The Case for a Decentralized Financial (DeFi) Infrastructure Built on Sound Money
A decade ago, the founder(s) of the Bitcoin protocol envisioned the establishment of a financial infrastructure more suited to our modern times. It needed to be decentralized, secure, and tamper/fraud-proof. And, of course, the now-iconic ‘Peer-to-Peer Electronic Cash System’ saw its first light.
Ever since its inception, Bitcoin has been revolutionizing our understanding that the centralized authorities residing inside traditional monetary systems are no longer required.
Because, across peer-to-peer, decentralized networks, value can be exchanged directly between transacting parties, on a borderless and global scale, without the need for intermediaries, 3rd parties, or middlemen.
However, because of its particular characteristics, Bitcoin lends itself better to being held for investment purposes instead of frequent use as an everyday medium of exchange. And because Bitcoin is not regularly spent, it promotes a deflationary spiral in the economy, making Bitcoin unsuitable to serve as a unit of measurement for labor, services, and products.
Others recognized this situation, which led to other decentralized protocols such as stable cryptocurrencies being created. Stable cryptocurrencies largely fulfill the three key functions of money (store of value, medium of exchange, and unit of account), and their inception certainly represents a step in the right direction.
But stablecoins are still extremely vulnerable and a far cry from being acceptable. Existing stable cryptocurrency models represent three major security and design flaws:
- Making extensive use of centralized oracles — oracle attacks have already amounted to losses of tens of millions of dollars to cryptocurrency exchanges
- Some are fiat-backed — which manifests all the risks with the traditional, centralized banking system again. Bankrupt commercial banks, failing governments, oppressive dictatorships, and fiat-reserve audit requirements are just some of the risks attributable to these cryptos
- Lack of independence and resilience — for base-layer stable cryptocurrencies to be robust, sustainable, and agile, they need to be dynamic and independent mediums of exchange, units of measure, and stores of value. Too many cryptos are still relying on cryptocurrency collateral, thus limiting the growth of said stable currencies.
Meter’s Proposal for a Robust Decentralized Financial (DeFi) Infrastructure
- High Performance
Meter redesigned the base-layer consensus with clear differentiation between record keeping and token issuance.
This mimics the physical world, where the gold miners mine gold, while bankers and accountants do the bookkeeping. In Meter’s system, the Proof of Work (PoW) consensus allows for token generation via mining, and the Proof of Stake (PoS) consensus uses the Byzantine Fault Tolerance consensus algorithm for swift record keeping, while preventing double spending.
In this environment, the PoS main chain in charge of record keeping can generate one block every 10 seconds (after the September upgrade, this was optimized to one block every 3 to 5 seconds) with a transaction-per-second (TPS) of 2,000. Compared to existing blockchain networks, this greatly enhances the performance of the main chain.
- Decentralized & Secure
Meter uses a hybrid PoW/PoS consensus mechanism, which can combine the benefits of both and address the weaknesses of each. For example, security risks like a 51% attack in a pure PoW consensus, and the “nothing at stake” problem and long range attacks in a pure PoS consensus are mitigated in a hybrid mechanism. Meter has put a great deal of thought into building a highly decentralized currency system and devising methods to survive network attacks from the nation level.
To prevent block proposer nodes from censoring transactions and prioritizing ones that will benefit them the most, Meter changes to a new node for every block. Changing block proposer nodes by way of a traditional pBFT algorithm as seen on Cosmos, Harmony, and Near, is extremely complex and comes with sky-high communication costs. So much so that when Harmony published its code for automatic block proposer node changes in case of node crashes, Cosmos’ Head of Research Zaki Manian went out of his way to tweet his congratulations.
With Meter’s PoV BFT algorithm, even if block proposer nodes are changed for every block generated, algorithm complexity will remain the same as proposing a regular block. Meter’s basic Proof of Value (PoV) consensus uses PoW to generate natural random numbers, which select a few hundred nodes out of thousands every hour as representatives to participate in the consensus mechanism. This enables more nodes to participate in the process. In comparison, Algorand’s main contribution is to use verifiable random functions to generate pseudo random numbers to achieve the same goal.
Meter is virtually unstoppable with its PoW system. If, for example, there is a major network partition between China and the U.S., the Meter network may temporarily suspend transactions to ensure the security of user accounts. However, once enough PoS nodes are online again, Meter is able to automatically resume operations. Meter’s simple PoV hybrid consensus algorithm features better performance and anti-attack capabilities than mainstream projects.
- Interoperability— Eliminate silos and enable efficient interchain asset transfers.
The Meter base layer architecture supports main chains, side chains, and parallel chains, and can function as a layer 2 for Bitcoin and Ethereum to provide a stable, base layer financial system that enables the development of sustainable decentralized businesses.
In the future, Meter will support interconnecting bridges between BTC, ETH, and other public chains. The Meter team is working closely with the Cosmos and Polkadot teams on interconnecting their cross-chain architectures. This will make it very easy for developers using Meter to transfer assets between different chains — a revolutionary solution for DeFi, which suffers greatly from lack of assets on a single chain platform.
Meter’s infrastructure is revolutionary for DeFi, but its global currency system will be a game changer.
Imagine a world where cryptocurrency is used instead of fiat currency, while avoiding the weaknesses of traditional currencies. This is what tens of thousands of blockchain projects and innovators are trying to achieve.
