Oct. 26, 2021

Professor published in Wake Forest Law Review

Article examines flaws in algorithmic stablecoins

Professor Ryan Clements has published "Built to Fail: The Inherent Fragility of Algorithmic Stablecoins" in the Wake Forest Law Review. 

Algorithmic stablecoins are inherently fragile.  These uncollateralized digital assets, which attempt to peg the price of a reference asset using financial engineering, algorithms, and market incentives, are not stable at all but exist in a state of perpetual vulnerability.  Iterations to date have struggled to maintain a stable peg, and some have failed catastrophically. This Article argues that algorithmic stablecoins are fundamentally flawed because they rely on three factors which history has shown to be impossible to control.  First, they require a support level of demand for operational stability.  Second, they rely on independent actors with market incentives to perform price-stabilizing arbitrage. Finally, they require reliable price information at all times.  None of these factors are certain, and all of them have proven to be historically tenuous in the context of financial crises or periods of extreme volatility.  Regulatory guidelines are needed for all stablecoin forms, including issuer registration requirements, a defined taxonomy clarifying forms, prudential, collateral custody, and transparency safeguards, and risk disclosure and containment measures.  A strong regulatory framework, with risk disclosure and containment safeguards, is particularly needed for algorithmic stablecoins, which currently serve only speculative DeFi trading applications and have very little, if any, societal or financial inclusionary value.

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