A Theoretical Approach to Stablecoin Design via Price Windows

2026-02-17

AI Summary

This study investigates whether collateralized stablecoins relying solely on fixed minting and redemption prices can simultaneously achieve short-term and long-term price stability. By constructing a model grounded in game theory and market equilibrium, the paper analyzes how arbitrageur behavior under a price band mechanism affects both the stablecoin’s market price and its reserve assets. The analysis reveals that, absent secondary stabilization mechanisms or non-volatile reserve backing, such a design inherently faces a fundamental trade-off: it cannot maintain both short-term peg adherence and long-term stability, inevitably leading either to reserve depletion or the transmission of volatility from the underlying collateral. The work further quantifies the intrinsic relationship between arbitrage activity and price fluctuations.

Technology Category

• Game Theory and Economic Paradigms: Mechanism Design
• Multiagent Systems: Mechanism Design
• Machine Learning: Online Learning & Bandits

Application Category

• Security and Privacy: Cryptocurrency and smart contracts
• Economics, Online Markets and Human Computation: Economic aspects of blockchain and cryptocurrencies
• Graph Algorithms and Modeling for the Web: Efficient manipulation of static and dynamic Web-related graphs

Abstract

In this paper, we explore the short- and long-term stability of backed stablecoins offering constant mint and redeem prices to all agents. We refer to such designs as price window-based, since the mint and redeem prices constrain the stablecoin's market equilibrium. We show that, without secondary stabilization mechanisms, price window designs cannot achieve both short- and long-term stability unless they are backed by already-stable reserves. In particular, the mechanism faces a tradeoff: either risk eventual reserve depletion through persistent arbitrage by a speculator, or widen the distance between mint and redeem prices enough to disincentivize arbitrage. In the latter case, however, the market price of the stablecoin inherits the volatility of its backing asset, with fluctuations that can be proportional to the backing asset's own volatility.

Problem

• stablecoin
• price stability
• reserve depletion
• arbitrage
• volatility

Innovation

• price window
• stablecoin design
• reserve stability
• arbitrage tradeoff
• backed stablecoins