What’s up with the Icewater protocol recently?
We have made some big changes in the last six months, including:
- Removing dependency of the protocol on Steam, and
- Adding ETH as collateral
But first, a quick overview of what makes Icewater special.
A Decentralized Stablecoin
Most stablecoins measure stability by asking an external oracle about the price of the coin in USD. This is a problem for two reasons. First, it requires dependence on USD. Second, it requires dependence on the oracle.
Icewater is the only stablecoin project that stabilizes without relying on USD, and in fact, does not require input from any external oracle. How do we do this?
The key is to realize that to be stable refers to the value over time, so we introduce two tokens: H2O and ICE. H2O is the stable currency, and ICE pays out a constant stream of H2O. Since the value of ICE depends on the future value of H2O (that is, it only pays out in the future), by stabilizing the price of ICE relative to H2O we can stabilize the value of H2O relative to future H2O.
In other words, interest rates are a natural market measure of the stability of a currency. H2O maintains stability by keeping interest rates constant.
Removing Dependency on Steam
The relationship between H2O and ICE provides a unique way of measuring stability. But how do you actually achieve stability once you have measured it? We need some way of increasing and decreasing the supply in response to changes in demand.
Initially, Icewater adopted a model similar to that outlined in the famous paper, Seigniorage Shares. Specifically, the protocol include a share-like token called Steam. The stability of H2O was achieved by minting and burning Steam.
However, just before we launched the first version of H2O, the Terra Luna protocol collapsed. Although Terra Luna didn’t share the unique features of Icewater (i.e., UST was pegged to USD based on an oracle of the UST/USD price), it used the share-like token Luna for stabilization. In the aftermath of the Terra Luna death spiral, the Icewater team decided to implement a different model of stabilization
Introducing ETH as Collateral
The death of Terra Luna did not invalidate the fundamental idea underlying Icewater. Now, more than ever, we need a truly decentralized stablecoin as the foundation of the crypto economy. Furthermore, there are numerous other ways to stabilize a coin.
For the current version of the Icewater protocol (which will be launching soon), we chose to stabilize H2O by exchanging H2O for ETH when the protocol determines that it needs to increase or decrease supply.
In the upcoming version, this will happen by way of auctions. When the supply of H2O is too low, we will auction off new H2O in exchange for ETH. When the supply of H2O is too high, we will auction off ETH in order to burn H2O.
This will allow the Icewater protocol to automatically adjust supply in response to changes in demand. We also plan to add support for individual vaults similar to those introduced by the Maker protocol for minting DAI.