Mechanisms and Challenges of Price Stability in Stablecoins: A Systematic Literature Review

Stablecoin price stability is inherently linked to the underlying operations of crypto asset trading, decentralized finance, and cross-border payments as a bridge between fiat currencies and crypto assets. Nevertheless, the failure of TerraUSD in 2022 and its cascades of depegging episodes suggest that price stability is not a property of stablecoins by default, and the internal connection between the processes of stability achievement and the processes of instability is not yet systematically analyzed. Literature exists along two lines- mechanism design and risk problems but it is comparatively disjoint. Mechanism design literature addresses institutional structure and does not explain well what happens to particular mechanisms during a shock, whereas risk research literature addresses crisis description without comparing differences across mechanisms systematically. With stablecoin price stability as its theme, this paper will perform a systematic literature review. The starting point is the typology that explains the operational logic behind four stabilization mechanism types: fiat-collateralized, basket-collateralized, crypto-asset-collateralized, and algorithmic. By using both theoretical explanations and common examples of depegging, it discloses the failure pathways and the causes behind reserve trust crises, price manipulation and systemic risk contagion. Through the comparison of various mechanisms and challenges, it can infer the policy implications with respect to the regulation of reserves, the warning of early depegging, and cross-border cooperation. This paper brings mechanism design and risk issues together in a single analytical framework to correct the weakness of the current literature that has concentrated on one dimension, and establishes a literature base enabling regulators to understand the chain of transmission of stablecoin risks and develop differentiated regulatory instruments.