Stablecoins are cryptocurrencies whose price is pegged to that of another asset (typically one with low price volatility). The market for stablecoins has grown tremendously – up to almost $200 billion USD in 2022. These coins are being used extensively in newly developing paradigms for digital money and commerce as well as for decentralized finance technology. This work provides a technical description of stablecoin technology to enable reader understanding of the variety of ways in which stablecoins are architected and implemented. This includes a descriptive definition, commonly found properties, and distinguishing characteristics, as well as an exploration of stablecoin taxonomies, descriptions of the most common types, and examples from a list of top stablecoins by market capitalization. This document also explores related security, stability, and trust issues with an analysis conducted from a computer science and information technology security perspective as opposed to the financial analysis and economics focus of much of the stablecoin literature.

Executive Summary 1

1. Introduction 5

1.1 One Year Stability Analysis of Top Stablecoins by Market Capitalization 6

1.2 Note on Regulations 9

2. Background Technology 0

2.1 Blockchain 0

2.2 Cryptocurrencies 0

2.3 Smart Contracts 1

2.4 Cryptocurrency Tokens 1

2.5 Centralized Finance (CeFi) 2

2.6 Decentralized Finance (DeFi) 2

3. Stablecoin Definition, Properties, and Characteristics 4

3.1 Stablecoin Definition 4

3.2 Stablecoin Properties 5

3.3 Stablecoin Characteristics 7

4. Stablecoin Taxonomy 12

4.1 Fiat Currency-Backed 14

4.2 Cryptocurrency-Backed 16

      4.2.1. Overcollateralized Debt Position 16

      4.2.2. Wrapped Fully Collateralized 19

4.3 Non-Currency Asset-Backed 21

4.4 Algorithmic Non-Collateralized 22

      4.4.1. Rebasing Coins 22

      4.4.2. Seigniorage Stablecoins 23

4.5 Hybrid 25

4.6 Private Institutional 26

5. Security Issues 27

5.1 Unauthorized or Arbitrary Minting of Stablecoins 27

5.2 Collateral Theft 28

5.3 Malicious Smart Contract Update and Hijack 28

5.4 Data Oracles 28

5.5 Exploiting the Underlying Blockchain 29

5.6 Writing Secure Software and Vulnerabilities 30

6. Stability Issues 31

6.1 Dynamic Interest Rates 31

6.2 Floating Collateral Requirements 31

6.3 Oracle Responsiveness to Rapid Price Fluctuation 32

6.4 Governance Token Devaluation 33

6.5 Share and Reward Token Devaluation 34

6.6 Native Cryptocurrency Devaluation 34

6.7 Transaction Price Increase 35

6.8 Trading Curb/Circuit Breaker 36

7. Trust Issues 37

7.1 Stablecoin Manager Deception 37

      7.1.1. Insufficient Reserves 37

      7.1.2. Reserve Type Mismatch 38

7.2 Stablecoin Manager Actions 38

      7.2.1. Account Denylisting 38

      7.2.2. Managing Organization Dissolution 38

      7.2.3. Mass User Departure 39

      7.2.4. Rug Pulls 39

8. Exchanges and Fund Movement 41

8.1 Centralized Exchanges 41

8.2 Decentralized Exchanges 41

      8.2.1. Liquidity Pools and Yield Farming 42

      8.2.2. Automated Market Maker Equations 42

      8.2.3. Liquidity Pool Security Concerns 43

8.3 Cross Chain Bridges 44

9. Conclusion 46

References 47

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