Designing Autonomous Markets for Stablecoin Monetary Policy

Abstract: We develop a new type of automated market maker (AMM) that helps to maintain stability and long-term viability in a stablecoin. This primary market AMM (P-AMM) is an autonomous mechanism for pricing minting and redemption of stablecoins in all possible states and is designed to achieve several desirable properties. We first cover several case studies of current ad hoc stablecoin issuance and redemption mechanisms, several of which have contributed to recent stablecoin de-peggings, and formulate desirable properties of a P-AMM that support stability and usability. We then design a P-AMM redemption curve and show that it satisfies these properties, including bounded loss for both the protocol and stablecoin holders. We further show that this redemption curve is path independent and has properties of path deficiency in extended settings involving trading fees and a separate minting curve. This means that system health weakly improves relative to the path independent setting along any trading curve and that there is no incentive to strategically subdivide redemptions. Finally, we show how to implement the P-AMM efficiently on-chain.