What is a Thriftcoin?
Understanding the new class of stablecoin
Recently the Dai stablecoin has been wrapped and augmented to form new tokens that are both stable AND resistant to inflation. Compound.finance’s cDai and WeiDai are among the first. Because of how saver-oriented these tokens are, they belong to a new class of stablecoins: thriftcoins. This article explains the nuances of thriftcoins and why they’re significantly distinct from previous forms of money.
Money has 3 important properties:
- Store of value
- Unit of account
- Medium of exchange
To understand how these properties are related, see my two-part article on the topic. Generally, as one of these properties increases, the other two suffer. No money in history has displayed high values for all 3 properties. Gold comes the closest and indeed gold backed or gold commodity money has existed throughout history. It would appear that when looking at inflation rates and prices in the early 20th century, gold was an excellent store of value, it was an obvious unit of account — especially during the Gold Standard — and since it was government backed, it was the undisputed medium of exchange. Prices remained fairly stable.
Conservation of Volatility
If Bitcoin is modeled on gold production, why did the world not see crazy Bitcoin-like price volatility during the Gold Standard era? It turns out that central banks of the world understood that left unchecked, gold prices are anything but stable so they coordinated to transfer the price volatility of gold into other areas in order to amplify the unit of account and medium of exchange properties at the expense of store of value. To simplify, each nation decided on a gold redeem rate for their notes. This is the amount of gold you’d be given if you turned the note in to the bank. For instance, if a 10 dollar note has a redeem rate of 0.2 oz then when you take your 10 dollar note to the bank, you can ask for 0.2 ounces of gold.
As an aside, dollar was once a physical unit of measurement which is why a $10 note would claim that 10 dollars worth of gold could be redeemed. This wasn’t a circular reference.
The redeem rate of each national currency would imply international exchange rates since if the US set their dollar redeem rate to $1 = 1 ounce of gold and the UK set their rate to £1 = 0.5 ounces of gold then $1 would be worth £2. Suppose the UK began to experience a persistent trade surplus with the US. This would mean that on net, US importers would need to buy pounds from international markets to satisfy their need to purchase British goods. In other words, the international demand for pounds would increase. Now, ordinarily when the price of something increases and supply remains the same, the price rises. But what is the price of money? Well in this example, the price of a pound is of course 0.5 ounces of gold. If the price of a pound were 0.6 ounces then we’d say the price of the pound has risen.
So under a Gold Standard system, a trade surplus is the market’s way of telling you that your currency should be worth more gold (conversely a deficit is the market’s way of indicating your currency is overpriced in gold). But the central banks of the world didn’t want to allow their money price in gold to change. So to maintain stability, the US would have to send the British large shipments of gold. The British would then add the gold to their vaults and issue more pounds so that the value of the circulating supply of pounds would match the gold in reserve. In this way, the British would print more money so that the supply of pounds would increase to offset the demand for pounds, restoring the pound to 0.5 ounces.
In today’s cryptocurrency parlance, the international Gold Standard was the first system of stablecoins. It would have been more accurate to describe the Gold Standard and the Bretton-Woods system as a Centrally Planned Single Collateral Stable Coin.
The incentives that governments have to not allow their currency to appreciate are strong and have nothing to do with international trade and everything to do with credit expansion. The reasons are explained in the second part of the aforementioned article on money. In addition to price stability, it is also in their interest to preserve the medium of exchange and unit of account properties which is why the most successful fiat currencies today are those with low but positive inflation rates. What if the governments of the world instead cared about encouraging the domestic savings rates of their citizens so that their populations would become more self sufficient and less reliant on credit and state welfare? In this case, they’d still want a stable currency but with a negative inflation rate. The currency would then have a high store of value at the expense of a slightly lower medium of exchange property (since consumers would rather spend less valuable currencies aka Gresham’s Law). This type of currency is what I call a thriftcoin since its stability and increasing value over time is excellent for parking your funds comfortably under your mattress, so to speak, in the knowledge that in the future it would have either maintained its value or grown in value. A thriftcoin is a type of stablecoin but a stablecoin is not necessarily a thriftcoin.
