The volatility of existing cryptocurrencies significantly reduces their usefulness. A cryptocurrency with stable value would permit much wider usage as a stable store of value, medium of exchange, and standard of deferred payment. Demand for a short-term and long-term stable cryptocurrency is obvious. The feasibility of implementing one is not—clear flaws can be demonstrated with many recently proposed designs . In this paper, we present arguments for why such a coin should implement an exchangerate peg to a fiat currency first and a basket of assets later, using off-chain foreign collateral that has been tokenized by a diversity of issuers. We then describe the Reserve Protocol, a decentralized stablecoin system that scales supply with demand and is built to maintain 100% or more on-chain collateral backing. This design strikes a careful balance between stability, decentralization, and profitability while supporting arbitrary increases or decreases in demand. For these reasons, we believe the Reserve to be the ideal economic building block for the blockchain ecosystem and a credible alternative to fiat money.
Cryptocurrencies have the potential to massively upgrade the effectiveness of money worldwide. They can be sent nearly instantly to anyone anywhere in the world, can’t be diluted or devalued by irresponsible governments, and can be programmed to operate inside of financial contracts that rely on code instead of law—each of which is independently a major improvement over fiat money. Cryptocurrencies have recently been top-of-mind for consumers, investors, and regulators around the world. Why, then, have they not been adopted?
In addition to technical impediments that are on track to being solved, cryptocurrencies like bitcoin and ether have been highly volatile in market valuation. Their volatility discourages merchants and consumers from using them as a medium of exchange or store of value. Put simply, nobody wants to spend a currency that may be worth twice as much in a month, and nobody wants to store their retirement savings in a currency that may be worth nothing in a year.
Their volatility also prevents them from serving as a standard of deferred payment.
Anyone who negotiates rent, wages, or loans in a currency lacking a stable value is unavoidably also speculating on that currency’s future purchasing power. Relying on a volatile currency for such needs introduces unnecessary risk and makes it more difficult to coordinate effectively .Reserve Stabilization Protocolwhitepaper