An important thing to remember about crypto protocols is that they are simply mechanisms for managing voluntary relationships among people. So let’s talk about the people involved in a stablecoin.
Specifically, there are three important groups of people that need to cooperate to have a successful stablecoin. Let’s call them users, guardians, and oracles. A stablecoin protocol simply automates transactions among these groups of people. It does not, by itself provide any value. The value comes from mutually beneficial trade among people with different needs and abilities. So the important thing to understand about each group of people is what they want, and what they can provide.
Users
What they give: Users must provide some form of compensation for the other groups in order for a stable currency to persist. See here for a more detailed discussion on this topic. If a stablecoin provider isn’t clear about how the users pay for the service, you should be skeptical.
What they get: This is simple. Stablecoin users get stability (i.e., protection from volatility). This helps them engage in a variety of other transactions (i.e., setting prices or making long term contracts).
In the Icewater system, users of H2O pay for the service because the stablecoin is mildly inflationary. Specifically, when people hold H2O, they lose a little value gradually over time, and this value is distributed to the other parties to compensate them for taking on risk.
Guardians
What they give: Guardians provide protection from volatility. That is, they take on risk from users. In essence, the fundamental role of any stablecoin service is to facilitate transactions between people who want protection from volatility, and people who want exposure to volatility.
What they get: In exchange for taking on risk, Guardians must be paid. The payout will necessarily be volatile because that’s the name of the game when you take on risk from someone else.
In the Icewater system, the guardians are the holders or steam (STM). That is, protocol transfers risk from H2O holders onto STM holders, and provides a payout to the STM holders.
The STM risk comes in the form of collateral that STM holders can lose if the system needs to support the value of H2O. The value to STM holders comes by providing them seigniorage that comes when demand for the token grows, or when the mild inflation reduces the value of H2O.
Oracles
What they give: Oracles provide information. Specifically, they provide users and guardians with an assessment of whether the stablecoin is stable.
What they get: Oracles must also be compensated for their role. However, they probably don’t need to be compensated as much as guardians. In many cases, the oracles are compensated by participating in a market and benefiting from price arbitrage.
In the Icewater system, the oracles are those who hold (or more specifically, those who exchange) the ICE token. ICE is a perpetuity that pays out H2O over time. Thus, it’s value depends on the future value of H2O. By trading between H2O and ICE, oracles reveal the relative value of these tokens, and hence the stability of H2O.
Conclusion
Every stablecoin system needs users, guardians, and oracles. If it isn’t clear who these parties are, or how they play their respective roles, you should take your business elsewhere.
