How to make a digital currency on a blockchain stable

Abstract

Bitcoin and other similar digital currencies on blockchains are not ideal means for payment, because their prices tend to go up in the long term (thus people are incentivized to hoard those currencies), and to fluctuate widely in the short term (thus people would want to avoid risks of losing values).The reason why those blockchain currencies based on proof of work are unstable may be found in their designs that the supplies of currencies do not respond to their positive and negative demand shocks, as the authors have formulated in our past work.Continuing from our past work, this paper proposes minimal changes to the design of blockchain currencies so that their market prices are automatically stabilized, absorbing both positive and negative demand shocks of the currencies by autonomously controlling their supplies. Those changes are: 1) limiting re-adjustment of proof-of-work targets, 2) making mining rewards variable according to the observed over-threshold changes of block intervals, and 3) enforcing negative interests to remove old coins in circulation. We have made basic design checks and evaluations of these measures through simple simulations.In addition to stabilization of prices, the proposed measures may have effects of making those currencies preferred means for payment by disincentivizing hoarding, and improving sustainability of the currency systems by making rewards to miners perpetual.

Monetary Stabilization in Cryptocurrencies – Design Approaches and Open Questions

“…In traditional economics, stability can go beyond a long-term link to an foreign currency or some asset. As a consequence, we broaden the definition 1 to cryptocurrencies "with mechanisms to mitigate fluctations in their purchasing power". 4 The scope of our analysis is limited to stablecoins that are (i) permissionless, (ii) intended for general use as a currency, and (iii) provide a whitepaper and website.…”

“…Although cryptocurrencies like Bitcoin have gained a lot of attention over the last years, they have not been adopted as standard means of payment. The large fluctuations in coin prices are often cited as one of the main reasons for everyday users' reluctance [1]- [3]. An increasing number of cryptocurrencies consequently devote themselves to maintaining a stable price.…”

Blockchain for Internet of Things: A Survey

“…Take digital currency platforms as an example, where miners are keen on the price of digital currency. For instance, the BTC reward for a generated block will be halved every 210,000 blocks [118]. The reward decrement will discourage miners to contribute to the solution of the puzzle consequently migrating to other blockchain platforms.…”

What is Stablecoin?: A Survey on Price Stabilization Mechanisms for Decentralized Payment Systems

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