Bridging the gap to a stable token

How Sweetbridge BRC (Bridgecoin™) was built for liquidity and trade

We get a lot of questions about how our two-token system of Sweetcoin (SWC) and Bridgecoin (BRC) will function in a commercial economic environment. While the innovative discount token model of SWC and the many benefits it creates for members in the Sweetbridge economy (e.g. lower fees and interest, higher levels of borrowing from assets) generate a lot of excitement, seasoned experts always have more questions about BRC, which is designed to be a stable liquidity token ideal for payment, exchange and trade settlement.

To speculators, the relatively flat rate of BRC may seem boring. However, for followers of crypto-economics, the promise of a truly stable token that provides enough liquidity to operate at the volume of real-world markets has long been a holy grail — one that would bridge the gap between conventional and digital economies and significantly increase the technology’s widespread adoption. This recent Multicoin Capital report on stable coins outlines some different approaches and challenges to creating this functionality in the market.

Scratch the surface of many such attempts so far and you begin to understand why experts are skeptical about stable tokens being resistant to market forces, unless of course they are backed 1:1 by specie such as RMG Gold, which is a really cool thing, but finite in liquidity for that very reason — a very limited asset for trading purposes.

We have seen a number of liquidity tokens that have issues remaining stable in dealing with market volatility. Early attempts have either proven to have a lack of basis or had their liquidity pools drained right out of the gate by fast-moving arbitrageurs on the open Ethereum network. Other intended payment tokens started moving rapidly in speculative value on exchanges, making them too volatile for trade. Tether has been the subject of stories predicting its underpinning monetary reserves are not matching the supply — leading to concerns that a major correction is in order.

Bridgecoin™(BRC) by Sweetbridge, is a flexible supply currency designed to remain fiat and commodity stable. BRC is minted when required for payments and exchanges backed by assets, and burned when used to redeem or unlock these collaterals. It uses a combination of monetary policy and market making to keep it very close to the value of the commodity or fiat it is denominated in, i.e. a dollar, a euro or later, other agreed-upon asset classes like bonds, gold, oil or other goods. This makes it ideal for trade and settlement purposes, especially in supply chains, where a swing in value between the time of order and payment could wipe out a supplier’s — or buyer’s — razor-thin profit margin overnight.

How Bridgecoin works with Sweetbridge Asset Vaults

The first and most common use case for Bridgecoin is demonstrated above, with the collateral values remaining constant and no network fees or interest rates shown to keep it simple:

You lock an asset like ETH in a blockchain-based Sweetbridge Assets vault, and an external data service (or an oracle that may aggregate pricing from multiple exchanges) informs the smart contract of the current average value of the asset (here $1000 USD), the maximum amount of BRC that can be borrowed (here $500 worth = 500 BRC or 50%) and computes the Sell-Line, or value at which some part of the asset may be automatically sold to cover a decrease in collateral value (say, 75%). The vault creates a “UOU” for -500 BRC, which is the amount you owe the contract to unlock the collateralized asset. Think of it like a lien on the asset for an amount set at the time of the loan. You get 500 BRC liquidity which can be exchanged for fiat, $500 USD. You can spend the $500 on what you want, while the original collateralized ETH asset remains yours and any value it gains or loses is yours. You can’t sell it or move it out of the vault until you pay back your loan and cancel the UOU. If it drops in value while a loan is active (to less than 75% of the original price for example), the smart contract will issue a Sell-Line warning to you and possibly automatically sell some assets. You can repay the loan by buying 500 BRC and unlocking the asset in the vault contract. When this is done the BRC is burned and original asset is returned to you at its current market value.

BRC is currently created (or minted) when liquidity is received by collateralizing crypto-assets within trustless on-chain vaults (smart contracts) owned by the collateral holders. The collateral is held trustlessly on-chain in owner vaults administered by smart contracts. The owner does not need to trust any centralized entity in order to pay off the loans and redeem the asset. To redeem their assets the owner pays off their liquidity loan with BRC, which are then “burned” (removed from circulation) in this process.

As the amount of collateralized assets increases, more Bridgecoin is minted. During times of decreasing collateralization or in the event of a selloff or devaluation of prominent asset classes, minting of Bridgecoin stops. Minting resumes when collateral increases again to maintain liquidity as the collateral base increases past previous high values.

The supply of BRC is dependent on economic activity, primarily in the form of collateralized assets added to blockchain vaults, that inform the protocol to mint (or not mint) tokens to produce an amount of liquidity aligned with demand.

