How to issue stable currency based on Bitcoin?
Editor's Note: This article comes fromGu Yanxi, published with permission.
Editor's Note: This article comes from
Gu YanxiLibra Project Research Analysis Report, published with permission.The emergence of the Libra project has increased the market attention of stablecoins by an order of magnitude. This project not only forces global financial regulators and central banks to formulate corresponding countermeasures, but also stimulates enthusiasm for stablecoin products in the market. Because the scope of the Libra project is too large, there are huge risks in all aspects, and there is great uncertainty in its future. But Libra's design and promotion experience will definitely be used as a reference for similar projects in the market. There will definitely be stable currency projects with more reasonable design and more feasible application promotion in the market.A few days after Libra's white paper was released, I published a research analysis report on it (Libra Project Research Analysis Report）。
) proposes that a very possible stablecoin generation method is based on digital asset mortgages and is generated in a distributed manner. Another article I published later (
How to create a new stable currency that competes with Libra?
) explains in more detail how this stablecoin is generated. However, the current scale of digital assets based on physical assets and equity is still very small, so the practical application of this stable currency generation mechanism is still relatively far away. In addition, whether a stable currency can really be promoted and applied in the market depends on many factors, and a reasonable generation mechanism is only one of them. Some other more important factors include the positioning and application scenarios of stablecoins, etc. Due to the development of blockchain technology and encrypted digital assets, the technical cost of issuing digital stable coins is very low, and various stable coins have appeared now. There will definitely be more types of stablecoins in the future. The product design and market positioning of stable currency products are therefore as important as the technical generation mechanism and financial attributes of stable currency. In this regard, stablecoins are the same as other product promotion mechanisms (
So many public chains, so few applications
At the current stage, a very feasible way to mint coins is to issue stable coins based on Bitcoin. If this minting mechanism is properly designed and positioned correctly, stablecoins issued in this way will be properly used at present.
1. The current currency value basis and circulation systemFor most of the history of human life, gold has been used as currency. The basic characteristics of gold are that the total stock is limited, can be divided into very small parts, has a very long life and is easy to carry. These characteristics make it a value carrier and a means of value circulation. In modern economic life, currencies linked to gold appeared. The Bretton Woods agreement established the dollar's peg to gold. The US dollar is used as the currency in circulation around the world. Due to the development of electronic technology, currency can also be circulated in the form of electronic bookkeeping in addition to the existing circulation methods of banknotes and coins. The value of the U.S. dollar is anchored to gold, and the media supporting its circulation are banknotes, coins and electronic bookkeeping. Such a new flow method is more conducive to the circulation and use of US dollars on a global scale.The U.S. government spent heavily during the Vietnam War. To cover such expenditures, the U.S. government prints vast amounts of dollars. As a result, the price of the US dollar cannot continue to be pegged to the price determined by Bretton Woods. Nixon was forced to decouple the dollar from gold in 1973. Since then, the U.S. dollar has relied on the credit issuance of the U.S. government and is no longer a gold standard currency.
2. Coinage model based on digital assets
At present, the representative project based on digital asset mortgage and distributed stablecoin generation is MakerDao. MakerDao takes Ethereum as collateral. The market transaction price of Ether is the basis of the value of this stablecoin DAI. MakerDAO uses smart contracts to automate the entire minting process. The mortgage assets used by users to mint coins are hosted on Ethereum. The entire minting process is done entirely through smart contracts without any human intervention. Such a coinage process is completely decentralized, which is completely different from the previous centralized coinage process, and is an essential change in the coinage process. But the limitation of the MakerDao project is that it only supports minting based on Ethereum. The number of underlying assets is limited, so the number of stablecoins that can be issued is also limited. On top of that, some basic elements of this minting mechanism are irrational (
Dissecting 'Most Promising' Stablecoin Project MakerDAO
), so it is difficult for the MakerDao project to support the issuance of a large number of stable coins.
3. Bitcoin-based coinage model
Satoshi Nakamoto's original intention was to design Bitcoin as a digital currency. However, due to the design problem of Bitcoin itself, when it began to circulate in the market, it did not become a digital currency, but a digital asset. Its value is formed through 7*24 transactions in exchanges around the world, which is completely the result of market consensus. Such a value consensus method is therefore more objective than the current method of determining the value of real estate and company stocks. The only difference is that Bitcoin is a so-called virtual asset, while other types of assets are actual assets. But regardless of its type, the value of Bitcoin is market-oriented and objective. Therefore, on the basis of such value, stable coins can be issued.
