Why is the mass adoption of crypto payments stalling? Among multiple challenges, the biggest barrier to widespread use of cryptocurrencies in everyday transactions is their high price volatility. Which merchant or service provider would take the risk offsetting a price and earning revenues in BTC when their costs are in USD?
On the land of cryptocurrencies, high volatility is an ordinary event. Where 10%-20% price movement is normal in a day frame, it is hard to create a stable economy. Financially it would be hard to live in a world where a highly volatile asset is the main currency. Who would agree to pay rent in BTC when their salary is paid in USD? Who would get a mortgage denominated in BTC when their salary is in EUR? As it is today, already an increasing number of DApps rely on ether and the ethereum network where a bigger price volatility could easily cause complications in the system. We can agree that it is essential to have a cryptocurrency with stable price to keep the decentralised, smart contract economy rolling. So there is the question. What is the best way to build a stable coin that could bypass the wild crypto price movement, market speculations and create the backbone of the internet of value?
Beyond multiple attempts to create a stable cryptocurrency, several projects are on the horizon which are aiming to decentralize money creation and even starting to apply credit money attributes in their schemes. There are three + one main model which might be a potential design for stabilize cryptocurrency: the fiat-collateralized, crypto-collateralized, non-collateralized, plus the asset-backed cryptocurrencies.
One of the easier way to create stable coin is the fiat-backed cryptocurrency. In this simple scheme, the organization just deposit fiat into a bank account and issue the fiat pegged coin or token on a one to one ratio. The digital token has value because it represents a claim on another asset with some defined value. When the holder would like to convert the stable coin back into fiat, then the issuer destroy the stable coin and transfer the fiat back to the owner. This bank deposit tokenization has some drawbacks such as these tokens require trust in the issuing party, that the issuer actually holds the fiat collateral and they are willing to honor the IOUs.
Tether is one of the widely known fiat-backed stable coin, but to as a whole it’s not really considered a cryptocurrency, rather a company for several reasons: There are owners of this organization, it is a registered company, the owners of Tether have complete control over the money supply and they could hijack the project if it is in favor.
The second main model on the list is the crypto-collateralized stablecoin. This model has no fiat related parts, all the possible collaterals are on blockchain, such as Bitcoin, Ethereum or other cryptocurrencies. These collaterals are locked into a smart contract, so there is no third party involved, the structure is more decentralized. Furthermore, if the system designed well, it can be completely decentralized, making crypto-collateralized stablecoins more appealing to people than the fiat-collateralized cryptocurrencies.
On the other hand, the drawback of this model is the high volatility of the collateral. The system requires a substantially higher amount of collateral in order to make the lending/transaction bulletproof. As an example, if a person/organization (let’s call it a user) needs 100 USD worth of crypto-USD, then the user needs to lock 150%-300% worth of ETH as a collateral in order to eliminate the obstacles of volatility. The smart contract, where the collateral is locked into, allows the users to access it by paying back the stablecoin debt or can be sold by the system if the collateral exchange rate falls below a certain point.
High collateral ratio is clearly an issue in the system, however, as the cryptocurrency ecosystem is getting more mature, several solutions appear on the horizon. Asset-backed tokens could be a good collateral option through their less volatile nature. There are already great progress on this field and predictions indicate that 10% of global GDP will be stored on blockchain by 2025 as tokenized assets.
The third model is the non-collateral stable coins or the so-called seigniorage shares. As its name says, this approach is not actually backed by anything other than confident belief that it will keep the promised value. Non-collateral stable coins scheme was invented by Robert Sams in 2014 where, its algorithm is controlling the supply of the coin, similar way as central banks do with fiat money.
As an example, take a non-collateral stable coin which pegged to 1USD. Given fixed supply, an increase in demand will cause the price to increase. Due to algorithmic setup, the system would issue more stable coin and sell it to the market resulting a price drop to the targeted 1USD.
On the other hand, when the demand decreasing, price also drops below the targeted 1USD. In most cases, the system is not able to buy back a sufficient amount of coins, therefore in order to reduce the circulating supply, the system issues shares or/and bonds with a par value of 1USD that are sold with discount in order to make it more appeal for users. In this case, bondholders are reducing stablecoins from the market, reducing supply, and raising the price.
As soon as the price rise above the targeted value, the system will favor the bondholders and shareholders first and pays them out (in a chronological order).
