[pɑɾɑbolʲ]

noun: a new stablecoin ecosystem that natively embeds risk-free return

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Stablecoins are critical to the efficient functioning of the crypto market as they act as a means of payment within the digital asset ecosystem. The rapid growth of stablecoins has proven their worth as a medium of exchange. However, while they seem to act as a “store of value” relative to volatility of other cryptoassets, they actually do not natively embed a risk-free benchmark hurdle rate which would act as such an anchor.

Off-chain collateralized stablecoins operate at a 0% rate, with all collateral returns going to the stablecoin manager. Other issues that arise from the inability of fiat-collateralized stablecoins to natively embed a risk-free return include:

1. The operator’s profit maximization motive results in a principal-agent problem that distorts the incentives for the operator in their choice of managing the collateral, such as introducing maturity mismatch, as well as liquidity, collateral and credit risk.
2. Alternative methods to reach equivalent risk-free rates, for example through tokenizing Treasury-Bills, introduce friction such as multiple layers of fees, settlement risk and multiple counterparty risk.
3. The lack of an embedded risk-free benchmark abstracts away the opportunity cost for stablecoin owners, pushing them to risky yield-farming solutions or on the other extreme, moving to fiat as a substitute.

We are working on a solution.

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