As a follow-up to our article “Adaptive Emission: Making Blockchain Economy Real”, we want to add that solution to the volatility problem of cryptocurrency already exists. The solution is so-called “stablecoins” – tokens with a fixed rate and relatively low volatility. Stablecoins can be “associated” with various assets, including fiat currencies, precious metals, natural resources and other cryptocurrencies as well.
Stablecoins can be divided into two categories based on their types of collateral:
- Decentralized Solutions, based on the mechanisms provided by blockchains (including economic incentives for the participants);
- Trust-Based Solutions depend on the credibility of a counterparty which issues tokens where the collateral is external to the blockchain assets.
Decentralized Solutions
In this case, maintenance of the stability of the token price is handled without using resources external to the blockchain. A good example of this solution is the BitShares blockchain with its MPA (Market-Pegged Assets), also known as “bitAssets” with the notable prefix “bit”: bitUSD, bitCNY, bitSILVER, etc. The price of these assets matches the market asset price and should be secured by a collateral in a the form of BitShares, core-tokens equal to a minimum of 250% of the value of the issued assets.. This is managed by a corresponding smart contract. This is why bitAssets are usually called “smartcoins”.
This solution has its own risks for the individuals issuing bitAssets, depending on the core-token price. A margin call can occur in a strong bear market. This means that the collateral itself is used to buy back the asset and settle the debt in instances where the core token value drops below 175% of the value of bitAssets. However, this doesn’t affect token buyers at all, so if you’ve bought bitUSD, then you can be sure of its value. That’s why Bitshares workers don’t have any problem with receiving their salaries in bitUSD. In the 4 years of bitAsset’s existence, they have proven their reliability, and continue to play an important part in Bitshares ecosystem.
As of May 20, 2018 the BTS (core-token of the BitShares) capitalization was 671.5 million USD. At the same time, the capitalization of bitUSD was 14.5 million USD, while bitCNY was – 38 million USD. According to these figures, it’s clear to see that despite the intrinsic value of bitAssets, they did not get the widespread recognition that they may have deserved.
Regardless of recognition, there are some good solutions based on BitAssets. For example, PalmPay, a software-based payment platform that allows businesses to accept cryptocurrencies.
BitAssets are also a pretty effective implementation of stablecoins. Even now, they are being used in real business. And from our point of view, such a relatively low capitalization is merely the result of a lack of serious organizations who could have created solutions for businesses and integrators right from the launch of the platform.
Trust-Based Solutions
Trust-Based Solutions supply tokens with a collateral in a form of fiat currencies and other resources external to the blockchain. A great example is the Tether blockchain. Their token, which is connected to the market asset, is issued when the corresponding amount in equivalent assets (USD for USDT, etc.) arrives in a company account. When USD is withdrawn, USDT is destroyed.
This solution has great potential in business, which is confirmed by a USDT capitalization of $2.5 billion as of May 20, 2018. The most obvious advantage it provides real resources along with cryptographic security. In layman's terms, these tokens are essentially IOUs on a public ledger.
Of course, there are disadvantages as well. We should note that these tokens are secured by assets which are outside of to the blockchain. Due to the nature of centralized storage (outside the blockchain), participants can’t easily check the status of their collateral. This takes us back to the problem of trust in the issuer, who is responsible for asset storage and risk management, all of which is conducted in a centralized way. For example, the bank account of a token issuer may be frozen at any given time.
Gravity Stable Assets: Protocol Level
Gravity Protocol developers realize the importance of stablecoins in the crypto economy. Since the launch of blockchain technologies, business integrations have required fast and reliable solutions. Gravity Protocol is Graphene-based, which means that we initially add the possibility of creating all asset types on the protocol level the same way it’s been done in BitShares, including Market-Pegged Assets (or MPA) secured by a pledge in a form of core-token. You can freely trade these assets on Gravity DEX, using centralized and decentralized gateways of exchanging bitAssets to fiat currencies.
Any blockchain user can issue MPA by freezing core-tokens as a collateral. To answer the question of why you would need to do that, it’s best to start with a brief explanation of how bitAssets work.
The first aspect of bitAssets involves the creation of the stablecoin for pursuing rational economic activities. Many use it, but not many know that bitAssets can also be used for the creation of perpetual and interest-free loans from the blockchain under a collateral of existing core-tokens.
If a user has core-tokens, he can issue his bitAssets and freeze a particular amount as collateral. These bitAssets can then be used to generate profits. Below are just a few use cases (of course, there are many more possibilities than these!):
- A user sells bitAssets for fiat currency via the gateway and uses that money to create a business where he makes a deal or profitable investment. When the profit is gained, the user buys bitAssets using the gateway and pays off the debt and is, of course, left with the profit.
- A user sells bitAsset for another crypto-asset on the DEX, expecting that the price of this new token will grow. After selling the purchased token, the user will gain profit in bitAssets and pays off the original debt, leaving profit. This is similar to the bitAsset short position with respect to the purchased token. This user can choose any assets for this strategy, including core-tokens.
For a better understanding of how bitAssets work, we recommend you to read Stan Larimer’s (@stan) "Bookie Bob’s Solution to Bitcoin Volatility".
Gravity Stable Assets: Solutions Level
In order to provide a trustless and permissionless stablecoin that’s free from the counterparty risks, we’ve implemented Gravity analogs of bitAssets on the protocol level, and we consider this a reasonable solution. However, we do understand that if both options of the stable-coin implementation are associated to the mentioned risks, the blockchain participants should be able to diversify these risks and choose the most appropriate tools as well.
That’s why now, Gravity Solutions GmbH are developing cooperation with different payment services and systems, is looking for reliable partners worldwide in order to implement tokens secured by fiat currencies and other external resources to the Gravity platform.
Perhaps even a hybrid solution may be considered, which uses blockchain collateralized assets, that allows for not only trust in a counterparty, but with fiat backing as well, for ease of on and off ramping.
There’s no final solution yet, but we do understand the requirements for such solutions, and the necessary technology needed to implement them in Gravity Protocol. Gravity Solutions GmbH will develop this solution, together with several other final products, in order to provide the opportunity to its users to use the blockchain without interacting with cryptocurrencies directly.
In the future, both trust-based and decentralized implementations will organically coexist in the Gravity blockchain space, providing developers with the tools for solving various business integration tasks; which will significantly expand the amount of Gravity ecosystem members.
by Jahspear
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See the previous articles
Gravity Protocol Intro
Gravity Protocol Roadmap
A Deeper Look Into Dan Larimer’s radio
Gravity Protocol initial distribution
Adaptive Emission: Making Blockchain Economy Real
Gravity IPFS: Off-chain Data Storage
Gravity: Ecosystem Participants
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