The Journal of Digital Assets

  • Volume 1
  • December 2022
  • Issue 1
Articles
  • Stablecoin as a Catalyst for DeFi Ecosystem Expansion
  • Gongpil Choi
  • First Published: 05 December 2022
  • Abstract | Full Text(815) | PDF download(291)

Abstract

This paper explains a new breed of stablecoin specifically designed for decentralized finance (DeFi) ecosystem expansion. It differs from earlier versions by specifically addressing the needs of DeFi participants, who constantly face frictions related to volatility, slippage, and forced liquidation. The so-called DeFi stablecoin is designed specifically to satisfy critical requirements for promoting the DeFi ecosystem by providing reduced volatility, improved capital efficiency, and better decentralization over a long-term period of time. Unlike other protocols for cross-border payment and value transfer, the current version tries to achieve the required stability of native protocol tokens, which act as catalysts for liquidity provision within the ecosystem. A grassroots DeFi stablecoin using the native protocol token requires the combinatorial use of centralized stablecoin, e.g., USDC, with specific choice parameters over volatility, slippage, and expected return. The eclectic approach to secure better liquidity instruments for DeFi depends on the use of fiat-backed stablecoin as a pillar to stabilize any native token with good disclosure and transparency. A preliminary empirical study shows that the current approach reduces volatility, allows more capital-efficient market transactions, and makes the financial system more resilient to different shocks. And future studies need to find whether this hybrid approach can serve as a prudential supervisory guideline for the DeFi ecosystem and embrace the multi-collateral mix.

Keywords: Decentralization, DeFi, stablecoin, tokenomics.

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