3.1. The market value of Bitcoin itself
Since its inception in early 2009, the total market value of Bitcoin has risen from zero to nearly $200 billion today. The highest period in history is about 400 billion US dollars. Using a part of this total market value as collateral, and then issuing stable coins on these collaterals, it is possible to issue a certain amount of stable coins.
3.2. Fairness of Bitcoin spot price
Bitcoin is not backed by any credit institution and its value is determined entirely through market transactions. Although there are many trading markets around the world that trade Bitcoin, since most of these trading markets are unregulated, the fairness of the market cannot be guaranteed. There are actually studies showing that the market price of Bitcoin is indeed manipulated. It is precisely because the fairness of this market price cannot be guaranteed that the US SEC has delayed in approving the listing and trading of Bitcoin ETFs. If stablecoins are issued based on Bitcoin, the fairness of the price of Bitcoin itself must be guaranteed. The measure that can be used for this is to use some fair price indexes in the market. For example, CME’s Bitcoin futures trading price uses a composite index from the British Facility Group. This composite index is based on several Bitcoin transactions in different regions. All prices are combined. Bakkt plans to launch one-day bitcoin futures based on physical delivery. This product is very beneficial in providing the real market price of Bitcoin. Based on these prices, stablecoin issuers can provide the real market price of Bitcoin in real time.
3.3. Sufficient Liquidity Support
The foundation of this minting model is sufficient liquidity. When the value of the mortgaged Bitcoin falls to the liquidation point, the stablecoin issuer needs to have enough market liquidity to sell the mortgaged assets. This requires the stablecoin issuer to cooperate with the world's largest bitcoin exchange and be able to trade out the mortgaged bitcoin assets in a timely manner. This problem will actually be a very big challenge. Because the amount of Bitcoin assets that it needs to dispose of must be huge. It is a very strong professional job to sell such assets in a short period of time without causing the price of the secondary market to drop sharply.
3.4. Technical architecture of minting process
One of the main reasons why there is no stablecoin issued based on Bitcoin mortgage in the market at present is that stablecoins cannot be generated in a distributed manner based on smart contracts. On Ethereum, the mortgage of Ethereum, the generation of stable currency DAI, and the liquidation of collateral can be completely controlled through smart contracts. But because the bottom layer of Bitcoin's blockchain cannot provide such a function, it is impossible to realize the automatic minting process by fully adopting technology. Therefore, a new technical architecture must be needed to realize such a minting process. Such a technical architecture will have two layers. The bottom layer is Bitcoin's blockchain for Bitcoin custody. The upper layer is the blockchain that supports smart contracts. The underlying Bitcoin needs to be mapped to the upper layer. At the upper layer, smart contracts are also used to support the entire minting process.
3.5. Escrow of staked bitcoins
There are two ways to escrow the mortgaged bitcoins. One is a fully centralized hosting model, and the other is an on-chain hosting model based on technical solutions.
The advantage of the centralized hosting solution is that cold storage can be adopted. Keep the escrowed bitcoins in a physically isolated manner. This greatly reduces the chances of technical hackers stealing bitcoins. But this approach also has its obvious weaknesses. First of all, it needs an institution with a compliant custody license to provide this business. It is not easy for such an institution to provide hosting services to all users globally. Since it is centralized hosting, there must be artificial uncertainty. Bitcoins mortgaged by users may not be freely used for other reasons. Finally, due to the centralized custody method, this method has weak responsiveness to the market, and cannot process the mortgaged bitcoins in a timely manner with market changes and customer needs.The advantage of using technical solutions to host Bitcoin is that the human factor is greatly reduced. This method can serve a wider range of users. Users are free to use their bitcoins according to predetermined rules. And this way is also more effective in responding to market changes and customer needs in a timely manner.)。
3.6. Organizations supporting minting
Since the birth of Bitcoin, the development of encrypted digital assets has basically followed three main lines, digital financial products, blockchains that support the circulation of digital financial products, and the application of consensus mechanisms in technology and social organization. In terms of organizational form, the first application of the company mechanism is The DAO of Ethereum. It is the first attempt to use the mechanism of community voting to jointly determine the technical development direction of Ethereum. The MakerDao project is also trying to apply the same voting decision-making mechanism. The Libra Association is also a development in this regard. Although it still operates by means of human decision-making and voting, in order to ensure a stronger foundation for organizational development, it is believed that the Libra Association will fix more business rules through smart contracts and execute them automatically, so as to obtain more The trust of many institutions and individuals to participate in the construction of this ecology. In future stablecoin projects, this kind of consensus mechanism based on technical guarantees will be a mainstream organizational form in alliance companies.
