A client comes to us with a requirement: a fractional-reserve stablecoin to tie up less capital than DAI. The first bank run simulation shows that during mass redemptions, reserves are exhausted within 3 blocks. The algorithmic part fails to react in time, and the peg breaks. Fractional-reserve is a trade-off between capital efficiency and stability. Our experience shows that most teams undertaking the implementation underestimate the bank run mechanism in an on-chain context: smart contracts allow withdrawing everything in a single transaction. For example, if the governance token price drops 30% within one block, the system must remain solvent — we design protection against such scenarios. We can reduce liquidity costs significantly, making the project viable for startups.
How to Ensure Fractional-Reserve Stablecoin Stability Against Bank Run?
The Algorithmic Part Kills the Peg Faster Than It Seems — Developing Fractional Reserve
FRAX v1 launched with CR 100%, then the algorithm lowered CR as demand grew. Theory: if the market trusts the protocol, part of the collateral can be replaced with governance token FXS. In practice, after the SVB crash during the crisis period, CR fell below 90%, and recovery took several weeks of volatility. Not a failure, but a vivid example that the algorithmic part is not linear under pressure.
The key invariant to protect: redemption must always be possible at face value. If a user cannot burn 1 stablecoin and get $1 in collateral (or equivalent), the arbitrage mechanism is broken, and the peg relies solely on psychology.
Contract Architecture: Three Layers
Layer 1 — Minting/Redemption. The user deposits collateral (USDC, ETH via Chainlink price feed) and receives stablecoins. On mint at CR=80% — 80 cents in USDC + governance tokens worth 20 cents. On redeem — the reverse. This layer must be atomic and independent of on-chain governance token liquidity.
Layer 2 — PID Controller CR. An algorithm that raises CR on depeg downward and lowers it on stable peg. Critical: do not make changes instantaneously. A CR change of 1% per day is typical. A sharp change creates MEV opportunities for arbitrageurs who will attack the transition moment.
Layer 3 — AMO (Algorithmic Market Operations). Free reserves are deployed in Curve/Aave/Convex generating yield. AMO contracts must have a hard limit on maximum deployment: if AMO can allocate more than (1 - CR) of total supply, the system becomes vulnerable to simultaneous withdrawals.
Example PID Controller Parameters
P = 0.05, I = 0.001, D = 0.01. CR change limit: no more than 0.5% per block, no more than 1% per day. Triggers: if depeg > 0.5% down — increase CR by 0.2% each block until stabilization.Why Oracles Matter for Peg Maintenance?
Typical flash loan attack: attacker borrows a large amount of USDC, suppresses governance token price by 40% through a thin Uniswap v2 pool, the contract instantly recalculates CR via a TWAP oracle with a short window (5 minutes) — CR drops, the protocol becomes technically undercollateralized. The attacker then opens redemption and receives USDC from reserves at an unfavorable rate.
Protection: TWAP minimum 30 minutes for the governance token as a collateral component. For USDC and ETH, Chainlink with deviation threshold 0.5% suffices. Separate oracles for different components, not an aggregated price feed. Chainlink documentation recommends using TWAP oracles for low-liquidity assets and decentralized price feeds for major collaterals.
How We Build Such Systems
Development starts with the economic model, not code. We need to determine:
- Target CR range (e.g., 80-90%)
- PID parameters: CR change speed, trigger thresholds
- List of acceptable collateral assets and their weight coefficients
- Incentive mechanism for peg maintenance (stability fees, bond mechanism)
Hybrid collateral — a combination of collateral assets and an algorithmic part — allows achieving capital efficiency without losing stability.
Stack: Solidity 0.8.x, OpenZeppelin for access control and pausability, Chainlink for price feeds, Curve Finance SDK for AMO integration. Tests in Foundry with mainnet fork — mandatory because AMO logic depends on real Curve pool states.
For the governance token — standard ERC-20 with burn mechanism on stablecoin mint. Important: the governance token must not have infinite mint — this killed projects like Iron Finance (IRON/TITAN, where value dropped from $2B to $0 within 24 hours).
Testing Bank Run Scenario
In Foundry, we can simulate simultaneous redemption of 80% supply in one block. The contract must either handle this correctly (dispense USDC from reserves, freeze governance token portion) or activate a circuit breaker. Circuit breaker — a pausable module with timelock that introduces a cooldown on redemption when a threshold volume per block is exceeded.
Property-based test via Echidna: invariant "total_collateral_value / total_supply >= min_CR" must hold for any minting and redemption scenario.
PID Controller Parameters
| Parameter | Value |
|---|---|
| P | 0.05 |
| I | 0.001 |
| D | 0.01 |
| Max CR change per block | 0.5% |
| Max CR change per day | 1% |
| Trigger for upward CR adjustment | Depeg > 0.5% down |
Process
- Economic design (1-2 weeks). Parameterization of the model, simulation in Python/Jupyter, stress-test bank run scenarios. Determine thresholds where the system becomes unstable.
- Contract design (1 week). Storage layout, interfaces, interaction diagram. Special attention to operation order in mint/redeem (Checks-Effects-Interactions).
- Development (3-6 weeks). Core contracts + AMO + oracle integration. Fork tests against mainnet Curve/Aave.
- Audit. For financial protocols of this level — mandatory external audit. We prepare the codebase: Slither clean, 95%+ test coverage, NatSpec on all public functions.
- Deployment. First testnet (Sepolia) with simulated market stress via Foundry scripts. Mainnet deployment via Gnosis Safe multisig with timelock of at least 48 hours on parameter changes.
| Component | Timeline |
|---|---|
| Minimal system (without AMO) | 6-8 weeks |
| With AMO modules and full testing | 2-3 months |
| Preparation for external audit | 1-2 weeks |
Timelines and cost depend heavily on the number of collateral types and governance complexity. We will assess your project in 1-2 days — contact us to discuss details. Get a consultation today and start developing your fractional-reserve stablecoin.
What's Included
- Economic model with simulations
- Full set of smart contracts (mint/redeem, PID, AMO, governance token)
- Chainlink oracle and Curve AMO integration
- Tests with >95% coverage, including property-based and fork tests
- Documentation (NatSpec, technical specification)
- Audit preparation (Slither, Mythril, Echidna)
- Testnet and mainnet deployment via multisig
- Post-release support (1 month monitoring)
Our team has over 5 years of experience in DeFi protocol development and 10+ implemented stablecoin projects. We guarantee passing external audit and resilience to bank run scenarios. Order fractional-reserve stablecoin development — write to us for a consultation.