If the value of a collateralized asset drops beneath a predefined threshold (or “Sell-Line”) set at the time of a loan, it is automatically sold by the protocol to ensure the stability of BRC. However, because an increasing supply of various types of assets are collateralized at different starting values together in the same vault, the probability that assets will be uncollateralized without the owner’s intention is very low. Furthermore, the token uses a combination of monetary policy and market making mechanisms to maintain BRC’s stability to the fiat currency or commodity to which it is pegged (i.e. USD, EUR, Gold, etc.). These mechanisms ensure BRC’s stability and enable Sweetbridge members to use it for trade and settlement purposes with confidence.

Image from Sweetbridge Whitepaper.

In addition to collateralization and monetary policy, the Bridgecoin protocol also uses market making dynamics to incentivize the funding of trust vaults for stability, and corrective buying and selling of BRC (or arbitrage) whenever its price deviates from the value of the asset it is denominated in. All of these mechanisms work hand-in-hand to govern a near-flat price.

Sweetbridge has developed several mechanisms to ensure BRC stability:

All loans for liquidity against collateral in the Sweetbridge network are paid out in BRC, which could be redeemed for fiat. This can produce a growing stream of regular economic activity.

Market makers that are incentivized to responsively collateralize their assets (and receive BRC in return), or buy BRC when supply exceeds demand.

An automated BRC repurchasing setting which will allow multiple customers to participate in the above market making arbitrage with the Sweetbridge Assets app.

In other words, If BRC>$1USD, users should take more loans since the liquidity that they will create is worth more. As a result, the supply of BRC will increase which will push its price down. If BRC<$1, users should pay back their loans in BRC, taking out BRC from circulation (less supply) which will increase the price of BRC. Both of these settings cause the token’s price to stabilize.

Collateralized assets that drop in value below their Sell-Line are automatically sold by the smart contract at fiat-par for BRC in the open market ensuring that BRC will always be backed by assets in a 1:1 ratio.

Parties can act as Trust Intermediaries by buying and locking up BRC for a portion of the total amount of fees and incentives occurring in the Sweetbridge network.

Risk managers receive fees from Sweetbridge to serve as a buffer against collateral price drops (similar to how insurance works for conventional deposit accounts).

Trust vaults, or vaults containing collateral that can be borrowed against, but not moved or sold off by the borrower, can collateralize additional longer term assets into the system and stabilize BRC even further.

Over time, collateralization of a base of multiple asset classes and types will further stabilize BRC. For example, when Sweetbridge enables settlement and collateralization of digital invoices for B2B payments (i.e., invoice factoring), BRC will be received for liquidity from the invoices based on the committed price of the invoice as agreed between the buyer and the seller. This price and payment expectation among known trading partners, coupled with the expected settlement volume of collateralized invoices, drives predictability. And, once payment is received for the invoice, the liquidity received from the collateralized invoice will be paid off with BRC, again helping to stabilize its price.

This functionality and Bridgecoin stabilization mechanisms are fully explained in the Sweetbridge Mathematical Specifications Whitepaper and additional whitepapers listed there.

Bridgecoin (BRC) is not Sweetcoin (SWC), but they go great together.

Don’t confuse the stable Bridgecoin (BRC) liquidity token with the Sweetcoin (SWC) discount token, though they work together very well within the Sweetbridge economy. SWC is held and activated by Sweetbridge members to receive discounts on services within the economy, including lower interest rates on asset-backed loans and reduced exchange fees between BRC and fiat, which certainly makes BRC easier to use for liquidity.

Unlike BRC, SWC is not designed to be stable. SWC has a limited supply of 100M tokens, and there is no need for the price of the SWC discount token to remain stable as it is not being used for payments and trade. Look for a story focusing on the exciting capabilities and mechanics of Sweetcoin soon!

There’s a lot of depth of thought behind our dual-token design and the maintenance of a stable Bridgecoin here at Sweetbridge, and I suggest educating yourself on the Mathematical Specifications paper for details on these mechanisms at https://sweetbridge.com/whitepaper. Trust yourself — even if you don’t understand all the math you can still follow the explanations quite easily. Or get on and chat with Sweetbridge about it, we can and will talk about it all day!

Big thanks to Sweetbridge Assets Product Manager and co-author Gal Mordechai for helping pull this article together! And we couldn’t have done without Harry Goodnight for the wealth of source material.