Stablecoin Pegging V: Pegging with RWA and AI

Stablecoin Pegging V: AI and RWA Pegging

Statblecoin Design Goals and the Trilemma

Let us look more closely into some of the fundamental goals of stablecoin design and how recently proposed protocols attempt to achieve these goals.

As Kampakis (2024) notes, stablecoin design has three goals: Decentralization, Capital Efficiency, Stability. All three goals cannot be achieved simultaneously. This is sometimes known as the "Stablecoin Trilemma". The three standard stablecoin designs prioritize two of these goals, at the expense of the third one.

• Fiat-backed stablecoins achieve high capital efficiency and stability, but need centralized reserve holding

• Crypto-backed stablecoins are decentralized and stable, but are overcollateralized and capital inefficient

• Algorithmic stablecoins are decentralized and capital efficient, but sorely lacking in safety and stability

New Designs

In recent months some new protocols have been proposed that attempt to resolve this trilemma, at least to an extent, by using AI and real-world asset tokens. For instance, the JANUS protocol proposes the following structure: issue two tokens, Alpha, the stablecoin that is “soft-pegged” to the reference price, and Omega, the “buffer” coin that is backed by RWA. In a stress event, the AI adjusts the system to sell Omega and buy Alpha. · The core idea is twofold: add RWA to Crypto collateral to reduce the need for overcollateralization, and use AI to monitor prices, collateral etc and adjust fees, rewards etc. to maintain the soft peg.

These ideas, or some variants are used in many other AI-based pegging systems:

• Use a basket of on‑chain tokenized assets as collateral

• Use AI that ingests price data from on-chain oracles and adjusts collateral basket weights

• Use soft‑pegs that use target bands

• Use on‑chain governance structures for compliance.

Conclusion

These new designs have decentralized their operations using on-chain oracles, governance, and smart adjustments, and they use dynamic weighting schemes to reduce the requirment for substantial overcollateralization. They have also proposed intriguing new ideas to achieve safety and stability. However, this aspect of the design will need to be battle tested with real-life stress events before they become widely accepted. Meanwhile, it will be a good idea to test their safety through simulation stress-tests.