A stablecoin for the apocalypse
Disclaimer: this article represents the author’s opinions only and should not be considered investment advice.
Stablecoins are the talk of the town this year. Let’s dig in and then tear most of em’ apart.
While a formal definition remains elusive, most people will likely define a stablecoin as a crypto which remains stable by virtue of being pegged to the value of another currency or asset. This can be anything — another crypto, fiat, gold, etc.
The original stablecoin is of course, Tether (USDT). Tether is pegged to the price of USD and users of Tether trust Tether Holdings Limited to maintain a fiat reserve equivalent to the amount of tether in circulation.
Put quite simply, USDT is kinda like a digital arcade token that can be exchanged for Bitcoin (not fiat mind you). The original motivation behind the concept was to provide a ‘safe’ alternative to volatile crypto assets for traders without requiring them to pay expensive fees to retreat into true fiat.
The vast majority of stablecoins are iterations of Tether. Some promise better transparency than Tether (TrueCoin for example). Other, more ambitious projects aim to peg their coins without a fiat reserve as collateral. Maker proposes to peg to the price of USD using smart contracts, while Basis is attempting a peg based on indexes of asset classes.
There are many articles on Medium and elsewhere that discuss the various types of stablecoins out there, so I won’t go into any more detail. At the end of the day, these stablecoins nearly all fail when it comes to at least one of the two following parameters: economic autonomy (functionally meaning: can the coin function in a vacuum?) and decentralization.
This might not at first glance seem like a problem. After all, if the purpose of a stablecoin is to provide a retreat for traders, autonomy doesn’t much matter. Even decentralization might not be too critical if we can trust the governing body. However, many stablecoins have bigger ambitions.
Bitcoins price has historically, been volatile in the short term and increasing in the long term. This has made Bitcoin a great long term store of value, but a questionable short term medium of exchange. Why spend Bitcoin when you can hodl it?
This has naturally led many stablecoin projects out there to view themselves as having the potential to be better mediums of exchange than Bitcoin because they are, well, stable. Some even view themselves as being a strong alternative to fiat currency.
This is an admirable goal. But in this light, economic autonomy and decentralization are big frickin’ deals. Also, questions about scale, security and how these stablecoins address credit, money creation and other features seen in the fiat economy should be considered carefully.
To illustrate what a stablecoin must be to truly live up to that kind of hype, let’s pretend we are experiencing an apocalypse.
For arguments’ sake, lets assume that during the apocalypse, the internet is conveniently still up and power has not gone out. But governments are no longer functioning and fiat currency the world over is dead. Humanity has retreated to the only safe places they know: precious metals and Bitcoin.
Also, it’s dark and toxic and stuff. Like in Blade Runner. Or Mad Max.
Bitcoin has become the de facto medium of exchange because it is far easier to transact with than gold. Due to the amazing advances provided by lightning network, Bitcoin is able to scale to the needs of the entire globe.
However, not all is perfect in this Bitcoin dominated world (beyond the toxicity). Bitcoin’s fixed supply causes it to behave a lot like gold standard currencies once did in pre-apocalyptic countries. This means that it experiences devastating short term economic shocks alongside long term price increases. It remains the roller coaster we know and love.
If the last paragraphs made you angry, take a deep breath and read this article I wrote which compares Bitcoin to gold standard USD. If you still think I am completely wrong afterwards, I welcome you to abuse me in the comment section.
In this world of scarcity and economic instability a single heroic figure makes himself known. A programmer, economist and researcher, he is hell bent on delivering a stablecoin capable of providing for the worlds needs.
He determines that the currency must be:
- Money: must provide the 3 key characteristics of money: store of value, medium of exchange and unit of account. Read this for more.
- Autonomous: capable of functioning in a world without fiat or most other asset classes. Pegging prices to gold won’t work because that will be just as volatile as Bitcoin.
Bye bye USDT, TrueCoin, Maker, Basis, etc.
- Divisible: necessary for a currency to be widespread for a large population.
- Decentralized: after the fall of governments no one is going to make the mistake of creating a centralized currency again. This also means no solutions that rely on a council of decision makers.
Bye bye USDT (again), TrueCoin (again), Havven, InitiativeQ, etc.
- Secure: no duh.
- Scalable: Must be able to process enough transactions to serve the entire population.
It’s the summer of 2018. The sun is still shining. Toxicity levels are normal(ish). Trump is in the Whitehouse. Bitcoin is still facing an uphill adoption battle. The crypto market is very much in a funk (sigh).
And yet, perhaps an apocalypse-ready stablecoin is more than just a thought exercise.
The heartbreaking situation in Venezuela is the perfect example for how things can go wrong very suddenly. The US Federal Reserve is fairly successful and USD is therefore a stable currency. But who is to say what the future may bring?
