Research into the stability mechanisms of kUSD

I’ve made a summary of this video for those too lazy to watch.

Eiland Glover, CEO of kowala.tech, who is making a new stablecoin that is not backed by any assets, gives a very good overview of the stablecoin sector in crypto at present.

Why study stable coins? I believe stablecoins will be the catalyst that will push cryptocurrency to mainstream adoption; as ordinary people can’t use crypto in daily-life unless its price-stable.

Bitcoin and Ethereum have inelastic supply, which makes them function more like assets, rather than our every-day fiat currency. They will continue to be useful as digital-gold, however, its likely we will use a different type of crypto, as a medium for daily exchange.

Cryptocurrency Market Capitalisation:

Crypto market cap is somewhere lower than Apple and Amazon.

At present, cryptocurrency adoption is still less than many major markets around the world.

Eiland views the massive volatility as being one of the main barriers that prevent mass adoption of cryptocurrency from happening.

Evolution of Stablecoins:

Fiat Collateralised (Tether, TrueUSD), Crypto Collateralised (DAI, HAV), Consensus Managed (Basis, Kowala).

Tether & TrueUSD seen as generation-1 stable coins, fiat-collateralised , similar to arcade tokens.

, similar to arcade tokens. MakerDAI, Havven are crypto-collateralised , not very different, just a different backing. (Havven has cryptoeconomics too)

, not very different, just a different backing. (Havven has cryptoeconomics too) Basis and Kowala are algorithmically-managed, and not backed by any asset. Algorithms harness market behaviour to keep the coin stable.

Why Algorithmically-Managed:

People can self-manage, self-issue their own fiat currency.

Retain decentralisation of crypto, remain outside of government control.

Create a stable means of crypto-exchange, to conduct commerce.

means of crypto-exchange, to conduct commerce. Stable coin value can be pegged to anything, peg can be moved.

Types Of Stable Coins:

Fiat Collateralised — USDT, TrueUSD

Crypto Collateralised — DAI, Havven

Algorithmic Central Bank — Fragments, Nubits

Consensus Managed — Kowala, Basis

Kowala Stability Algorithm:

Always attempt to keep kUSD price at peg of $1 USD.

Demand & supply causes the price to fluctuate around $1 USD.

Decentralised oracle keeps track of kUSD market price.

If kUSD > $1 USD, algorithm mints more kUSD , distributes new supply to blockchain miners.

, distributes new supply to blockchain miners. if kUSD < $1 USD, algorithm stops minting kUSD, on-chain transactions get hit by a “stability fee”, which goes to a public “burn wallet”.

Excess kUSD is burned, however the burning happens gradually.

Traders that know burning is going to come into effect for kUSD, causes them to buy kUSD at $0.95, in the hopes of selling it at $1.00 later.

This economic incentive causes speculative-demand to rise as the price of kUSD falls below $1 USD.

Traders + Burning of kUSD, cause the price to rise back to $1 USD.

Possible Challenges:

Barrier 1 — Cryptocurrency too volatile.

Barrier 2 — Most cryptocurrencies too slow for mass adoption.

Possible Solutions:

Design algorithmic stable coin (Kowala).

Forked ethereum to produce faster crypto (may have issues).

Further Cryptoeconomic Thoughts:

Their automatic burning mechanism is a good idea, because it does not require anyone to “buy-back” the kUSD.

kUSD is simply burned, eliminating the need for human actors to sell stable coins to buy seigniorage bonds and such.

As kUSD goes down in price, logically people would want to sell it for something more valuable, and the transaction fees accrued should therefore increase, and allow kUSD to be burned.

The act of desperate selling = Burning of kUSD in the form of fees = Bringing the price of kUSD up.

Question: “Will the rate of burning be sufficient to respond to a sudden price-shock?”

Mining Rewards & Incentives to Validate:

Miners earn newly minted kUSD when the price of kUSD > $1 USD.

As long as demand for kUSD keeps going up, the network will become more secure; perpetual miner-ponzi-scheme.

When demand for kUSD falls, minting of new kUSD stops, miners may leave the network as its unprofitable to continue mining.

Question: “Will this be sufficient incentive for miners to keep the network secure?”

When Will Mainnet Go Live?

According to their timeline, July 2018 is when we’ll see the mainnet. There is no news on when they will list on Coinmarketcap; it is a new cryptocurrency based on Tendermint after all.