Understanding cryptocurrencies: A Stablecoins and blockchain introduction
Cryptocurrencies emerged as a huge impact during recent years, getting attention for its revolutionary structure as a unique alternative to centralized systems that range governments and corporations.
In cryptocurrencies and tokens’ “crypto-world”, direct transactions and a decentralized structure decrease the cost and the need of intermediaries, acting as a versatile platform to perform investments and remittances, rather than traditional ones. Without all the financial expenses in those traditional ways (such as banks) bring to the customers and investors, the new network is a good alternative path to preserve their own monetary values.
Since then, the cryptocurrencies have been a source of great attention. The growth and enthusiasm from investors brought volatility and instability to the digital coins, causing unpredictable floating prices. Thus, the digital currencies still lack several regulations in economic, laws and exchanging rates in several countries due to its recent establishment, that sums to the high speculation.
One of the main intentions of the creation of cryptocurrencies rests on the idea of securing values, preserve it from government confiscation or extra expenses, but its instability leads to the other way around, if we consider that high variations in a single day are not compatible with the idea of a daily use currency, nor as a source of safe investment.
To maintain the value and avoid the fluctuation of prices of main cryptocurrencies, it was necessary to create new coins with a potential market without the vulnerability of the previous cryptocurrencies, associated with a need of practical use in a permanent scale without carrying risks.
As a consequence of this uncertainty, the Stablecoins and Stable Tokens were created as price-stable cryptocurrencies, sometimes pegged to other currencies to soothe the worries of investors of highly demanding risks.
Their main characteristic is the predictability, not entailing big investment risks. This type of currency is considered the best option for the general public without causing disturbances or big loss of investments.
The Stablecoins and tokens can be classified as fiat-collateralized, crypto-collateralized, and non-collateralized.
The fiat-collateralized ones are the most common type of Stablecoin, pegged to a fiat currency (usually U.S Dollars) in a very simple affiliation of 1:1 ration, requiring a high degree of trust in the custodian that will issue the tokens.
Based on the fiat-currency stability guaranteed by the bank or custodian, this category of Stablecoin is the simplest, but also vulnerable to failure and bankruptcy. Thus, it is encompassed by a centralized system, denying one of the main principles of the cryptocurrencies: the decentralization.
Most of the stablecoins fall under this category, such as TrueUSD (TUSD) and Tether (USDT), as investors believe this scheme can be the best option for a safe investment. However, the ideal autonomous use for unbanked or underbanked populations is compromised because it’s mandatory to have a bank account with ‘real-money’.
The second category is the crypto-collateralized coins, that are backed up by other cryptocurrencies with large market assets, such as Bitcoin (BTC) or Ether (ETH). Those coins and tokens are supported by different coins rather than a single currency, distributing the risk among them, as they work with decentralized trades secured inside the blockchain.
Despite decentralized, the dilemma of high volatility of the collateral cryptocurrencies is still experienced. To solve this issue, it’s necessary to over-collateralize the stablecoin. Thus, the over-collateralization takes more investment in assets than fiat-collateralized ones to absorb the fluctuations of the market.
Some experts also consider the crypto-collateralized stablecoins very vulnerable to Black Swan events and not appropriate for general use.
The third and the last type is the non-collateralized or “Seignorage share” Stablecoins. These are the only category of coins that are not backed up by any assets such as fiat currency or cryptocurrencies.
These coins use algorithms to prevent the volatility (called “Algorithmic Central Bank” — ACB), working as well as a Central bank that, in the real world, can create or destroy money to stabilize the market (monetary policy). In simple words, if the stable coin is trading too high, the smart contract will automatically mint new tokens to establish the harmony (supply x demand), reducing the value of the coin.
This intelligent system permits the desired equilibrium, guaranteed by decentralized and autonomous smart contracts without any intervention other sources. If well established, the mechanism of this system can be of a great value due to its improvement of costs compared to the other systems used in Stablecoins. But how can this scheme work in ‘real world’?
Understanding the blockchain technology and dealing with cryptocurrencies is very challenging for investors and mostly, seems incomprehensible to ordinary people who are used to tangible currencies.
