Seigniorage Supply (Algorithmic) StableCoins with 2019 Complete Guide!
2019 Complete StableCoin Guide
Part 4 of 7
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If you haven’t read the first part of this, you may catch up so on my post here;
Simply stated, a StableCoin is a cryptocurrency pegged to another asset. Or, a global digital currency solely unrelated to a central entity. StableCoins make for practical usage of cryptocurrencies by allowing for secure, convenient transactions without the high volatility traditional cryptocurrencies hold. Now let’s move on….
Types of Stablecoins: Asset-Collateralized vs. Non-Collateralized
Define Asset-Collateralized StableCoins.
The socially agreed upon currency most countries use is termed ‘fiat’, which literally means ‘something that was created without effort.” Until 1971 world currencies were backed by gold. Before printed money; diamonds, silver, gold, land, estate and other goods were used as means for barter. Shifting from an asset backed currency to the current fiat system left centralized banks, governments, financial technologists, private entities, and economic experts with the concept of Asset-Collateralized StableCoins. These specific StableCoins’ purpose is to tokenize stable assets on a blockchain serving as a digital currency for means of speedy, secure and stable daily transactions. Stablecoins in this category should be guaranteed to exchange 1 : 1 StableCoin for its underlying asset.
Define Non-Collateralized StableCoins.
One argument states, fiat is not backed by any tangible asset, therefore; why should cryptocurrency only have value as an asset-backed currency? An opposing argument suggests currency merely must have an agreed upon “value” to be successful. Non-Collateralized Stablecoins were created as a medium. This category of digital currency is not backed by any “real-world” or cryptocurrency asset; but instead, maintains value by its users expectations of maintaining a certain value. The only current noted Non-Collateralized approach is the Seigniorage Supply (Algorithmic) StableCoin Model.
Each Category Broken Down
I’ve separated three different types of asset backed coins, one non-collateralized and a group of hybrids, in hopes of a more simplistic understanding.
Looking back, the first Asset-Collateralized StableCoin we discussed was Fiat- Collateralized. You can find that publication here:
Second, we covered Crypto-Collateralized StableCoin’s. That article is right here:
Now we are going to switch things up a bit and visit the only Non-Collateralized StableCoin Category.
Seigniorage Supply (Algorithmic) Stablecoins
Seigniorage Supply or Algorithmic StableCoins the only noted Non-Collateralized StableCoin. They’re an algorithmically governed approach to expanding and contracting a cryptocurrency’s money supply. Modeled after central banks’ management over their countries’ monetary supplies, Algorithmic StableCoins use algorithms to automatically increase or decrease StableCoins for a low volatile digital currency.
“Special thanks to Robert Sams for the development of Seigniorage Shares and insights regarding how to correctly value volatile coins in multi-currency systems.” Vitalik Buterin states in his 11.11.2014 publication “The Search for a Stable Cryptocurrency”. Sams published the Algorithmic StableCoin concept earlier that year. Crypto-enthusiasts and centralized companies created White Papers shortly after.
- Absence of Collateral. No tangible asset required. This StableCoin is created or destroyed by an algorithm, lessening errors from users.
- Autonomous. Cryptocurrency not influenced by outside markets.
- Decentralized.Trustless, onchain ledger providing secure digital currency.
- Stable. Theoretically protected against crypto volatility related to; automatic value adjustments based on market supply/demand.
- Supported. Many financial technology experts support Algorithmic StableCoins
- Complex. The rule-based system is integrated with complex logic, making understanding difficult for average investors and consumers.
- Futuristic. Relies on own future demand for successful StableCoin.
- New technology. Unproven successful methodology related to new, complex concept.
- Regulations. Real-world bonds are considered securities. Algorithmic StableCoin Bonds run the risk of also being classified as such, risking benefits of decentralization.
The Seigniorage Supply or Algorithmic StableCoins method uses ‘Smart Contracts’ that automatically expand and contract the supply of Non-Collateralized currency using algorithms to maintain value.
Said StableCoin has a $1 value. The price drops to $0.80, indicating supply of StableCoins is higher than demand. The algorithm uses seigniorage to buy ‘said’ StableCoin, thereby decreasing supply and pushing price back to $1.
In event price continues to remain under $1, and no remaining profits to purchase more of the coin’s supply; seigniorage shares are then issued. These are essentially “bonds” used to raise funds for network users. “Bonds” promise seigniorage profits to buyers. Users are essentially investing in the growth of Algorithmic StableCoins supply. When said StableCoin trades above $1, the algorithm issues additional tokens increasing supply until price returns to $1. Profits collected are termed “seigniorage”.
From The Swiss Finance Institute; Didier Sornette and Richard Senner released a publication stating recent use of Quantitative Easing (QE) tried to restore the US economy by flooding the market with new bonds. With that, they add, “QE was not overly effective because it did not channel new liquidity to ordinary people, who would have a high propensity to consume.”
Others claim “bonds” are merely a bet your investment will remain stable or grow. Preston Byrne closes his critique of a recently failed Algorithmic StableCoin, “An investment scheme backed by introducing new investors… and not backed by income-generating assets can be called a number of things. I leave it to you, dear reader, to decide what name you will choose to give to this one.”
“If executed well, this type of stablecoin will unlock rich possibilities for crypto holders since it will be decentralized, efficient, and free of counterparty risk. The approach is promising, albeit in need of testing.” Says Nat Wittayatanaseth on her Medium Publication. (Nice to meet you, Nat! Fabulous work!)
Seigniorage Supply (Algorithmic) StableCoins could potentially collapse in a cryptocurrency black swan event. A successful Non-Collateralized stablecoin could radically change financial technology, consumer trade and society views both; value and money. However, an unsuccessful Algorithmic StableCoin can be catastrophic and dramatically impact cryptocurrency.
Part 5/10 of Alyze Sam’s 2019 Complete StableCoin Guide
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