“Stablecoins” are interesting because they attempt to solve one of the most significant usability problems of cryptocurrencies, high volatility.
Volatility can make it difficult to transact, particularly for transactions which occur over extended periods of time, for example transactions which require an escrow period. In these cases the volatility adds an uncertainty cost for both parties.
The general approach to minimizing volatility is the use of an “algorithmic” central bank, which automatically mints and sells tokens in order to collateralize a reserve, and automatically sells collateral in the reserve in order to support a specific price target.
Depending on the system, algorithm can be more or less conservative, in the case of Maker, CDPs are over-collateralized meaning that for every 1$ of DAI there is >1$ of collateral that can be liquidated in order to support the price. If we look at the other extreme you have Basis where there is no collateral, and instead supply is issued to shareholders who in theory have some incentive to support the price target by purchasing bonds.
If we look at how FIAT price stability is generally maintained through monetary policy, we can see that at least in some cases its possible to create a stable currency supported by fractional reserves and bond sales. One reason for this can be attributed to the creditworthiness of the issuer, In the event that reserves are depleted a national government can use force and taxation in order to raise funds to pay debts, and thus so long as the government is deemed unlikely to collapse entirely bonds are generally a safe investment.
In the context of a decentralized stability mechanism, the use of force is not an option, taxation is an option but is limited by the ability of users to fork away any excessive taxation. One possible way for a decentralized protocol to establish credit worthiness is through an established history of utility (or other independent revenue generating activities).
From the perspective of the Aragon Network if we want to minimize downside risk for holding ANT, while allowing holders to capture meaningful value appreciation as the network grows we should plan for independent network services, like the Court, to charge a Network Fee paid in ANT and burned. This fee is reasonable from the perspective of Users and Jurors in the court and unlikely to be forked away because:
- An asset that has downside protection, reasonable upside potential and which “splits” to maintain a stable unit of account is ideal for collateralizing agreements. Reducing the opportunity cost for users of collateralized agreements makes arbitration services via the court more practical, so justifying the fee as a way to support that quality in ANT makes the court more useful.
- Users and Jurors in the court are likely to be participants of the Aragon Network and hold ANT, so using the court to provide an ANT “sink” would be unlikely to be seen as excessive rent-seeking.
In the future other services similar to the Court could be provisioned by the network, generating additional utility and revenue. As the these independent revenue streams become significant, the network will be seen as more credit worthy, and we can relax the ratio of collateral held in the reserve in order to pass more value appreciation onto holders of ANT. In the event that collateral is exhausted bond sales will be supported by the future revenues of the network, which minimizes the risk that in the event of a crisis of confidence no one will want to buy bonds.
