Mel is the only trustless stablecoin
Why $MEL is the only reasonable Web3 reserve currency
Themelio’s base currency, mel, is the world’s first non-fiat stablecoin. That is, mel is the only currency unit to have both of the following properties:
- Stable real value: 1 mel has low volatility in its purchasing power.
- Trustless, non-fiat issuance: no trusted parties are involved in issuing mel.
But wait! There are tons of stablecoin projects that claim to be “decentralized”, “algorithmic”, or “endogenous”. Some, like Rai, are not even pegged to fiat. How can we claim that mel is the only non-fiat, trustless stablecoin?
This boils down to exactly what we mean by trustless issuance. By saying “mel is trustless”, we really mean that Melmint, the algorithm that stabilizes mel, has endogenous trust. This means that the security of Melmint lies entirely on internal incentives, not on preexisting trust in Melmint participants — a property unique to Web3 “autonomous software”, such as public blockchains.
Let’s now examine the entire “stablecoin” landscape, broadly considering any kind of cryptocurrency that aims to reduce volatility compared to traditional, inelastic-supply cryptocurrencies like bitcoin and ether. We see that other than mel, all other stablecoins introduce exogenous trust — trust in protocol participants that cannot be reduced down to trusting internal incentives. No other stablecoin can serve as the reserve currency for a Web3 ecosystem with true endogenous trust.
Traditional issuer-backed fiat stablecoins
This is the first kind of stablecoin to be invented, and the most boring kind. A centralized, trusted “bank” issues stablecoins as IOUs for some off-chain asset, typically the US dollar.
Tether, USDC, and BUSD are all examples of issuer-backed stablecoins. Obviously, these stablecoins are highly centralized, being little more than a digital version of banknotes. We run into the same problems that “meatspace” banknotes run into — fractional reserve, issuer risk, etc
It’s clear that these stablecoins run entirely off of external trust in the issuer, rather than endogenous trust.
Autonomous fiat-pegged stablecoins
By an “autonomous” stablecoin, I am referring to a stablecoin that is pegged to an external currency like USD, but whose issuance mechanism is based on an autonomous mechanism (e.g. a smart contract), rather than a trusted issuer. Some autonomous stablecoins still derive value from some sort of backing asset, but these assets are on-chain assets managed by the smart contract.
The prototypical asset-backed autonomous stablecoin is Dai, issued by MakerDAO — a complex on-chain system that backs Dai with USD-denominated debt collateralized by a pool of mostly on-chain assets.
Some other autonomous stablecoins, somewhat imprecisely called algorithmic stablecoins, do not use any kind of backing asset. Instead, algorithmic stablecoins attempt to adjust the supply of the stablecoin to target the peg using a feedback loop. For example, the algorithmic stablecoin Ampleforth increases supply by airdropping $AMPL to existing holders when its price is above $1.06, while reducing supply by deleting $AMPL when its price is under $0.96.
At first sight, it may seem that autonomous stablecoins do achieve endogenous trust — other than a smattering of human-led governance for tweaking protocol parameters, autonomous stablecoins rely entirely on a trustless on-chain mechanism to issue the token. Unfortunately, the inputs and target of this mechanism lack endogenous trust.
In particular, an autonomous stablecoin takes in oracles that give exchange rates between on-chain assets and the off-chain peg target don’t have endogenous trust — somebody must be trusted to tell, say, the Ampleforth mechanism what the price of AMPL is in USD. In fact, it’s most likely impossible to design an oracle for entirely off-chain facts like the AMPL/USD exchange rate with endogenous trust; even “decentralized oracles” rely essentially on honest-majority assumptions, rather than the rational-majority assumptions of endogenous trust.
Furthermore, a fiat-pegged autonomous stablecoins targets fiat currency, which itself lacks endogenous trust. We can’t possibly build a true alternative to traditional, central-bank-manipulated financial infrastructure on top of a USD equivalent.
“Non-pegged” stablecoins
One final kind of stablecoin is not pegged to any fixed exchange rate. Instead, they simply aim to take in on-chain, non-stablecoin collateral (such as ETH) and produce an asset that endogenously damps the collateral’s volatility.
Perhaps the only example of this is Rai, from Reflexer Labs. Unlike other stablecoins, Rai is pegged to a fluctuating “redemption value” that automatically adjusts based on demand for Rai and the value of Rai’s underlying collateral, which is ETH. The intent is, very roughly, to synthesize a version of ETH with “smoothed out” volatility.
Now, is Rai finally the trustless stablecoin we want? It’s not even pegged to a fiat currency!
The answer is no. This is because the “redemption value” here is an exchange rate with US dollars, as measured by trusted oracles. And at a higher level, trying to synthesize a low-volatility derivative of something like ETH can’t work without measuring volatility against some other currency assumed to be stable — if that currency is off-chain like USD, you need oracles, and if that currency is on-chain and trustless, well you already have your trustless stablecoin.
So unfortunately, “smoothing out” high-volatility trustless assets like ETH is not a viable approach for a trustless stablecoin.
Mel: the only trustless stablecoin
This brings us to Themelio’s native currency, mel. Unlike all of the other stablecoins we summarized above, MEL has robust endogenous trust of the same degree as currencies like ETH and BTC. This is because
- Mel is entirely oracle-free: the pegging mechanism Melmint does not take in any trusted oracle information. Instead, 1 MEL is pegged to its target (1 day of sequential computation) through entirely endogenous mechanisms. For instance, the prices that drive Melmint’s feedback loop are on-chain exchange rates between trustlessly issued tokens — a data source kept accurate by arbitrage, a prototypically trustless “rational majority” process, rather than external trust in some oracle provider.
- Mel is definitionally fiat-free: both the peg target of the algorithmic “monetary policy” of MEL is defined entirely in terms of real resources, without reference to any nominal values in fiat currencies like the USD. In particular, 1 MEL represents the value of a day of sequential computation on the fastest processor — something ultimately backed by the economic value of real resources like time, silicon, and energy, not fiat numbers that can be centrally manipulated.
Thus, mel simply has no competitors in the space. In fact, I would claim that MEL is the only usable reserve currency for Web3. It’s the first asset ever to exist that can really fulfill the role of a cryptocurrency even with volatile demand — cryptoeconomic, trustless security on one hand, and a stable unit of account, store of value, and medium of exchange on the other.
(Note: right now, Themelio has not yet done a public token sale. The best way to get your hands on some mel is to join our community on Discord. There you can learn how to mint your own, as well as participate in events with mel-denominated rewards!)
