Money As A Unit of Account
People are accustomed to the US dollar and local currencies as the unit of account. Debt-based money is hard for everyday people to grasp. Debt-based monetary theory is not even taught much in advanced academic institutions. The basic concepts are simple. Banks have the power to create money out of thin air. They do however create money as loans collateralized by real assets, namely real estate. Hence most of the US money supply is backed by real estate, not just the US military. Creating money from illiquid assets makes sense. It adds more monetary liquidity to the economy.
Simple Crypto-Collateralized Stablecoins
We can use a similar process that traditional banks use to create stablecoin dollars based on crypto assets just like fiat money is created out of thin air backed by real estate. Some examples of crypto assets that have succeeded in using this model include bitUSD from Bitshares and Dai from MakerDAO. We propose a similar yet simpler design to create stablecoins from EOS as collateral. A smart contract holds EOS and allows users to automatically obtain a credit line for new debt-based stablecoins called bUSD. All the EOS that users deposit are pooled together in a treasury and the treasury automatically maintains a bUSD supply at a prespecified loan-to-value (LTV) ratio (eg. 75%). We will manage the treasury to minimize the possibility of being undercollateralized. However if such an undercollateralized situation occurs, we will simply convert some bUSD back to EOS gradually and as needed. We can prioritize the conversion of bUSD back to EOS based on the length of time the bUSD has been dormant. This would minimize inconvenience, stale funds, hoarding and support the potential of bUSD as a circulating currency. In general outside rare occasions, users will spend their bUSD credit line to pay others or use it to buy more EOS without worry. Currently bUSD remains in the treasury when sent from one user to another. In the future bUSD could be sent to external wallets. The users must also maintain their own loan-to-value (LTV) ratio (eg. currently 66%) to minimize the chances the treasury pool is undercollateralized. Instead of displaying an LTV ratio to users we display a loan-to-equity (LTE) leverage ratio (eg. currently 200% or 3x leverage). Our platform routinely checks user LTE ratios and will issue immediate margin calls to reduce the bUSD loan so the LTE ratio remains below the requirement (eg. currently 200%) on an ongoing basis.
Oracle – Price Feed
One of the keys to a good stablecoin is a strong oracle system & price feed to determine pricing between bUSD and EOS. Instead of assuming a soft-peg as many other collateralized stablecoin systems do, we fix the peg to our price feed and provide automatic redemption. We start with an internally operated price feed that provides pricing every 5 or 10 seconds for redemption and trading. The price feed frequency provides our community with relatively recent exchange pricing for trading and to establish the peg. For margin call triggers and as a backup price feed we use the more moderately fluctuating Delphi Oracle. Delphi uses the median of price feeds generated every minute by a number of EOS block producers ranked in the top 50. We plan to foster or develop a more decentralized price feed system over time.
Simple Exchange + Margin Trading
So how do we incentivize users to post collateral to increase the supply of bUSD? We plan to distribute 80% of exchange trading and platform revenue to those who stake EOS on the platform. We’ll create a simple exchange market without an order book where users can easily buy & sell bUSD for EOS. When bUSD is created from EOS it could then allow users to 1) buy back into EOS to get a leveraged position on EOS or 2) lend their bUSD to others to buy EOS to gain a leveraged position. This would create a back & forth exchange between bUSD and EOS and a liquid bUSD/EOS trading pair exchange. EOS collateral in the stablecoin contract can also be lent to others to buy bUSD to gain a short position.
20% of the revenue will be distributed to the startup DAC to grow and fund new features and applications. The DAC will also update and refine the parameters & tokenomics of the smart contract to make sure we have an optimal tokenomic design.
Collateralized stablecoins like Bitshares & MakerDAO use various mechanics to handle undercollateralization, price feeds and pegging, as well as user experience. We believe our alternative design is more practical, effective and far more user-friendly. Instead of creating a soft peg using an independent stablecoin token asset like DAI/bitUSD that trades against its parent currency ETH/BTS in various exchanges, we fix our peg and create automatic redemptions to EOS based on our price feed. By relying on a price feed we can create a stronger peg that doesn’t require governance or interest rate manipulation. We also pool EOS deposits together to simplify trading, lending, and stablecoin creation mechanics that all happen in the background. Unlike Bitshares and MakerDAO we don’t have one global settlement for black swan events. We have a more natural and progressive margin maintenance system that gradually converts bUSD to EOS to minimize undercollateralized situations. The platform leverages the power of the community. Our entire stablecoin generation process is abstracted away from the user so they do not each have to spend time & endure the hassle of going through the painstaking steps of creating stablecoins themselves to ultimately achieve the same objectives. Instead users get to immediately experience the stablecoin’s power to help them trade with leverage, purchase goods & services from a credit line and minimize price volatility risk.