Convertibility is the quality that allows money or other financial instruments to be converted into other liquid stores of value. Convertibility is an important factor in international trade, where instruments valued in different currencies must be exchanged.

Freely convertible currencies have the immediate value on the foreign exchange market, and few restrictions on the manner and amount that can be traded for another currency. Free convertibility is a major feature of a hard currency. Convertibility first became an issue of significance during the time banknotes began to replace commodity money in the money supply. Under the contemporary international currency regimes, all currencies’ inherent value derives from fiat, thus there is no longer any thing (gold or other tangible store of value) for which paper notes can be redeemed.

So, to have USD convertible coin it must be:

1. fully backed, 100% in fiat USD,

2. freely convertible,

3. changeable directly to fiat USD,

If we want to be fully backed in fiat USD currency we must work like Tether LTD does. But we do not want to be like Tether! We do not want to have full backing in fiat USD like Tether has, because of this >>>

Stable tokens vs Tether

Second option is to focus on currency board and fixed proportion. A currency board is an institution that issues currency that is freely convertible, at a fixed rate, into an external reserve asset. Also currency board must hold 100 percent foreign reserve ratio at the margin — not necessarily 100 percent total reserves. This results from the fact that a currency board cannot independently influence the money supply and cannot engage in any type of discretionary monetary policy, like we can not engage in USD money supply. A currency board is a monetary authority that maintains a fixed exchange rate with an anchor currency.

STABILITY = fixed exchange rate +convertibility +high external reserve at the margin

fixed exchange rate can be ETH/USD=ETH/ST

Users can send when they want and how much they want ETH to personal conversion smart contract to change them for minted Stable Tokens ST.

2. convertibility can be personal conversion on the smart contract ETH to ST and ST to ETH

User can do buyback of all ETH on personal conversion smart contract by the same peer if he sends Stable Tokens ST to burn them on the smart contract and no one else can buyback his ETH.

3. high external reserve at the margin can be ST=ETH+derivative1+derivative2…derivativeN on the smart contract

Personal collateral smart contract gives every user personal liquidity by safe keeping input amount of ETH and preserving minted amount of derivative1, derivative2….derivativeN in the trusted smart contract custodian. The only challenge is to determine the derivatives.

Economic conclusion:

Fixed proportion is not the same as fully backed Token cannot be fully backed, if it isn’t 100% directly covered in fiat USD Token should not be fully backed to have the value of one USD

Therefore, we do not want full coverage but the focus is on a fixed proportion. Fixed proportion can be maintained if you constantly monitor the proportion of USD/ETH, and for that, you do not need full coverage, but you have to be careful of the speculations that are decreasing proportion.

The solution lies in centralized personal conversion in a decentralized public smart contracts! Smart contract gives us TRUST. Personal conversion gives us LIQUIDITY.

Stable Token System is fixed priced and liquid if every peer on the network have fixed exchange rate and reserve on the smart contract at all time. Only all peers together can make Stable Token in a trustworthy and distributed network like Ethereum. More about this Stable Token System is found in next two articles, because the most complicated part is to actually create Stable Tokens.

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