Decentralised consensus and the disintermediation of trust

Despite the hype around blockchain, the key innovation that made cryptocurrencies possible was to create a reliable consensus mechanism to validate transactions in a decentralised manner. Although blockchains make clever use of cryptography to allow anyone to verify their integrity as a transactions ledger, the more fundamental problem was to ensure that only valid transactions enter the blockchain, and that they do so in a well-defined process.

The fallacy of uncollateralised stablecoins

Stablecoins are cryptocurrencies that are pegged to some underlying, such as the US dollar. In other words, one unit of a stablecoin pegged to the dollar should always be worth one dollar.

Our main conclusions are that uncollateralised stablecoins are problematic

(i) economically, as they will struggle to maintain their purported value; and, depending on the design,

(ii) in that some parties to such a system may have profited substantially at the expense of others should it collapse.