Cryptocurrency market fine-tuning has begun.
We’ve discussed stable coins and their role as a key to cryptocurrency adoption. Stable coins, by definition, are aimed at being as stable as possible. This is usually achieved by pegging the value to a fiat asset, such as the US dollar.
The cryptocurrency exchange BitBay adds to the stable coin offering by introducing their own pegged coin. In contrast to other attempts at stable coins, BitBay promises to return power over coin value to the user.
Stable coin shortcomings
Stable coins are surprisingly difficult to implement. Trust-based systems, such as Tether’s stable coin, are often suspected of dishonesty in their off-chain auditing processes. These type of systems tend to promise to buy back their currency at a guaranteed price. To this end, they claim to hold the fiat equivalent of their coin’s total supply. Of course, we have to trust the company and their “independent” auditors regarding the validity of these claims.
Other approaches try to implement decentralized means of providing price stability. An example of this is MakerDAO’s DAI stable coin, which uses crypto collaterals locked into smart contracts instead of off-chain assets to back up the value of the currency. So far, this approach has worked well, but the corresponding smart contracts are obviously very complex.
A Simpler Approach?
BitBay’s idea to pegging their coin to the US dollar is surprisingly simple. Coins are frozen and unfrozen in accordance to their price. For example, during a price dump, coins can be frozen. Every user has two balances: a liquid balance and a frozen balance. Only liquid balances can be transferred. During a pump situation, the process can be reversed. The theory behind this freezing and unfreezing is that the total supply changes. Basic economic theory suggests that prices depend on demand and supply. Therefore freezing coins should increase the price of the remaining liquid coins. In reverse, unfreezing coins should decrease the price, as supply increases.
You may ask who controls this freezing and unfreezing process. The answer to this that coin users can vote on this issue. If a user chooses not to vote a built-in algorithm is used. This algorithm favors high volume and a healthy price. “Manual voting”, or voting according to a user-defined algorithm, is possible. However, in order to participate in the voting, users need to have a stake in the system. This is achieved by the “Proof of Stake 3” algorithm borrowed from Blackcoin. This algorithm rewards notes for verifying transactions. The goal of only accepting the votes of staking votes is to limit influence in the system to those participants that have an interest in the health of the currency.
Of course, markets are difficult to predict. In theory, BitBay’s protocol could be a simple yet powerful means of providing a decentralized stable coin. But will the markets behave as expected? Will loopholes be found? All these questions remain to be tested in practice. What seems certain, is that stable coins are highly desired tools that could bring an end to unwanted volatility and proof the key to adoption.