Thought experiment: a government thriftcoin
Staying with the fictional Gold Standard above, how would a government create a thriftcoin currency? To simplify, let’s take the UK out of the equation and simply concern ourselves with a gold backed US dollar. Suppose the redeem rate for a dollar is 1 ounce of gold. The government decides that it wishes to gradually increase the value of the dollar relative to gold so that holding dollars automatically makes you richer in gold terms over time. Assume that the total circulating supply of dollars is 100 million, implying that there are 100 million ounces of gold in reserve at the FED. There are two possible mechanisms the government can use to increase the redeem value of the US dollar*:
- Increase the reserve holdings of gold while leaving the circulating supply unchanged.
- Decrease the circulating supply of US dollar notes while leaving the reserve unchanged
*assume for this example that the redeem rate is announced by the FED, rather than stamped on each note so that the rate can be dynamically updated at any point in time
Option 1 is difficult since it requires physically finding gold and storing it in reserve. Purchasing gold by printing more dollars is pointless. The two actions would offset each other, leaving the dollar price unchanged. The government could instead run a budget surplus and use the surplus to purchase gold to add to reserve. In this way, the circulating supply of notes remains unchanged but the reserve would increase. For instance, if the Treasury’s budget showed a $1 million surplus then it could purchase 1 million ounces of gold and add it to reserve. The reserve would now be 101 million ounces but the circulating supply of notes would be 100 million, implying that each dollar is now worth 1.01 ounces of gold. The FED would then announce the new redeem rate and every holder of dollars would be instantly richer (at least in terms of gold).
There is an easier alternative. Suppose once again the government runs a budget surplus of $1 million. Instead of purchasing more gold, they can send the million to the FED to retire the notes from circulation. In this way, the reserve remains unchanged at 100 million ounces but the circulating supply of notes has now shrunk to $99 million. The FED announces a new redeem rate of $1 will give you 1.010101 ounces of gold. The resultant appreciation is slightly more in this case but the direction of the result is the same.
If we were to use cryptocurrency parlance, we’d say that the FED burnt their fiat “tokens”. In cryptocurrencies, token burning is often intended to raise the market price of the circulating token as it was in this example. The idea is that if price is set by supply and demand, then burning decreases supply and hence will increase the price. However, in this Gold Standard example, the price of the currency isn’t set by demand and supply for the currency but rather by the value of the collateral backing asset, namely gold. The price is the ratio of circulating supply to the quantity of collateral in reserve so that when a collateralized token with an adjustable redeem rate is burnt, we should expect the price to instantly increase as was the case with our fictional Gold Standard. This is how WeiDai works.
Putting it all together
WeiDai is a collateral backed token with a dynamic redeem rate. This means that if either the circulating supply of tokens changes or the collateral in reserve changes then the redeem rate for WeiDai will instantly change. WeiDai is 100% collateralized (backed) by Dai, a stablecoin. This makes WeiDai a stablecoin, as well, by conferring the stability of the Dai to the circulating WeiDai tokens. WeiDai can only be issued if the new tokens are backed by a reciprocal increase in the reserve of Dai. In this way, the redeem rate of WeiDai in Dai terms can never fall. However, WeiDai can be burnt out of existence, all the while leaving the Dai reserve unchanged. This means that the WeiDai redeem rate (in terms of Dai) can only ever increase. Special sets of dynamic incentives have been created to encourage the constant burning of WeiDai, meaning that the redeem rate of WeiDai should gradually rise, given constant use. Because WeiDai is both stable and a better store of value than Dai, it is known as a thriftcoin.
The humanitarian cause of thriftcoins
WeiDai is one of the first thriftcoins but hopefully not the last. The burning-collateral strategy is just one way to create a thriftcoin and hopefully the emergence of this new class of stablecoins will excite developers into coming up with more innovative ways of generating thriftcoins. My hope is that the killer app for thriftcoins will be to give the unbanked populations of the world a secure way to preserve their savings without needing the traditional financial system at all.
The unbanked will become the postbanked.
Where to go from here
If you’d like to get your hands on some WeiDai visit the dApp. Please note that in order to buy WeiDai, you first need to either create some Dai or get it on an exchange such as Uniswap. Both WeiDai and Dai exist on the Kovan testnet so be sure to experiment with the dApp in the safety of test Dai before trying out the real thing.