To start, it is necessary to underline how the sustainable development of non-collateralized coins works, by observing how it works in palpable money.
“Currency” comes from ‘currens’ in Latin, meaning something that moves, or circulate. The currency main purpose is the ability to trade, or exchange.
During the 19th century B.C, salt took the role of currency. It provided saline concentrations that could inhibit the proliferation of bacterias or microorganisms in food, keeping them in good condition for a much longer time. As it became an essential substance in society, it also became a target of governments, that soon started to tax its circulation and established a monopoly over the production. Equally, metals also took the role of currency, and banks were created to guarantee the authenticity of the metals and weight (especially gold), manipulating greater values exchanges by charging for the services.
Back in the present days, the currencies still have the same approach as they had in ancient times: they have the ability to trade goods or services (medium of exchange), can be a mean of maintaining its value power over time based on people’s expectation (store of value) and can be measured or quantified to be compared (unit of account). Unsurprisingly, banks and trades still retain their position as a guarantor and, consequently, can arbitrary set up their fees as their own choice.
On the other hand, cryptocurrencies can be a medium of exchange (such as the fiat currencies), but not exactly have a major store of value by virtue of their own prosperity: the high speculatory demand of people interested in multiplying their assets turns the system very volatile and unstable, with fluctuations rising or falling by about 25% in a single day.
So what is the best form of creating a coin that can deliver the same aspects of a completely stable coin? The idea of non-collateralized money is originated from “Denationalization of Money: The Argument Refined”, published by F.A. Hayek, in 1976. Hayek argues that money would be better supplied if there were competition between currency issuers, controlling and regulating the prices better than a government monopoly.
In basic economics, price determination is the result of supply and demand equilibrium. If there is an imbalance, the price will be increased or decreased. Central banks run by governments are the ones to establish inflation targeting, following monetary policies to maintain price stability. Hence, stablecoins can provide a way to use money, as they are designed to have low volatility with a perspective of growth in medium to long term. But how would it work?
Understanding blockchain platforms and how it works
Blockchain is the innovation behind the cryptocurrencies. The concept of blockchain was developed by Satoshi Nakamoto in 2008, to bring a secure environment to all the transactions. In Blockchain, all information is stored in blocks, connected to other data blocks that work like ledgers. Each of them has a hash, working like a fingerprint to each one of them, that will also be stored in the next block.
The first generation blockchain runs 1.0 protocol (known as the Bitcoin protocol), achieving the network consensus through a proof-of-work for those digital transactions’ confirmations. The bitcoin protocol permits every block to be created after 10 minutes after the consensus with a limited 1mb size, making the system very slow and not scalable, but secure.
The second generation is the improved version of the first generation. It is built using the Ethereum protocol, adding the feature of “programmable money”. This characteristic is deemed important as it adds the benefit of automating the fundraise resources channeled to the cryptocurrency and self-executing payments. This protocol utilizes smart contracts to enact the conditions of every transaction, accommodating not only assets but a variety of data (like gold, real estate or medical information, etc) in a decentralized market.
Despite the introduction of programmable money and adoption of smart contracts, the 2nd generation protocol also lacks scalability and it is still slow. Another issue of the 2nd generation is the security of smart contracts. While the 1st generation of blockchain is inherently secure, the smart contracts interacting within wallets and the blockchain of the 2nd generation demonstrate a vulnerability in account addresses and individual keys.
The 3rd generation of blockchain is being designed to solve the scalability and enhance the dynamic performance of the previous generations. With this revolutionary and ambitious project, the platform will be able to sustain scalability, interoperability, and sustainability. A few projects are being advanced, such as the Cardano Project and EOS , that are still developing the desired security and performance.
In this aspect, the SovereignWallet app is being designed to be a messenger-style cryptocurrency mobile wallet that incorporates a hybrid approach of banking grade security features, associated with the usability of the 3rd blockchain technology. The users can utilize the identity-based feature of the wallet to send and receive crypto funds simply, like sending and receiving instant messages.
