May 22, 2018
Resource Allocation StableCoins p1.
MYLES SNIDER’s article An overview of Stablecoins by MultiCoin Capital, layouts out three designs for stablecoins:
- Centralized IOU Issuance
- Collateral Backed
- Seigniorage Shares
In this brief article I would like to posit a 4th kind of Stablecoin that has not yet appeared on the market: Resource Activity.
Centralized IOU Issuance works like Tether, in that one organization keeps a running balance of all outstanding IOU’s which are theoretically redeemable at any time (theoretically). Collateral backed stablecoins work by programmatically managing a portfolio of other decentralized tokens and/or assets in the goal of keeping the value of tokens stable. Seigniorage shares work by programmatically inflating and constricting supply based on market demand.
What none of these models take into account however is the economic activity of the underlying infrastructure on which they run. This is partially because currently blockchains by and large do not properly expose the internal market dynamics of their protocols. An example of this is bitcoin’s economic mismatch between security and usefulness. Bitcoin provides coin holders with unparalleled security for storage of their bitcoin assets. This security is paid for via mining rewards and transaction fees. Active users pay a disproportionate share in the security of the network via fees when compared to users who simply store their assets long term without transacting. Satoshi herself, believed to be the largest single coin-holder, has for the most part never moved any of her vast fortune of coins. Despite holding the equivalent of billions, she receives an incredible level of security for essentially free while ordinary users who transact on a daily basis are the payers who will eventually become the sole motivation for miners to continue to secure the network. There is no market mechanism that forces ‘savers’ to contribute to their own security.
GasToken
What if long term savers were able to do something with their money? Something productive in the economic sense? Enter GasToken. Ethereum in general has similar economic imbalances to bitcoin but GasToken exposes a special kind of internal, protocol level, economic mechanism: the price of computation. GasToken takes this further by allowing individuals via a rebate mechanism to pre-purchase gas at lower prices and then redeem during periods of high-computational cost.
This creates a fascinating blockchain-internal market mechanism. Since as long as the Ethereum network is a desirable commodity, gas will also always be desirable, and there is a strong correlation directly between the usefulness of Ethereum as a whole and the price of gas. The more useful and in-demand the network, the higher the price of gas. With a system like GasToken, in an efficient system we should eventually see ethereum users hedging their gas costs by saving up for gas in advance of their transactions and if the price of ethereum continues to grow (and thus the price of gas) we should also see users eventually scheduling their network usage taking in account the cost of gas in their budgets.
What this means is that long term we would expect the spot price of Gas to eventually become fairly stable in relation to ETH. An ETH pegged stable coin conceivably needs only to wrap up bundles of GasToken contracts (Indeed GasToken allows gas to be represented as a ERC-20 token) and then buy and sell gas to keep it’s value stable. Taking this idea further, GasToken could dramatically increase it’s capitalization if it were to pay out fee’s/commissions for it’s usage and become adopted by large/popular smart contracts as a general mechanism.
Theoretically this model should lead to eventually stabilizing the cost of computation on the Ethereum network as when gas is cheap, speculators buy it up and when it’s expensive, users offset their expenses by buying gas back from the speculators, plus some fee that the speculators keep.
In practical terms, the friction of GasToken probably makes this homeostasis unlikely. But it points to the possibility of building stable value financial instruments based on network resources, rather than external oracles, complicated math, or exotic token portfolios.
The Real Stable Coin
I think it’s quite reasonable to think we can build stablecoins that peg to network resource allocation markets on a protocol level. Most current stablecoins are attempting to peg their value to USD, which in my opinion, is solving a problem that very few people currently have. While the money transfer example where the value of money fluctuates in transit is real- it affects a relatively small portion of the current existing market. (One can make the case it’s a small portion of the market because of this problem) On the other hand, all Ethereum users are affected by the unpredictable nature of gas costs, so it seems reasonable to conclude that the demand and market forces for such a product would be high. The catch is wether or not their exists a mechanism with a great enough efficiency to make it possible.
In Part2 I’ll talk about how the internal resource markets on EOS might make this type of stablecoin possible.