Should a stablecoin be able to live up to apocalyptic requirements, it could truly be a competitor for fiat. This would finally help us get rid of those pesky banks once and for all and provide safety from economic crises caused by bad regulation.
Let’s redefine what a stablecoin is according to apocalyptic requirements.
“A stablecoin is an autonomous, secure, decentralized and scalable cryptocurrency which minimizes economic shocks and successfully provides the three key features of money: store of value, medium of exchange and unit of account.”
A bit of a mouthful but I think we covered all our bases. To achieve this, a stablecoin should probably try to learn from fiat currencies. Or at least from the things that fiat does well.
Fiat is better at dealing with economic shocks than gold standard currency (and Bitcoin) in large part because it has a dynamic money supply. To use USD as a (grossly simplified) example for how this works: the fed loans newly created dollars to commercial banks which then loan out that money at a 10:1 ratio according to the fractional reserve system. In essence, every dollar created by the fed is multiplied at a factor of 10 in the economy. This enables the fed to enact economic policies aimed at minimizing shocks and promoting a healthy economy.
Of course the ugly side of this is that we are reliant on a central bank to make good decisions. When they mess up, hyperinflation can occur as well as other problems. Also, the system is rigged against the little guys. Commercial banks get access to juicy federal loans and to the big business of the 10:1 ratio we talked about earlier (they of course loan out that newly created money at higher interest rates to the population). Read more here about money supply.
Disclaimer #2: I am not involved with the Ryo project in any way, but I do intend on participating in their airdrop.
Side note: the Ryo project I talk about below has NOTHING in common with Ryo, the Sumokoin fork. Afaik, there are plans to change the name.
The only crypto that I know of that might have a chance of functioning in an apocalypse today is Ryo.
The main focus of this project is to create a cryptocurrency with a dynamic money supply rate that adjusts based on the price of money in the system, minimizes economic shocks and is an ideal medium of exchange.
In fiat, a central bank has a monopoly on money supply, meaning that they dictate the price of money by creating the amount that suits regulator strategy. Ryo proposes a system in which the price of money is the result of free market economics, or simple supply and demand. The gist of it to cut out the fed and commercial banks from the money creation process and to make a fairer type of money.
In order to achieve this, Ryo has a two token architecture. Ryo tokens function as exchangeable money and Trust tokens serve as a credit score of sorts. Trust tokens cannot be transferred from account to account. An account can increase its Trust token balance by engaging in peer-to-peer loans (by lending money and by paying back loans with interest).
Accounts with higher Trust token balances are able to create more money when they mine Ryo, so every miner is like a mini central bank. The Trust balance also functions as a nifty credit score for an account as it reflects economic behavior.
When the price of money and interest rates are low, more people are likely to take out P2P loans and successfully pay them back with interest. This will result in many accounts with high Trust balances, causing an increase in the money creation rate in the short term.
“every miner is like a mini central bank”
On the other hand, when the economy slows, the price of money will increase and less people will engage in loans, causing Trust to be lower across the system. This will result in a slower rate of money creation in the short term.
This concept is elegant and seems to promise money supply rate changes as offered by fiat, but in a completely decentralized way while being a better store of value than fiat. Also, P2P loans replace the need for institutional loans seen today. Economically speaking, Ryo could exist in a vacuum and be perfectly fine.
From a technical perspective, Ryo is based on a clone of Nxt source code. When a miner generates new money, they also secure the blockchain. This process is coined as Proof of Trust, a twist on PoS that uses the Trust token as the stake parameter instead of the actual token stake as seen in traditional PoS.
The core blockchain tech is very very similar to Nxt, which is probably a good thing as Nxt is a mature project. Ryo is currently in testnet, so I have little doubt that changes will still be made down the line. I know the project is looking for more devs. If you have more questions I recommend reading the whitepaper at the Ryo website — it addresses economic aspects of the project in more detail and also drills down into technical/cryptographic questions.
The important thing to note, is that Ryo seems to have the potential to provide a secure, divisible and scalable solution that fits the apocalypse-ready template very well.
Lastly, Ryo is not an ICO. The anonymous team has been developing the product for about a year and are close to launching mainnet, which is refreshing after so many projects that have nothing beyond a whitepaper. They plan on distributing the first chunk of coins via airdrop to Nxt owners, however final details are not yet published at time of writing.
Philosophically speaking, they believe that Bitcoin is the ideal store of value and view Ryo as a medium of exchange in synergy with Bitcoin. They intend on open sourcing the code alongside the launch.
To summarize, I believe that there is value in an apocalypse-ready crypto. Venezuela has shown us that. It seems to me that projects aiming to do so will only become more important as crypto gains wide stream attention and begins to truly challenge fiat. I think that Ryo has the potential to deliver, and am keeping my eyes open for more projects that fit this mold.