Jax.Network Blog
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Jax.Network Blog

JAX as collateral for smart contracts

by Iurii Shyshatskyi, Chief Scientist at Jax.Network

Jax.Network is a highly scalable blockchain with Proof of Work consensus based on sharding and merged-mining. A novel block reward function reduces the volatility of its native token JAX. The relative stability of this cryptocurrency combined with a high throughput of Jax.Network makes it an ideal candidate to become a default collateral asset for stablecoins and various Decentralized Finance protocols, often called DeFi.

First, let’s discuss what is DeFi, why do we need collateral assets, and what properties they should pose.

While Bitcoin succeeded as a cryptocurrency on a number of levels, many enthusiasts endeavor to apply blockchain technology to other economic matters. This DeFi trend gave a boost to many platforms for smart contracts such as Ethereum.

However, very soon it has become evident that it’s impossible to solve the most interesting use cases in a completely decentralized trustless fashion. For example, the notorious ICO boom of 2017 has shown that there is no smart contract or oracle that can ensure the success of a certain startup and guarantee profit for its investors.

One of the very few DeFi ideas that reached success and became widely used is the concept of stablecoin. That has happened not because somebody has come with an ultimate trustless solution but because many people and businesses desperately/severely need such a solution.

Bitcoin has turned up as a very volatile asset. In March 2020 the price of Bitcoin hash crashed by 60% from 10,000$ to 4,000$. Then by the end of the year, it increased 7 times up to 27,000$.

For businesses, such volatility in price is unacceptable. Imagine you have signed an agreement in which you have to get a payment in Bitcoins and suddenly it falls by 60%. Also, you may find yourself in a situation in which you have outsourced some project and taken an obligation to pay in Bitcoins.

A dozen of projects take care of these risks and issue stablecoins such as USDT, USDC, DAI, and BUSD. It’s clear that these solutions are not trustless. However, when there is no ideal flawless solution there is a need for compromise. Designs of all the aforementioned solutions share one common idea: they use collateral assets to back their extensive emission. The idea of collateral assets is widely used in the financial system.

The ideal collateral asset should be:

  1. Transparent for audit
  2. Highly liquid
  3. Stable

It’s clear that operations with collateral assets should be easy to audit. It’s an inherent property of cryptocurrencies. One of the most successful stablecoin, USDT, uses Bitcoin and other cryptocurrencies as collateral despite the fact that, according to its whitepaper, it’s backed by US dollars with a bank account based in Taiwan. This is a reasonable decision. The story of Wirecard tells us that it’s hard and expensive to audit payment systems based on bank accounts: auditors can miss a gap of two billion dollars.

It’s clear that JAX possesses this property. Any account on any shard could be easily verified. Trustless verification of the entire history of any shard could be performed on a single desktop with an internet connection. This verification doesn’t require the data from other shards.

High liquidity is another requirement for a good collateral asset. It should be very easy to quickly buy and sell it without significant expenses. Gold was used as a medium of exchange for ages for metal coins. However, in modern times gold has become inconvenient. It is not easy to send from one continent to another as it would take too much time and effort. Often there is a need to pay taxes or fees.

Jax.Network is a scalable blockchain with high throughput and low transaction fees. Therefore, transferring value with JAX is quick, affordable, and convenient.

Finally, a collateral asset should have a relatively stable market price. Issuers of stablecoins often face the risk to get a severe loss and collapse when the price of collateral assets dramatically decreases. Unfortunately, Bitcoin has a bad reputation as a highly volatile asset. The price of other altcoins follows the same trend and has a very high correlation with the price of Bitcoin.

JAX doesn’t follow this pattern since it has completely different coin issuance rules. If the price of JAX rises, more coins are issued. If the price of JAX falls, the coin issuance rate will be reduced. JAX coin issuance is based on the cost structure of the miners and the demand for transactions from users. This simple mechanism reduces the volatility of JAX and makes its price more predictable. In the case of mass adoption, the JAX cryptocurrency could become more stable than many fiat currencies issued by central banks.

The etalon implementation of the Jax.Network client is based on Bitcoin’s client BTCD. So it’s rather compatible with DeFi protocols based on Liquid and Omni. We believe all these properties can make JAX be an indispensable asset for stablecoins and various DeFi protocols.

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Jax.Network provides the technological infrastructure for a decentralized energy-standard monetary system. Our blockchain is anchored to the Bitcoin network and issues two digital currencies JAX and JXN.

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