In such a minting process, it is very likely to adopt the method of super node alliance. Participating nodes jointly participate in the formulation of relevant minting policies, providing minimal human participation. It should have properties similar to the following: "An institution that issues tokens based on mortgaged ST assets must be a DAO institution with a joint decision-making mechanism composed of distributed nodes. The functions performed by this institution are similar to the central bank. This DAO is shared by some super nodes. These supernodes should be distributed in major economic regions around the world. DAO’s decision-making is decided by the voting of these supernodes. In this regard, the DPOS governance model of the public chain can be used for reference.”(
Bitcoin, the pioneer of everyone's coinage model
4. The core factors of this coinage model
4.1. Escrow mechanism
In this business, the security of assets is the primary concern. Whether it is a centralized custody method or a solution combining business and technology, it is necessary to ensure the safety and free use of customer assets.
4.2. Liquidity
The liquidity of digital asset transactions is the foundation of this business. Sufficient liquidity is not only a fair guarantee for the pricing of various digital assets and digital currencies, but also a guarantee for the security of customers' mortgage assets.
4.3. Blockchains that support the issuance of stablecoins
In this infrastructure, the second-tier blockchain needs to support the storage and circulation of stable coins. The performance of this blockchain can be simple or more complex. If it only supports a single financial product currency, such a blockchain can achieve better performance by giving up some functions. But if this is a Turing-complete blockchain that supports smart contracts, then such a blockchain will be more scalable in the future, but it needs to accept some shortcomings in performance. This is an important technical choice that the organization issuing this stablecoin needs to make.
4.4. Trustworthiness of operating organizations
In view of the fact that this coinage model cannot be completely completed with technology, there must be a social organization to provide a minimum of human management. The fairness and trustworthiness of such an organization are the key to this organization. The organizational model of the Libra Association can be used for reference in this regard. Due to the fairness and trustworthiness of the Libra Association organization, it can attract leading and direct competitors in related industries to join the association. Without the fairness and trustworthiness of such an organization, the minting business will not be able to attract more members to participate, so the business will not be able to expand.
5. Application Scenarios of New Stablecoins
The application scenarios of stablecoins will be diversified in the future. Digital stablecoins that perform a single function will appear in different application scenarios. In the current digital asset field, the most obvious growth trend is the global digital asset transaction. However, due to the compliance considerations of banks around the world, it is inconvenient for users around the world to use fiat currency for transactions. This also led to the creation of Tether, the first digital stablecoin. Among some stablecoin products produced after Tether, their main application scenario is still digital asset transactions. At the current stage, there is absolutely no need to apply digital stablecoins to retail payment services in an area where fiat currency is popular, because there is no such demand in the market. The best application scenario for stablecoins based on Bitcoin should still be digital asset transactions.
6. Impact on mainstream financial markets
According to the scale of Bitcoin’s market value of 200 billion U.S. dollars, and with reference to the current 2% of the total amount of Ethereum in MakerDAO, the market value of Bitcoin that can be used for minting coins is about 4 billion U.S. dollars. If the same discount rate as MakerDAO is used, the value of stablecoins that can be minted in this way is about 2.6 billion US dollars (4 billion US dollars * 67% = 2.6 billion US dollars). Such a volume is insignificant compared to the total market volume of mainstream currencies. In addition, since such stablecoins will definitely be mainly used in the field of digital asset transactions, they are not directly related to the real economy in terms of application fields. A stablecoin minted in this way would have negligible impact on the existing financial and economic system.
