: A substitute for legal tender, typically issued by a private entity or community, that represents claims on goods or services.

Seigniorage: The difference between the face value of money and its production cost, often used to describe the profit mechanism of some algorithmic stablecoins.

Stability Fee: Interest charged on borrowed stablecoins in collateralized systems, used to maintain the peg and generate protocol revenue.

Tokenized Real-World Assets (RWAs): Traditional assets like treasuries, real estate, or commodities represented on blockchain networks, increasingly used as stablecoin backing.

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