The Pillars of Boreal Stability — Part 1: Debt

Boreals (BRL) are a price-stable cryptocurrency built on the Ethereum blockchain, a new approach to solving the stablecoin problem. Boreals are backed by a combination of ether reserves, debt, and acceptance from retailers, beginning with IDEX. Each of these backings plays a role in generating demand for the currency or supporting its value. Today we’ll explore further the relationship between debt and currency, and how debt helps create demand for the boreal and maintain its price target.

Debt and currency have a long history together, a relationship that is captured through the credit theory of money. Proponents of this theory emphasize that currency and debt are essentially the same thing, two sides of the same coin. In his recent book, Debt: The First 5000 Years, anthropologist David Gerber provides historical evidence that the original purpose of monetary systems was to act as a unit of account for denominating debt. It was only later that this debt was “tokenized” into coinage that could be used to transfer the debt, coinage which eventually became valued due to containing a specific amount of precious metal.

Galway Bank: Early Bank Note

The concept of debt and money creation is also instrumental in our modern economy. Debt allows those who lack current financial resources, but who have other assets such as time or a business, to borrow against future revenue streams, multiplying the impact of their efforts. A worker can borrow for a car that allows them to get to their job, while a business borrows inventory on 30-day credit terms to increase their sales. Banks are the market’s answer to this need, intelligently allocating excess capital to those who can better leverage it and, in the process, earning a return on investment. When done responsibly, this compounds economic growth and creates more opportunity and prosperity for all.

Backing the Boreal with Debt

With responsible lending in mind, debt will be an integral component of the boreal. Borrowers will be subject to both a background and credit check, with identity services such as uPort and RepSys providing a measure of trustworthiness. Previous loan history, KYC attestations, and even less typical credit indicators such as professional skills and work experience will allow Aurora to build an accurate profile of the user. Credit will begin conservatively, but as borrowers build up a history the loan terms will improve, similar to today where a new college grad has a lower credit limit than someone who’s shown an ability to service a mortgage. The borrower can use the boreals directly to purchase products and services on the Ethereum network, or sell them on the open market for another cryptocurrency.

The loan system not only serves as a method for distributing boreals, but also as a core driver of demand, ensuring that the boreal maintains a target value. Every loan, both principal and interest, must be repaid in boreals. Borrowers will purchase these boreals on the open market or directly from Aurora. Whenever the price of boreals falls below its target value, borrowers are incentivized to buy up the discounted currency and reduce the overall cost of their loan. Each customer will have a different payment schedule, creating a diverse set of borrowers capitalizing on underpriced boreals at all times. Aurora will also provide a software tool to help borrowers manage this process and more easily minimize the cost of loan repayment.

In addition to being a source of profitability, debt is also an ideal part of a basket of assets backing a decentralized currency. Debt itself is inherently decentralized. Each individual or business is responsible for servicing their own liability, and each represents an independent source of revenue for Aurora and demand for the currency. Issuing loans through the blockchain will allow Aurora to expand anywhere in the world, ensuring that the various debts are diverse and reducing idiosyncratic and correlated default risk. By linking this debt to emerging blockchain identity systems, Aurora can tap into and safely utilize debt, the most diverse and decentralized asset, to securely back the boreal.

The auditability of the blockchain creates a unique opportunity to perform this lending responsibly. Due to its open nature, anyone can analyze the supply of boreals as well as the rate of repayment. Aurora Labs will utilize this information to refine the design and manage attributes of the currency such as supply and reserve ratios. Current technology will allow Aurora to take a more sophisticated approach and determine the optimal characteristics to both maintain stability and maximize access.

More details are available in our whitepaper. Stay tuned for additional posts on how we maintain boreal stability, and join the discussion on Telegram, sign-up for our newsletter, visit us on Bitcointalk, or follow us on Twitter to learn more about Aurora IDEX and our DVIP membership sale.