All risk, no gain? The vague definition of stablecoins is causing problems.

It is a sign of our industry’s youth that we routinely fail to provide a coherent descriptive definition of a stablecoin.
Sometimes, “stablecoins” and variants such as “algorithmic stablecoins” function like historical names, as they refer to projects that call themselves stablecoins, such as Basis Cash, Elastic Set Dollar, Frax and their clones.

The word "stablecoin" can be used as a logical description for “a cryptocurrency designed to have low price volatility” and has “stores of value or units of account,” or “a new type of cryptocurrency that often have their value pegged to another asset… designed to tackle the inherent volatility seen in cryptocurrency prices,” or a currency that can “act as a medium of monetary exchange and a mode of storage of monetary value, and its value should remain relatively stable over longer time horizons.”

On the more metaphysically speculative end, some have defined a stablecoin as “an asset that prices itself, rather than an asset that is priced by supply and demand. This goes against everything we know about how markets work.”


Circularity is the core issue, as I see it. The alleged deficiency of Bitcoin (BTC) as money and a vague definition originally inspired a host of stablecoin projects. The design features of these projects have now been incorporated back into the stablecoin definition.

Haseeb Qureshi — a software engineer, author and famous altruist — defines a stablecoin as simply a price peg. Yet, it is not obvious that anything with a peg should bear the name of stablecoin. Ampleforth has a “peg” and has been bucketed into the stablecoin category. The founding team routinely clarifies that it is no such thing.

So, who is right?
Another example of just what exactly is “stable” in a stablecoin — the peg or its value? Wrapped Bitcoin (wBTC) is perfectly pegged to Bitcoin — one wBTC will always be one BTC. Is that a stablecoin?

According to the original motivations for creating stablecoins, BTC is not a stable means of exchange, even though Bitcoin is the canonical “store of value” asset.

Having clarified the problem — that no one knows how to define or recognize a stablecoin — the rest of this essay outlines a solution. It provides a well-defined description of value as a relational property, namely, “value in terms of a measurement unit.”

Using this description, I then comprehensively classify all digital assets along two dimensions — risk of loss, or the probability of realizing a decrease in value, and risk of gain, or the probability of realizing an increase in value. We can then precisely and logically define stablecoins: assets where the risk of loss and risk of gain are both zero.