Icewater is building the world’s most decentralized stablecoin. This paper will describe why and how. It proceeds in four parts:
- Decentralization is important
- Stablecoins are important
- Stablecoins are not decentralized
- Decentralized stablecoins are possible
A new global commons is emerging based on blockchain technology. On the blockchain, people can build communities and engage in transactions without relying on centralized systems such as legal systems enforced by police powers. Icewater is building on the shoulders of revolutionary technologies such as those underlying the Bitcoin and Ethereum protocols to achieve this global decentralized commons.
Stablecoins are essential to the future of the new global commons. Money is one of the most important concepts underlying human cooperation. Bitcoin and other blockchain monies have proven that cryptographic technology can be used to create a decentralized store of value. However, money has other aspects that are not well served by tokens with a volatile value.
As a result, a new kind of cryptocurrency has arisen to serve as a medium of exchange: stablecoins. Since stablecoins are less volatile than other cryptocurrencies, they are better suited for things like purchasing goods and forming contracts.
Although some stablecoins are implemented using immutable contracts that live on the blockchain, almost all of them have a key issue that makes them fundamentally centralized entities: they are pegged to the dollar or another fiat currency. In other words, they still use the dollar as the unit of account.
Any stablecoin that relies on the dollar for measuring stability is not truly decentralized. It is an extension of a fiat currency whose value is determine by a handful of old men (and occasionally women) operating out of some proverbial smoke-filled room.
To truly serve as money, a token must be suitable as a store of value, a medium of exchange and a unit of account. A decentralized stablecoin must do this without referencing the dollar. Icewater has built a decentralized stablecoin.
The key insight underlying the Icewater protocol is that you don’t need any external reference to achieve stability. Instead, you can use a market indication of stability: interest rates. The Icewater protocol issues a form of debt, and lets the interest rate fluctuate based on market forces. The protocol then measures the interest rate, and uses it to stabilize the currency.
Specifically, when the interest rate is above target, this is taken as an indication that the value of the currency is declining too fast (i.e., inflation). This is because when the currency is losing value, the market will demand a higher return on debt to compensate for the expected loss in the value of the money that gets paid back in the future. To compensate, the protocol stops printing money. Similarly, when the interest rate is too low, it is taken as an indication of deflation, and the protocol prints more money to keep the value stable.
The details of the mechanism and the economic theory behind the Icewater protocol are somewhat more complicated than have been described here. But the bottom line is that Icewater is building a truly decentralized stablecoin, which is an essential component for a truly decentralized economy. If you have questions or want to get involved, please contact us!