The wallet security system uses hierarchically deterministic (HD) key generation, that enables the creation of infinite private key, making them less vulnerable as the 2nd generation limited keys. The SovereignWallet application also utilizes a machine-learning algorithm and user authentication to learn behavioral patterns to establish and validate a user’s identity. Another mechanism of protection is the is end-to-end encryption; using zero knowledge algorithm and protocols ensures that anything performed in the wallet is encrypted before being sent to the server or shared.
What is SovereignWallet Network and how the project is being developed?
“Sovereign” means the full and total authority of one individual. By analogy with this principle, the SovereignWalllet Network was founded with the mission to grant each individual a total financial control by giving the tools and opportunity to self-manage their own tokens freely. The project aims to conduct not only digital financial services but also as a route to protect the values of the users, including those who are unbanked or underbanked. In this system, everyone will be able to emancipate themselves from highly regulated banks and other financial institutions.
Based on the Seignorage share system, the project is developing a stablecoin based in the non-collateralized structure: the MUI, under the SovereignWallet app. The activities of MUI will be distributed and stored in public Ethereum blockchain network using the decentralized 0x protocol, allowing tokens to be freely exchanged and listed.
Through the SovereignWallet app, users can participate in the project by buying MUI token in a safe and secure environment, being able to exchange their cryptocurrencies with low cost and the facility of using their mobile phones.
The MUI token is designed to secure all the features of money, such as store of value, medium of exchange, and unit of account. We believe that MUI token has moderate liquidity, fungibility, low possibility of confiscation, high portability, divisibility, and security.
The wallet comprises the MUI and Ethereum wallets, providing a safe chat room for group and peer-to-peer instant messaging to simplify cryptocurrency remittances or exchanges and get benefits from additional services that might be offered in the future as incentives.
The project is being developed through the Initial Coin Offering (ICO). In ICO, users will receive tokens in exchange for another digital currency (such as Ethereum or Bitcoin). These tokens are issued via smart contracts on Ethereum blockchain.
The stability of the MUI token is expected to be achieved through a combination of tools:
- By utilizing the autonomous mechanism of the Algorithmic Central Bank (ACB), the number of tokens in circulation is controlled.
- The Sovereign Treasury will hold the funds to support the sustainability aim of SovereignWallet. It will implement the features to control the circulation of the MUI tokens and grant incentives, instead of block reward. These incentives can be implemented using airdrops into users’ SovereignWallet’s MUI account to spread their interest and commitment, as it allows users to invite friends themselves to the platform. Giving this structure to users, the platform will self-expand.
Considering the SovereignWallet Network project is built on top the Ethereum blockchain, the system uses Ether (ETH) — the Ethereum native token as a medium of exchange — between the MUI token and other tokens. ETH is commonly used because it is connected to decentralized applications to allow exchanges and digital payments. The ongoing success of the Ethereum makes ETH a convenient and attractive choice for a base cryptocurrency and medium of exchange on the SovereignWallet system for those who aim to secure safely their values.
Concerning the Ether used as a base coin, MUI token current price is 1 ETH to 5000MUI (i.e. 1 MUI ≅ 1/5000ETH). The sales of the MUI token shall be conducted in phases and periodically. MUI tokens also carry smart contracts with unchangeable commands that stores the collected data in the Ethereum blockchain network, using proven security features of the wallet with high performance. This process makes the system trustless, fast-paced and with affordable fees.
Conclusion
In sum, Stablecoins built using an Algorithmic Central Bank (ACB) to prevent price volatility are the key for the future of cryptocurrencies. These currencies will provide a good medium of exchange, with a long-term value protection that, in the future, might be a substitute, or at least decrease, the need for fiat-currencies in our day-by-day.
Hence, the good establishment of these coins will be enhanced by the development of a better blockchain technology. In this sense, SovereignWallet Network aims to achieve scalability, interoperability, and sustainability to achieve high performance and security at the same time, by using a 3rd generation blockchain with provably secure smart contract features.
More details on how SovereignWallet works can be found in our whitepaper. Visit our website to become part of a community that is reshaping the future of finance.
