How bitcashBank Works
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.
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 cryptocurrencies as collateral.
The bitcashBank holds EOS, pBTC, pETH deposits and allows users to automatically obtain a credit line for new debt-based stablecoins called bitcashUSD. All the crypto that users deposit are pooled together in a treasury and the treasury automatically maintains a bitcashUSD supply at a prespecified loan-to-value (LTV) ratio (eg. 50%). As collateral value goes up and down the bitcashUSD supply is burned and created to match the LTV. We will manage the treasury to minimize the possibility of being undercollateralized. However if such an undercollateralized situation occurs, we will simply convert some bitcashUSD back to collateral gradually and as needed.
We believe this is the most elegant and graceful method to resolve black swan scenarios where cryptocurrency value drops suddenly and precipitously. Hence, it is possible for bitcashUSD holders to end up with crypto collateral in a once in a lifetime black swan event. In general, users will be able to spend their bitcashUSD credit line to pay others or use it to trade on leverage with no worries. Currently, bitcashUSD remains in the treasury when sent from one user to another. In the future, bitcashUSD could be sent to external wallets as wrapped bitcashUSD.
The main preventative measure to minimize any under-collateralization risk for the bank is to maintain the LTV ratios on a user-by-user basis. This is a variable parameter and can be adjusted. The LTV directly determines how much leveraged trading we allow on the system. When the global loan-to-value (LTV) ratio is low, we can enable trading of 5/10/20x. However as global LTV gets closer to 50%, we will only allow users to get up to 20x trading leverage (or 50% to 66% LTV respectively). The smart contract bank would routinely check LTV ratios on an ongoing basis and automatically margin-call individual user positions back below the maximum LTV to minimize the chances the treasury has to make up for any under-collateralization loss that a user incurs.
The users who are over-leveraged risk total loss, but we should not expect the treasury to bear any risk of funds unless the smart contract collateral checker somehow fails and the system is not able to initiate an emergency pause for trading in time.
In addition to individual collateral checks, our platform will also routinely check global collateral to maintain a 50% LTV system-wide and burn any bitcashUSD tokens in the treasury if necessary. Furthermore, bitcashBank plans to hedge treasury positions to mostly eliminate under-collateralization risk as described in the next section.
Trading and Hedging
We allow users to trade on leverage and take aggressive positions long or short any crypto asset with our first 100x Trade application. Our platform allows users to make frequent and rapid changes. Because our bitcashBank system does not require an order book and offers a great user experience, the smart contract bank effectively takes on the opposite side of every user trade and acts as a market maker. In general and with a random-walk hypothesis, market makers overtime should break even on trades ex-trading fees because long and short positions should balance over time. However, cryptocurrencies move in fast and rapid swings and trade on momentum. To reduce trading risk, the bitcashBank can reduce leverage on trading assets when a particular asset is overbought. The smart contract bank could also add higher trading fees based on leverage. Our initial beta version will start at a fixed trading fee of 1%.
Because the smart contract bank acts as a market maker, it can be seen more as an order routing system or aggregator on behalf of its users. The treasury can hedge its positions by buying or selling from other decentralized exchanges (and even centralized exchanges). If the smart contract bank is perfectly hedged, there will be no under-collateralization risk for the stablecoins. In order to hedge bitcashUSD, we can purchase USDT, USDC, or DAI or wrapped versions of US dollars on the EOS network. There is one caveat. The smart contract bank does incur the risk of the fiat-backed or external collateral stablecoins not maintaining its value. The bitcashOrg must determine the quality of any stablecoins it uses as a hedge and minimize counterparty risk.
With proper hedging no matter if prices of the collateral go up or down, the value of the treasury and bitcashUSD positions will remain the same and fully collateralized. Hence, hedging is a way to enforce the continual stability of our stablecoin system.
Source of Truth on Prices Oracle System and Delphi
One of the keys to a good stablecoin system is to have a strong oracle system & price feed to determine pricing between bitcashUSD and the crypto collateral (EOS, pBTC, pETH). 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. Hence, we rely on good price feeds more than other stablecoin systems since the price feed determines the ‘true’ price in our stablecoin system. The price feed frequency provides our community with relatively recent exchange pricing for trading and to establish the peg. We use Delphi, a price oracle system that is operated by a number of well-established EOS block producers ranked in the top 100. We plan to foster a more decentralized price feed system over time.
Depositor Incentives Sustainable Yield Farming
So how do we incentivize users to post collateral to increase the supply of bitcashUSD?
- We plan to distribute 80% of our exchange trading and platform revenue to those who stake EOS, pBTC, pETH on the platform in the form of new bitcashOrg network tokens. The revenue will flow to the bitcashOrg treasury and in return depositors earn new bitcashOrg network tokens at the prevailing market price of tokens.
The value exchange between depositors and bitcashOrg is fair and everyone who earns a share in the network organization is aligned with the bitcashOrg. The bitcashOrg also runs its organization in the same logical and fair manner. All contributions of time, value, ideas and capital to the bitcashOrg are rewarded in bitcashOrg network tokens.