Another type of “stable cryptocurrency”
Haseeb Qureshi had a great blog post dissecting three types of “stable cryptocurrencies”. Here’s the link to his article. It’s a good read, very logical and methodical, but I think there is another category of stable coins that Haseeb didn’t mention or consider — coins that have a consistent real rate of return. If the holders of a coin receive 5% annual return and if investors trust the source of this return this coin would be very stable by cryptocurrency’s standards and would trade with a volatility of a 10 year bond.
For instance, if there was a coin that generates 5% return annually (based on the initial value of 1 USD per coin) and the source of this return was such that investors had sufficient confidence that this return can continue in perpetuity or at least for a foreseeable future, this coin would find it’s price level in the marketplace. When price of such coin would decline the yield would go up until such time that investors would consider the yield attractive enough and would start buying these coins, and vice versa, as coin price appreciates, the yield would decline proportionally and some investors would be sellers of the coin as it would be considered to be overpriced. Such coin would be compared to other interest-generating instruments and would exhibit a fixed income like volatility. Off course, this model wouldn’t work if the source of the return is an external or artificial, for instance, if funds used to pay this interest were raised in the ICO that wouldn’t work because, obviously, the ICO funds will run out at that point and the coins will stop these payments. But if the source of the return is transparent and understood by the investment community, the longevity of this return will be trusted and the coin would be valued based on the relative strength of the return vs other interest-generating instruments.
Hypothetically, if a coin is issued on top of a blockchain that charges a small transaction fee, these fees can be collected and paid out to the coin holders as part of the POS process, if the amount of the fees collected was high enough to generate required return level, that could work. The investor’s confidence in such return will be based on the probability of maintaining the rate of the transactions on that blockchain.
Such POS blockchain model where coin holders are adequately compensated for their participation in the decentralized consensus mechanism would be a viable system in its own right. Producing a stable currency becomes a welcomed side effect of this design. The cryptocurrency issued on top of this blockchain would find it’s own level of stability based on the stable return that coin would produce. In such model, instead of targeting the coin price, the blockchain algorithm can target the rate of return (automatically increasing or decreasing coins in circulation) that in turn will have a direct effect on the price of the coin as well.
Additional coin price appreciation could be built in if an increase in the rate of return is programmed in. If the rate of return is set to increase each year by 5% (5% year one, 5.25% year two, etc.) we could create a stable coin with build in appreciation of the coin price. And again, we won’t be targeting the coin price or the rate of coin price appreciation, in fact, we can’t really predict where the price equilibrium will be found. The marketplace will determine the price based on supply and demand, but as long as the rate of return is stable, we can be sure that price stability will be found.
We at Fungible are working on including these ideas into our own blockchain design. Fungible is building a platform for asset-backed tokens with focus on the security and transparency of handling the underlying assets as well as real-time token creation and redemption. We have a number of stable tokens backed by fiat currencies, fiat currency baskets and cryptocurrency baskets in our product development roadmap. But deriving price stability from the price of the underlying asset has its own limitations. This type of stability comes with build in risk, inflation, devaluation, politics and other manipulations that underlying assets are exposed to. Fungible own stable cryptocurrency, where stability comes from a steady rate of return would make Fungible Platform stable and secure for all asset-backed tokens issued on top of the Fungible Network it would also make the Fungible Platform more attractive and useful to independent token designers and issuers that are looking for a secure and stable platform to issue their tokens.
Stay tuned!
