Rational Ponzi Game in Algorithmic Stablecoin

Fu, Shange; Wang, Qin; Yu, Jiangshan; Chen, Shiping

doi:10.1109/icbc56567.2023.10174904

Cited by 5 publications

(1 citation statement)

References 13 publications

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“…Klages-Mundt A. and Schuldenzucker S. 21 design a new type of automated market maker (AMM) that can help to maintain long-term viability and stability in a stablecoin. Fu et al 22 apply rational Ponzi game model to study the stability issue in algorithmic stablecoins. Clements R. 23 studies the inherent fragility in algorithmic stablecoins and claims that they are built to fail.…”

Section: Related Workmentioning

confidence: 99%

Leveraging Ponzi-like Designs in Stablecoins

Wang

et al. 2023

Preprint

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Stablecoin is a medium of exchange with stable value in the world of decentralized finance (DeFi). In which, algorithmic stablecoins are one special type of stablecoins that are not backed by any asset. They stand to revolutionize the way a sovereign fiat operates. As implemented, algorithmic stablecoins are poorly stabilized in most cases; their prices easily deviate from the target or even fall into a catastrophic collapse, and are as a result often dismissed as a Ponzi scheme. However, what is the essence of Ponzi? In this paper, we try to clarify such a deceptive concept and reveal how algorithmic stablecoins work from a higher level. We find that Ponzi is basically a financial protocol that pays existing investors with funds collected from new ones. Running a Ponzi, however, does not necessarily imply that any participant is in any sense losing out, as long as the game can be perpetually rolled over. Economists call such realization as a rational Ponzi game. We thereby propose a rational model in the context of algorithmic stablecoins and draw its holding conditions. We apply the model to examine: whether or not the algorithmic stablecoin is a rational Ponzi game. Accordingly, we discuss two types of algorithmic stablecoins (Rebase & Seigniorage Shares) and dig into the historical market performance of a number of impactful projects to demonstrate the effectiveness of our model.

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Section: Related Workmentioning

confidence: 99%

Leveraging Ponzi-like Designs in Stablecoins

Wang

et al. 2023

Preprint

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Leveraging Ponzi‐like designs in stablecoins

Fu,

Wang,

et al. 2024

Int J Network Mgmt

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Stablecoin represents a unique subset of cryptocurrencies designed to offer price stability, achieved either through backing by specific assets or by employing algorithms that adjust their supply in response to market demand. In its landscape, algorithmic stablecoin is one special type that is not backed by any asset, and it stands to revolutionize the way a sovereign fiat operates. As implemented, algorithmic stablecoins are poorly stabilized in most cases; their prices easily deviate from the target or even fall into a catastrophic collapse and are as a result often dismissed as a Ponzi scheme. However, what is the essence of Ponzi? In this paper, we try to clarify such a deceptive concept and reveal how algorithmic stablecoin works from a higher level. We find that Ponzi is basically a financial protocol that pays existing investors with funds collected from new ones. Running a Ponzi, however, does not necessarily imply that any participant is in any sense losing out, as long as the game can be perpetually rolled over. Economists call such realization as a rational Ponzi game. We accordingly propose a rational model in the context of algorithmic stablecoin and draw its holding conditions. We apply the model and use historical data to examine if the major types of algorithmic stablecoins meet the criteria for being a rational Ponzi game.

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FTX Collapse: A Ponzi Story

Fu,

Wang,

et al. 2023

Lecture Notes in Computer Science

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Rational Ponzi Game in Algorithmic Stablecoin

Cited by 5 publications

References 13 publications

Leveraging Ponzi-like Designs in Stablecoins

Leveraging Ponzi-like Designs in Stablecoins

Leveraging Ponzi‐like designs in stablecoins

FTX Collapse: A Ponzi Story

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