Diving into the Celo Price Stability Protocol

An friendly explanation of the Celo stability protocol

Asa Oines
Asa Oines
Apr 25 · 7 min read

Motivation

Despite many potential advantages over regular (or “fiat”) currencies, people have been slow to adopt cryptocurrency as a medium of exchange. We believe that this is in large part due to the price volatility of today’s most popular cryptocurrencies. Users may hesitate to use a cryptocurrency for purchases or to pay back friends if the price fluctuates each day. In the same sense, merchants who might accept cryptocurrency would typically then convert payments immediately to fiat so that their cost base is predictable. For a currency to be a useful medium of exchange, it must be able to maintain a stable value. Enter: stablecoins.

Types of Stablecoins

In short, stablecoins are simply cryptocurrencies with stable value, sharing all the appealing characteristics of other cryptocurrencies but without the volatility. They are often, but not always, pegged to a fiat currency like the US dollar. Broadly speaking, stable value cryptocurrencies can be grouped into three categories: fiat-collateralized (FC), crypto-collateralized (CC), and seigniorage style (SS).

A comparison of different stablecoin approaches

Celo’s Approach

The Celo price stability protocol can be thought of as a hybrid crypto-collateralization/seigniorage-style model, designed in a way that we believe offers the best of all three approaches. The protocol supports an ecosystem of stable currencies, the first of which, the Celo Dollar, will be pegged to the US Dollar.

Expansions and Contractions

The protocol uses the reserve to adjust the supply of Celo Dollars in response to changes in demand. It relies on a number of ‘oracles’ external to the blockchain to provide feeds of the Celo Gold price in US Dollars. To maintain the peg, the protocol allows users to create new Celo Dollars by sending $1 worth of Celo Gold to the reserve, or to destroy Celo Dollars by redeeming $1 worth of Celo Gold from the reserve. This is similar to how fiat-collateralized coins work, except that the trusted third party (e.g. Tether or Circle) is replaced by a decentralized protocol.

Lessons Learned

Designing a new stablecoin protocol has been a long journey, and with the contributions of a diverse group of academics, students, developers, cryptographers and many others, we’ve learned a lot along the way. At the core of this journey has been a simulation framework, which allowed us to explore a wide range of scenarios and analyze those which put the protocol at the greatest risk of depegging. This framework was a critical tool for informing design decisions and evaluating the protocol as it evolved. We’ve laid out the details of this framework in our stability analysis, and will explore this even further in our next blog post.

Final Thoughts

Blockchain technology offers the opportunity to connect people globally and bring financial stability to those who need it most. We believe that stable value cryptocurrencies will be the basis on which this opportunity is fulfilled.

Celo

Celo is an open platform that makes financial tools accessible to anyone with a mobile phone. Visit celo.org for info on the community, team, and technology.

Asa Oines

Written by

Asa Oines

Celo

Celo

Celo is an open platform that makes financial tools accessible to anyone with a mobile phone. Visit celo.org for info on the community, team, and technology.