Cryptocurrency startup Carbon has raised $2 million in seed funding, the company revealed to CoinDesk, Thursday.

Investors in the round include General Catalyst, Digital Currency Group, FirstMark Capital, Plug and Play Ventures and The Fund. Carbon did not disclose its valuation.

The investment round brings the project a step closer to launching a dollar-pegged cryptocurrency based on Hedera hashgraph.

So-called “stablecoins,” which maintain steady exchange rates with fiat money, have been the object of intense interest as well as scrutiny in recent months.

The most famous example, Tether, has been criticized for its opacity. While the company claims that every tether token is backed by $1 in bank deposits, it has failed to provide convincing evidence and was reportedly subpoenaed by the Commodity Futures Trading Commission in January.

Tether is “the elephant in the room,” said Carbon co-founder Connor Lin, that puts Carbon in a challenging position: “how do you build up trust?”

Even so, cryptocurrencies’ extreme volatility has made the prospect of a reliable stablecoin alluring, allowing the technology to satisfy “basic economic needs like paying bills and buying coffee, not to mention more complex needs like loans and insurance contracts,” says Carbon’s white paper, In a statement to CoinDesk, the team added cross-border remittances to that list, too.

Trust in code

The problem is how to maintain the peg. Carbon’s developers reject Tether’s method of backing with fiat currency, opting instead for a kind of algorithmic monetary policy. (Basecoin has also developed a stablecoin without fiat backing.)

Lin told CoinDesk:

“If we can create a mechanism that the Federal Reserve currently employs, [but] in a decentralized way, we don’t have to trust a central authority. We can just trust code.”

This mechanism involves two tokens: carbon stablecoin, which is pegged to a value of $1, and carbon credits, which fluctuate in value in order to absorb changes in demand.

When the stablecoin’s value falls below $1, an auction is held, and users willing to give up their stablecoins (thereby reducing the supply and driving up the price) receive carbon credits in exchange.

The next time the stablecoin’s price rises too high, its supply increases, and those newly created stablecoins are given to carbon credit holders. The process is governed entirely by algorithms.

Decentral banking

Lin compares Carbon to the U.S. central bank’s bond buying. The Federal Reserve uses these asset purchases to influence interbank lending rates and, by extension, the price of the dollar on foreign exchange markets.

For now, says Carbon co-founder Sam Trautwein, the goal is to maintain an exchange rate of $1. Eventually, though, he thinks that “society can do better than the Federal Reserve” and other centralized arbiters of monetary policy.

Carbon, in other words, acts as a proof-of-concept for monetary policy through smart contracts.

Lin said:

“Obviously this is a really experimental, ambitious idea, but we think it’s an experiment worth running.”

Carbon has decided to base their stablecoin system on Hedera hashgraph. Hashgraph is a distributed ledger technology similar to blockchain, but it dispenses with the block structure and the proof-of-work consensus mechanism, which requires electricity-intensive mining.

Lin and Trautwein told CoinDesk that the decision to use Hedera’s network was based on its high throughput and secure design.

However, since Hedera has not yet launched, Carbon’s roadmap is constrained for now.

Dollar image via Shutterstock.