There are actually more than two things you can’t escape in life, not just death and taxes. There’s another force of nature, which is probably no less imminent — volatility. We’ve learned to live with it, but it is always with us. Everything fluctuates — be it prices, new daily COVID-19 cases or the number of your media channel subscribers. It’s unnerving, and it makes you crave for stability, for something you can rely on. Humanity has always strived to create stability out of chaos: stable measurement units, stable currencies or a stable social order.
Therefore, it is no surprise that we try to turn very volatile crypto into something more stable and solid. Cryptocurrency is volatile by design. Only the market can attach a value to native tokens of different blockchains, and there’s hardly any intrinsic value to them, apart from the role they play in their ecosystem. In the near future, we’ll definitely see attempts to create stable native tokens, but for now, we have to make use of the value locked in volatile coins to create something more stable.
Probably, I don’t need to explain why we need stable assets. If we want to replace fiat money with something more transparent and accountable, crypto might be our only hope. But, if you want to pursue any meaningful economic activity (beyond trading and speculation, though I’m not really sure if it’s meaningful…), you can’t have your currency change value more than a fraction of a percent daily.
We can start by creating a token backed by some money in the bank. This works, Tether has a market cap in billions. But it’s just the same fiat philosophy that uses a new technical layer. We have the same issues — counterparty risks, excessive control etc. It’s basically an e-currency rather than a cryptocurrency.
So, the next step is to make it properly decentralized and based on the underlying blockchain economy rather than on the same old fiat. There can be various approaches to this, all using value locked in native tokens in one way or another. It can be over-collateralization, as in Maker DAO, where you lock an excessive amount of ETH to account for volatility. Another path is taken in the Neutrino protocol, where price stability is ensured through a secondary bond-like token, issued when the system moves off balance. Also, we can try to build stablecoins based on derivatives mechanics, using a forward contract on the underlying asset (a native token) to connect it to the USD price.
Those mechanics can also be different in terms of how strict the peg is: assets can be quasi-stable or provide a 1:1 correspondence to some real-world assets, such as USD. Neutrino’s architecture is built on a strict tracking of USD price , which allows for guaranteeing the exchange rate. It is crucially important if we want to use our assets in the real world, Bitcoin hasn’t yet really picked up as an international settlement unit exactly because of issues that daily volatility brings about. Volatility effectively increases transaction costs.
But once you have the 1:1 connection and an underlying value in assets you back your stablecoins with, you can build exact replicas of real-world assets and, depending on the exact properties of the underlying blockchains, even enhance them. In Waves’ case, we can use staking mechanics to create interest-bearing stablecoins. Profits don’t come from p2p loans, as in most ETH projects, but from the economy of the blockchain itself. Basically, we repackage it for mass adoption. You hold USD stablecoins and you get USD profits, without any custodial or default risks. This is gold that multiplies itself.
Having a hard peg and an architecture that guarantees stability, we can take a step further. Let the smart contract generate different assets and let’s do an instant swap between them! What do we get? It’s decentralized FOREX, or DeFo that’s frictionless and charges an almost zero fee.
We effectively combine Uniswap with stablecoin mechanics. Uniswap is an automated token market maker, which works especially well with stable assets. It offers very simple pricing mechanics that could potentially fail in case of too volatile tokens. Liquidity for Uniswap exchanges is usually provided through user pools, and we use the same pool mechanics to ensure the stability of derivative assets based on top of USDN, the “main” stable asset of the Neutrino protocol. Users provide their USDN to maintain liquidity for derivative assets, such as EUR, gold and any other established real-world assets. They share swap profits with the main contract and receive NSBT, the governance token of the protocol, for their efforts.
Basically, any assets can be issued based on this architecture. We are creating an entire new ecosystem of stable assets, which replicates and even enhances (in case of derivative products) what we have “in the real world”. This is a central bank + exchange packaged in several smart contracts on the Waves blockchain. The lowest hanging fruit which we’re targeting here is the cross border payment issue. Many attempts to resolve it with crypto have been made, but transaction costs are still quite considerable, even though there has been a huge improvement over legacy costs that can be in double digits.
Combined with the Gravity protocol, it will allow stable assets on all blockchains, not only on the Waves blockchain. Inter-chain DeFi is what brings all chains together and creates a single economic space for all of them. A port to the Ethereum blockchain is definitely a priority, but we will go beyond that. You can’t forget about permissioned chains, as enterprise blockchain needs the same tools as open chains.
To give you an idea of how products will eventually look like, imagine an app on your phone that supports all of the world’s major currencies, enabling buying all of them, as well as withdrawing with your credit card, sending to any person regardless of where she’s located and swapping to any other currency with an almost negligible swap fee.
On top of that, you can stake any currency you hold and collect an annual interest of 10–15% in USD, paid in the currency you stake. You will even be able to borrow against stable assets you hold. This is a decentralized bank in your phone, with all major features that banking provides, such as deposits, exchange and collateralized lending. And this is only one app in the ecosystem that we’re building.
This is a new stable real-world asset ecosystem based on the Waves chain economy. The Neutrino team will publish a detailed roadmap later, but before the end of this year, we’ll have custom assets, profitable pool mechanics and NSBT token tweaks allowing for its unlimited price. By the end of 2020, all core functionality of the Neutrino protocol will be complete.