When the non-collateral stablecoin system is observed closely, it shows some similarities to the pyramid scheme. When the price is below the targeted level, the only healing serum is the promise of a future growth, which can be maintained by a higher market cap/demand. As soon as a continuous growth can’t be maintained, the stablecoin and bondholders might be in a serious trouble. And here is why: As the price of the stablecoin falls, the system issues more bonds to raise the price. As more bonds the system issues, the longer the bond queue will be. As the bond queue is longer, the more time it needs to get paid (they are getting paid by chronological order, as it was mentioned above) and decreases the likelihood that each bond is paid. As the risk is higher, the bonds price must be lower to offset the additional risks. As the price of the bonds falls, more bonds need in order to shorten the supply of stablecoin. Users will lose faith in the stablecoin, stop using it and this will further push down the price and trigger a death spiral.
Let’s start with assets. Real assets are tangible or intangible economic resources that can be converted into cash. Tangible assets can be gold, real estate, etc., while intangible assets are bonds, stocks or even bitcoin. Intangible assets are traded with its potential future worth, they can be much more valuable than tangible assets, therefore also more volatile. Since stability is most of the asset-backed cryptocurrencies aim, they are pegged to a tangible asset. This means that each token is worth exactly as much as the agreed unit of the physical asset, in other words the token price depends on the supply and demand fundamentals for the underlying asset.
Asset backed crypto currencies are differ a bit from the last three, because It is lacking of the characteristics of a currency.
Asset-backed tokens are a good store of value, an excellent solution for investors to protect their portfolio during volatile periods and it is also a feasible solution to protect wealth from inflation. You could buy 100 USD worth of goods for just 5.56 USD in 1915. That’s how much value the USD has lost in the past hundred of years. Assets such as gold has historically been an excellent hedge against inflation because its price tends to rise when the cost of living increases. Over the past 100 years investors have seen gold prices soar and the stock market plunge during high-inflation years.
Asset backed cryptocurrencies could be good as a medium of exchange, although it is not a natural approach. Money is a particular type of asset in an economy that people use to buy goods and services from other people or businesses. A medium of exchange is something that buyers will exchange with a seller when they want to purchase goods or services from the seller. While many things could be used as a medium of exchange in an economy, money is the most common and useful medium of exchange in our society.
A unit of account in economics is a nominal monetary unit of measure or currency used to represent the real value of any economic item; goods, services, assets, liabilities, income, expenses. Even though an asset-backed stable coin might have a lower volatility than other cryptocurrencies, it is still not good as a unit of account, which provides a common base for prices.
Augmint’s model is based on the crypto-collateral method. The system is designed in a way that it’s functionality is decentralized and trustless, it’s diversified and broad base of collaterals make the system usable and it’s unique platform makes the system scalable.
While many are unaware, all modern currencies in circulation are a kind of credit money. The most important aspect of credit money is that it is created and destroyed continuously in the economic cycle by the mutual actions of economic actors. Augmint will construct digital tokens along similar logic, each targeted to a fiat currency. It will automatically adjust the supply in circulation of each token in a similar way to fiat money. Augmint tokens are only issued when a new, collateral backed loan is issued. Tokens are automatically destroyed (burnt) on loan repayment. In case of loan default the collateral goes to the stability reserves, managed by smart contracts. Augmint intends to construct a digital pair to every important fiat, thus at first the EUR. The digital pair for the EUR is Augmint Crypto Euro (A-EUR). The mechanics are targeting the EUR/A-EUR market exchange rate to be 1:1 all the time.
It all happens in an automated, cryptographically secure and decentralised way.
Augmint aspires to be the world’s digital payment token. It is considered to be viable only with a system where no single group is able to take control and new stakeholders can join the decision making quorum simultaneously. Augmint propose a structure that ensures open and democratic governance in the long run.
The project will be maintained by an open community of financial and technology experts, financed by the stakeholders. The fundamental rules are set out in the Augmint manifesto.
One of the most significant challenges is to make the Augmint system flexible and gradually upgradable and keep it trustless and decentralized at the same time. Augmint must ensure that nobody (not even the founders or the developers) could “hijack” and take control of the system by deploying components without consensus, hence make the system more secure, trustless and attractive for users than the fiat backed stable coin model.
