Introducing “Type III Stablecoins,” a new category of yield-bearing stablecoins

The Stanford Blockchain Club published a paper on March 28 introducing “Type III Stablecoins,” a new category of yield-bearing stablecoins

Stanford Blockchain Club published a paper on March 28 introducing “Type III Stablecoins,” a new category of yield-bearing stablecoins governed by autonomous smart contracts, developed by Cap Labs' Benjamin and Jae.

Yield Without Compromise? Type III Stablecoins Propose a Trustless Path Forward

A new paper published in the Stanford Blockchain Review introduces “Type III Stablecoins” — a unique category of yield-bearing stablecoins governed by autonomous smart contracts, devised by Cap Labs' Benjamin and Jae. The paper, titled "Yield Without Compromise: Type III Stablecoins and the Final Frontier of Decentralized Finance," is a contribution to the Stanford Blockchain Review.

The research positions Type III as a solution to the scalability and safety limitations of existing yield-bearing stablecoins, exploring a paradigm shift in decentralized finance (DeFi) with an architecture that minimizes human intervention.

Capitalizing on the burgeoning interest in yield-bearing stablecoins, the framework presents a model where smart contracts durably enforce the rules for capital allocation, operator oversight, and user protection. In contrast to Type I (centralized) or Type II (DAO-managed) stablecoins, Type III diverts decision-making to "restakers" who pledge assets to back third-party operators. These operators, in turn, generate yield through capital efficient strategies like lending, while restakers are incentivized to prioritize safety due to direct exposure to slashing risks if strategies fail.

The framework, presented by Benjamin at ETH Denver's Stable Summit, addresses key challenges in current yield models. Type I stablecoins, despite their early success, are limited by small, overworked teams and products becoming obsolete. On the other hand, Type II stablecoins, managed by decentralized autonomous organizations (DAOs), face corruption risks in decentralized committees and lack clear recourse for slashed funds.

Cap Labs' solution proposes an architecture where strategy shifts are automated via market-driven interest rates, and slashed funds are redistributed to users during failures, ensuring verifiable recourse without resorting to legal intermediaries. However, the paper acknowledges trade-offs. Complex smart contract dependencies could introduce technical risks, and initial adoption will be restricted to accredited institutions due to the inherent complexities that require familiarity and care.

Despite this, proponents argue that the model's latency reduction and permissionless long-term vision could unlock mass adoption of yield-bearing stablecoins, which currently comprise just 10% of the $200B stablecoin market.

Cap Labs' innovation arrives as TradFi institutions are increasingly exploring DeFi integrations, presenting both opportunities and pressing challenges.

Stablecoins today remain tethered to the frailties of human misjudgment and discretionary control. Yet, yield-bearing variants of stablecoins are burgeoning, presenting a new frontier in DeFi. The paper contends that these endeavors will falter in achieving scalable growth unless manual oversight is excised from capital distribution.

It is within this context that Cap Labs' Type III stablecoins architecture seeks to harmonize motives among operators, restakers, and end-users through the immutable precision of code-driven governance. As the first architect of Type III, Cap Labs envisions a phased deployment, initially engaging institutional collaborators to fortify foundational trust in the system. This initial phase will be crucial for laying the groundwork and securing the necessary capital for large-scale operations.

After establishing a solid foundation, the next step will be to democratize access, enabling a wider range of participants to join the ecosystem and contribute to its growth. This expansion will be key for realizing the full potential of Type III stablecoins and realizing their promise of a decentralized and prosperous DeFi future.

This blueprint, therefore, attempts to classify and evaluate the emerging generation of yield-bearing stablecoins, presenting a framework for navigating this evolving landscape in the Stanford Blockchain Review. It also aims to highlight the pressing need for innovation in designing scalable and sustainable yield models for the long-term growth of the stablecoin industry.

This initiative underscores the ongoing efforts to push the boundaries of DeFi and create novel solutions to pressing problems in the blockchain space. As institutions increasingly interact with DeFi protocols, pressing concerns regarding legal clarity, technical robustness, and economic sustainability are coming into sharper focus.