Coin Watch - Stability Coins

There’s a category of crypto currencies which can be easily be called “stability coins”.

By far the most prominent is Tether. It is listed on most major crypto exchanges, and it presumes to be pegged to the US dollar.

The value for the trader is obvious. If a trader is expecting a crash of the whole crypto eco-system, he can transfer his wealth to dollars.

The value for the exchanges is also obvious. They outsource legal liability to the company that issued Tether. Instead of trading dollars, which have a myriad of legal consideration, they trade these digital tokens.

Unfortunately, Tether seems to be running on promises and wishful thinking. The Hong Kong company behind it did three months of monthly audits which abruptly ended in March 2017. There were rumors that banks blocked transfers of dollar into the company’s bank accounts.

So it seems unlikely that Tether tokens are backed by actual dollars. Despite this, Tether is currently trading at $0.997326, and has a $1.6B market cap.

Nubits and Dai and other stability-coin projects, which, unfortunately, I have not had time to research.

And then there’s bitUSD.

There’s also bitEUR, bitSilver, and bitGold, but they all work the same way. And it seems to me, this is by far the best digital peg I’ve encountered. I’ll explain how they work.

They all exist in bitShares, which started as a Dan Larimer project, but now runs as a Decentralized Autonomous Community (DAC). BitShares is a decentralized exchange. It’s also a system of governance, a lending platform, and many other things. You can trade Bitcoin and a few dozen other currencies. bitShares has its own money, namely, bitShares.

BitShares, unlike, Bitcoin, has a big supply of its currency that owned by the system. This is called the “reserve pool.” The BitShares community can vote to inflate the reserve pool for specific projects. To vote, you need to own Bitshares. I like how this aligns incentives. Imagine the people who hold US dollars voting whether to inflate, and how to distribute the newly create dollars, instead of the Federal Reserve doing so.

Anyway, back to bitUSD. Every bitUSD is backed by the bitShares reserve pool. So you can hold bitUSD for however long you want, and when/if you ever redeem them to bitShares, you’ll get the exchange rate at that particular moment. Right now, bitShares are about $0.50 each, so if you redeemed now, you’d get two bitShares for every bitUSD.

Furthermore, they keep a 200% reserve of bitShares. So if the supply of bitUSD is $1M, and each is redeemable for two bitShares, they keep a reserve of 4M instead of 2M.

Lastly, there’s an automatic mechanism which will liquidate bitUSD and trade them from bitShares in the event of a BlackSwan event that causes a very fast and dramatic fluctuation in the exchange rate beyond the reserve pool’s ability to cover it.

The same is true for bitGold, bitSilver, and bitEur. This seems pretty damn awesome.

Currently these assets are only traded on the BitShares decentralized exchange, but they’re trying to get them onto centralized exchanges.

Other interesting things about BitShares:

• BitShares has a deflation as as an inflation mechanism. Holders of Bitshares can nominate and vote on specific projects and then inflate the reserve to pay for them. Whenever you make a transaction, part of the fee is destroyed. That’s the deflation mechanism.

• I could not believe it actually works so well. The interface is about as good and responsive as those of centralized exchanges. And the exchange fee is literally fractions of a penny, in contract to the 1% which centralized exchanges usually charge.

• BitShares, as well as Dan Larimer’s current project EOS, have received criticism for being only loosely decentralized. There is a limit of hundreds of key nodes which do the actual work, instead of the limitless number in Bitcoin and Ether. Dan Larimer calls his approach “delegated proof of stake”. Holders of bitShares can nominate, hire and fire nodes. This architecture seems to give BitShares (and will give EOS) performance that I really didn’t think was possible. Dan argues that his approach has better dencentralized because while theoretically anyone can mine Bitcoin, in reality 75% of the mining power is in China, and they’re the ones making decisions. And it’s miners, not the holders of Bitcoins don’t directly make decision about the future of Bitcoin.

I am amazed by bitShares. It seems to eclipse the value propositions of other projects. For example, bitshares can do loans against 90% of the value of a digital asset that you put in escrow. Lending in the lone value proposition of SALT, which has a $400M market cap.

And their decentralized exchange is active and easy to use. I think what I wrote in my previous newsletter may have been wrong. Decentralized exchanges are not far away — at least not if you accept Dan Larimer’s “delegated proof of stake” as sufficiently decentralized.

Edit: Comments welcome.