Designing stablecoins

Yizhou Cao, Min Dai, Steven Kou, Lewei Li and Chen Yang

Mathematical Finance, 2025, vol. 35, issue 1, 263-294

Abstract: Existing cryptocurrencies are too volatile to be used as currencies for daily payments. Stablecoins, which are cryptocurrencies pegged to other stable financial assets such as the US dollar, are desirable for payments within blockchain networks, whereby being often called the “Holy Grail of cryptocurrency.” By using the option pricing theory and the Ethereum platform that allows running smart contracts, we design several dual‐class structures that are written on the ETH cryptocurrency and offer a fixed‐income crypto asset (Class A coin), a stablecoin (Class A′ coin) pegged to a traditional currency, and leveraged investment instruments (Class B and B′ coins). Our investigation of the values of stablecoins in the presence of jump risk and black swan‐type events shows the robustness of the design. The design has been implemented on the Ethereum platform.

Date: 2025
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