In 2009, when the bitcoin network came into existence, a financial revolution has begun and with its blockchain technology, it is impacting several industries. Augmint believes that with this revolution it is possible to create a better financial system, where a decentralized autonomous organization is controlling the monetary system instead of a government or central bank. The fact that there is no single entity or government might sound like a drawback but the Augmint founders believe that a decentralized, trustless system is more secure and better functioning, one single entity cannot change the rules or take advantage of its power, rather decisions are made by any person who is a shareholder.
Augmint tokens will serve as a new medium of value transfer combining the advantages of cryptocurrencies such as:
- trustless operations
- distributed ledgers
- working smart contracts
- permissionless access
with the advantages of fiat currencies such as:
- purchase power stability
- ease of use
- fulfilling money functions of (medium of exchange, unit of account, store of value)
Based on these features, the Augmint tokens’ value proposition has 3 main offer:
- Simple and censorship resistant stable store of value and medium of exchange for economic actors who are using cryptocoins
- Easily accessible liquidity for digital asset holders who don’t want to sell their assets.
- A stable unit of account for cryptocoin projects in need of a stable cryptocurrency.
The Augmint system should accept a broad base of assets as collateral. This diversification will be key in ensuring system stability. New forms of collateral will be continuously added according to the Augmint roadmap, including real world tokenized assets to maintain low correlation among volatility of collateral types. To reach the appropriate level of collateral asset diversification takes some time but partnerships are about to happen with several tokenized asset supplier. Our two main collateral types will be cryptocurrency and tokenized asset.
Cryptocurrency as collateral
The asset-like nature of existing CCs makes them a suitable loan collateral. Augmint plan to accept a CC as collateral only if it has a significant market capitalization and high liquidity, such as BTC and ETH.
Tokenized assets as collateral
The process of “tokenization” is expected to extend to “real world assets”: predictions indicate that 10% of global GDP will be stored on blockchain by 2025. Therefore we contemplate that in 5 years time there will be at least 15-20 different tokenized assets, at least 5-10 concrete and recognized application in each type, for example 10-15 token pegged to the gold.
From the credit perspective, tokenized property/real estates, commodity (gold), shares and investment funds appear to be the most promising, once used on a more general basis.
Companies with good credit (initially AA or AAA) standing may apply to be listed on the Augmint Company Whitelist. The listed companies can access to the smart contract which issues Promissory Tokens (tokenized promissory notes). These will be standard ERC-20 tokens. These tokens will be accepted as loan collaterals in the Augmint system. The credit risk management will done by the Augmint stakeholders. They will regularly voting on the collateral ratios of the Company Promissory Tokens. The result of the vote will be a system parameter.
Occasionally Augmint system allows users to lock up their A-EURs for a defined period of time in exchange for a lockup premium. Adjusting this premium serves as an incentive for locking up tokens, which in turn impacts demand / supply conditions and A-EUR/EUR exchange price. The locked up A-EURs remain on the account of the user, no one else can use it. During the lock up period the user can’t transfer, sell or use the locked amount. Although from monetary (macro) point of view the locking up is similar to a bank deposit, it is inherently different from it. The locked up tokens’ ownership does not change, the user cannot lose them, the time lock automatically release the tokens without a third party involvement. The lock up is only a temporary liquidity sacrifice.
Create different pairs
It can be stated that a sole currency would make trading easier globally, but there are several economical reasons to have different currencies for different countries. Countries would no longer have independent monetary policies, control on interest rates, the power to stimulate economic growth etc. Therefore the roadmap includes several digital pairs in the long run. The kickoff projects will be using A-EUR-EUR pair, but for the long run Augmint plans to make a unique platform, where Augmint Community Board (ACoB) members can easily and safely create any type of cc-fiat pairs to make the system scalable and useable for anyone.
The cryptocurrency ecosystem is in a desperate need for a stable digital currency with the benefits of digital tokens in the form of a unit which can be used in the various blockchain use cases for payments, planning, in smart contracts and holding value in a relatively stable digital form.
With that in mind, Augmint is going to offer an independent, transparent, open source Digital Autonomous Organisation (DAO) and stable cryptocurrencies as a medium of exchange. On the technical point of view, Augmint’s focus is on three keys attributes: decentralization, a wide variety of collaterals with a low collateral ratio, and a unique platform for a scalable crypto-fiat pair creation. To get more familiar with the project, please check out our white paper and website. Please follow us on social media and if you have any question just shoot it on Discord.
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