Meter has created an innovative solution to reach this goal.
As a medium of exchange in daily life, it is necessary for currency to be an intelligent unit of measurement that can accurately evaluate the value of labor, enabling accurate and relatively equal exchanges of value. Only this type of medium can promote the flow of value in society.
Unit of measurement/measure of value
- Why does the encrypted world need a measure of value?
Since the dawn of humankind, people have exchanged surplus value for the commodities they needed. As production power increased, surplus commodities were churned out at an increasing rate. We discovered that a certain amount of a currency, that can accurately reflect the amount of labor needed to produce a commodity, can measure its value. This proved to be a quick and convenient way to exchange commodities, which brings us to one of the basic functions of currency: measure of value.
Any market activity and exchange of value within the encrypted world needs a currency that is able to measure value.
Thus, any currency with a measure of value is fundamental for the development of decentralized businesses in the encrypted world.
Bitcoin, a deflationary currency with continuously rising prices, cannot serve as a unit of measurement for labor. With its rigid supply and expectation of rising value, Bitcoin has the characteristics of an investment vehicle for holding rather than of a medium of exchange that needs to be frequently spent.
Evidently, any currency that suffers from overinflation or deflation cannot serve as a unit of measurement to determine value.
Meter’s currency system provides an intelligent currency that can successfully measure value. How does it achieve this?
2. How does Meter ensure the stability of MTR?
In Wealth of Nations, Adam Smith states that the value of a commodity depends on how much labor a manufacturer invests in the product. The more labor that is invested, the higher the value. He believes the best way to measure value is by looking at how much production labor is needed.
- MTR Mining & Issuance
In the decentralized world, Bitcoin puts this theory into practice. Bitcoin is generated via mining, and the mining rewards are dependent on a miner’s efforts.
Meter is no stranger to this theory and has a keen understanding of its advantages. The Meter system leverages PoW mining to produce MTR stable coins, exchanging miner labor for value within the Meter network.
So, that’s how MTR is issued within the Meter network. But how is the value of MTR determined?
- Pegged to Electricity Pricing
Mining is a highly competitive activity where miners are competing against each other’s hashing power. Mining costs include the cost of electricity (which accounts for most of the cost) and mining equipment. Researchers have shown that that Bitcoin’s market price is 85% correlated with the marginal cost (mainly consists of electricity consumption) of mining Bitcoin.
Meter connects its stable coin MTR to a fixed amount of electricity costs in PoW mining, thus connecting the coin to stable values in the physical world. In addition, this value also has long term stability in purchasing power.
The industrial electricity price index, based on real price (adjusted for inflation), remained virtually the same from the 1960s to 2010s, more stable than fiat currencies.
Meter’s consensus algorithm ensures the mining cost of its stable coin MTR to be a fixed amount of electricity. A miner’s profit-chasing behavior will naturally create a disciplined monetary policy, and MTR will only be created when it economically makes sense. The supply and demand will automatically be balanced by economics and drive the MTR price to fluctuate around its marginal cost of production.
Meter therefore ensures the stability of MTR through PoW and pegging mining costs to a fixed amount of electricity cost.
Inside the Meter network, MTR is used as the measurement of value and medium of exchange to facilitate the development of decentralized businesses.
However, Meter isn’t satisfied with just a stablecoin.
There are many stablecoins out there, but they either have limited capacity by design or are not truly decentralized at all, which renders them incapable of serving as a base for building a decentralized financial system. Meter believes that there is a currency system out there that can bring Satoshi’s “currency beyond nation states” dreams to life.
3. Meter’s Dynamic Currency Policy
Meter is not pegged to any fiat currency and is generated via mining. That is why its stable coin, MTR, is completely dependent on market activities and the profit-driven behavior of miners to balance out MTR supply.
However, similar to the centralized commerce, unpredictable events also occur in a decentralized market.
That’s why Meter added another layer of financial tools to ensure the stability of MTR and the smooth operations of its decentralized system.
In Meter’s hybrid PoW and PoS systems, MTR is generated via mining on a side chain using the PoW mechanism, while the PoS main chain is maintained by the governance token MTRG, which is the staking token for record keeping and ecosystem governance.
MTR holders can obtain MTRG via auctions. Some of the MTR used in auctions are automatically removed from circulation to incentivize miners to mine more MTR with their computing power.
The MTR that was not burned will go into a reserve pool. A portion of the reserve pool will be gradually released to PoS validators as block rewards and the remaining is kept as the stability fund for the Meter ecosystem.
In summary, the Meter currency system has two layers of security:
- MTR, which is generated via mining and pegged to electricity. MTR supply is adjusted automatically by the profit-driven activities of miners, maintaining MTR’s stability.
- In the case of extreme circumstances, the MTRG token holders can use the built in leverage to borrow against their pro-rata shares of the stability fund to adjust supply and demand.
MTRG holders do not have the right to create currency. The power of currency creation is given to the people. That power lies with any individual in the community that chooses to become a miner. MTRG is a DAO-based decentralized commercial bank, where community participants can profit from providing transaction security and increasing liquidity within the financial system. Their activities will also enhance the stability and balance of the currency.
Bitcoin and Ethereum are not the competing currencies in Hayek’s theory — Meter is the key to bringing the economist’s vision to life.