Introducing the CryptoDollar Coin
In this blog post, we will detail the latest version of our CryptoDollar Stablecoin (an implementation of the Proof CryptoFiat protocol) after a quick overview of pegged currencies and Stablecoins. An upcoming post will be published next week and will explain the inner workings and different design decisions of our smart-contract architecture.
Pegging a currency to the dollar is not a novel idea. Dozens of countries peg or have tried to peg their currencies to the dollar. For small economies, this facilitates participation in international trade and finance. Countries such as China or Japan use a similar idea and use a fixed-exchange rate that enables them to have comparative advantage in their exports to the United States. Although the idea of of pegged currency is straightforward, they have historically been problematic to maintain. Although some countries (e.g. China) are still maintaining a fixed-exchange rate or , others such as Argentina, Mexico, Russia failed at doing so.
Ultimately, no pegging can be maintained if market conditions become to detrimental which illustrates the need for better safety mechanisms.
In the world of cryptocurrencies, the need for a pegged currency is necessitated by market swings and the general market volatility of the asset. There have been a few attempts to create stable cryptocurrencies that we can classify in the two following categories:
- Cryptocurrencies collateralized with fiat/dollars
- Cryptocurrencies collateralized with cryptocurrencies
If you are interested, there are plenty of other models and financial instruments (Seignorage shares, Future contracts, etc.) that also try to achieve a stable crypto-value but we will not address these in this article.
Some examples of Dollar-collateralized cryptocurrencies include coins such as Tether and TrueUSD. The CryptoDollar coin is an Ether-collateralized cryptocurrency. Another example of cryptocurrency collateralized with Ether is the MakerDAO project and their Dai Stablecoin.
Both models have advantages and disadvantages. The major shortcoming of fiat-collateralized cryptocurrencies is that they are not decentralized, require trust in a third-party entity and therefore at least partially defeat the purpose of decentralization and creating of a Stablecoin. They do however have the advantage of requiring only 100% of collateralized value to function properly.
In contrast, cryptocurrencies collateralized with cryptocurrencies do require additional collateral to account for market crashes. Although no amount of collateral will make the system completely infallible, a 200% or 300% collateral is required to protect the Stablecoin value in regard of the cryptocurrency market volatility where currencies often lose half of their value in the span of a few days.
The CryptoDollar coin
The CryptoDollar coin is an Ethereum token collateralized with ether. As any Stablecoin, the value of a CryptoDollar coin will ideally always remain equal to $1.
As we saw in the previous section, no amount of collateral completely secures a Stablecoin. Therefore a 0.5% fee on each CryptoDollar token buy will be used to grow the value of the collateral over time. We also provide a safety mechanism that will replace the pegging mechanism in the event of a catastrophic scenario (more on this below).
To give an accurate representation of the current strength of the contract, we use the following indicator:
The collateral represents the smart-contract balance while the outstanding value is the total value in dollars of all Cryptodollar tokens that have been minted. We can also represent the contract state with the following buffer formula:
The value of the buffer decides on the behavior of the contract:
- In the pegged state (Buffer > 0), sellers receive the equivalent value of their initial investment in dollars.
- In the unpegged state (Buffer < 0), sellers receive the number of ether they initially sent to the CryptoDollar contract (we call this amount “reserved ether”).
The advantage and the goal of this safety mechanism is to partially avoid “bank runs”. Here again, the word ‘partially’ is important because there is no way to completely refund everyone.
In the case a critical state is reached, the “unpegged” state of the CryptoDollar smart-contract is activated. Every CryptoDollar token holder can then choose to sell their CryptoDollar tokens for their reserved ether value.
This mechanism along with accounting transparency brought by blockchain helps mitigating possible selling spirals: When the collateralization of the contract drop under 100%, the pegging mechanism is paused and the price of CryptoDollar tokens is no longer dependent on the value of Ether. Everybody attempting to withdraw gets treated “equally” rather than on a “first-come first-served” basis.
One of the key distinctions between the CryptoDollar and other Stablecoins is the binary state of the contracts wherein the system trades a bit of market fault tolerance for predictability. Rather than creating a shifting basket of collateralized crypto-currencies whose valuations need to be closely monitored and whose behaviors are opaque, the CryptoDollar opts instead to have explicit “red-lines” wherein holders can redeem their initial ether based on their individual tolerances. Although quick-in/quick-out has the potential of adding volatility, user freedom should not be sacrificed completely in the name of stability.
This was a very general overview on Stablecoin principles and the different mechanisms brought by the CryptoDollar to solve current problems in the domain. This post will be followed by a post outlining the different technical details and inner-workings of the CryptoDollar token. If you liked this introductory article, give us a clap, share this with your friends or join our community!
If you are interested, check our Github to read the code.
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