Dual Loop Cryptocurrencies

Started by RickyChhajed, Aug 31, 2022, 01:56 AM

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RickyChhajedTopic starter

Stablecoins pegged to conventional currencies or physical commodities

The oldest and simplest approach is to simply link the value of a cryptocurrency to a regular currency. This approach immediately imposes restrictions associated with centralization and the need to follow the regulators.



For the clients of the system, the problem of trust in the issuer of the cryptocurrency immediately arises - it cannot be verified by the user himself, unlike the chain of mathematical proofs of conventional cryptocurrencies that can be traced starting from the first block.

Even for Tether, it took years to publish reserve collateral, and as it turned out, it was cash that made up a tiny part of the collateral (3.88%) and the main collateral came from bills of exchange 66% and fiduciary deposits 23%.

For physical commodities, things can get even more complicated, as the ability to check reserves may be completely non-existent. Example: El Petro and its scandals.

Note that Tether has the ability to ban / block user addresses that, according to Tether, violate laws or are involved in laundering. On the part of users, even the mechanisms of approaches to resolving such disputes are incomprehensible (https://www.theblockcrypto.com/linked/70981/tether-blacklist-addresses-ethereum-usdt)

So, with all the existing criticism, Tether and others are widely used. The reason is a little trivial - it is that Tether and others can be entered into the crypto circulation and into the very exchange algorithms, confirmations on blockchains, and so on. Just those properties that conventional currencies do not have.

Conclusions:

    + peg/stability to traditional currency

    + technical compliance with cryptocurrencies: wallets, blockchain, exchanges

    - centralization

    - impossibility to check reserves

    - ban / block users

    - transferring all the problems of the traditional currency to the token/coin (inflation, bans)

Cryptocurrency or volume adjustable token
The next logical step is to overcome centralization, looking for the possibility of stabilizing the purchasing power of a coin or token.
An instance of such a token is Ampleforth, in which the number of all existing tokens varies every day depending on the price target of the token to 1 USD.

Let's explain with an instance: let's say the demand on exchanges for a token has grown and its price has grown by 10% - 1.10 USD / AMPL the next day, the ethereum token contract increases the number of all balances in all users' wallets according to their share. As a result, users and traders have additional coins that they sell, increase the supply on the exchanges and the price comes back to 1 USD.

And vice versa, when the rate falls, the smart contract reduces the balances of all users, respectively, the supply on the market decreases, which can lead to an increase in the price of the token.

From an investor/user point of view, everything looks good as long as the amount of the token in the wallets remains more or less stable, but as soon as its number starts to jump, it is already difficult to understand how to use it.

It is quite difficult to explain to the user why tokens simply disappeared from his wallet.

So, that is a good forward movement to overcome the problems of traditional stable coins.

Conclusions:

    + decentralization

    - Difficulties in using with a changing balance

    - a token in the Ethereum ecosystem, rather an investment tool, but as an investment it is not clear as it is tied to a price

Dual Loop Cryptocurrencies

At the moment, this is a novelty in the world of cryptocurrencies, for instance: Dynamic Peg technology implemented in BitBay (BAY) cryptocurrency

Let's take a closer look at how this system works.

Implemented on top of the "standard" UTXO crypto coin, BAY is a Proof-of-Stake (v3) coin that inherits the bitcoin code and all its features like bitcoin script, multisig, locktime, etc. Ideally, the technology is applicable to other UTXO cryptocurrencies

The idea is that all coins (each Satoshi) have an additional quality, let's call it "proof" after the instance as "gold coin proof". In this system, each satoshi has a sample (a number from 1 to 1200) that will determine its liquidity.

Coins (satoshi) cannot change the "probe". The initial distribution by "probes" during mining / staking is exponential - in each next column there are less coins by 1%.

Further, the system is divided into two circuits, reserve coins and liquid coins. This is done by introducing an index (Peg Index) that indicates the number of the column from which the coins will be liquid.
As a good illustration with the "fineness" of coins, with peg=100 this means that coins with a fineness less than 100 are now recognized as reserve and coins with a fineness of 100 and more are liquid.

Liquid coins can be used for payment (sending coins on the network).
Reserve coins are limited in the speed of movement - they go to the sender for 1 month.

The management of the peg index (the minimum value of the "sample" that is accepted for payment for goods) is decentralized. Users who participate in mining / staking can vote for inflation in the system (reducing the "sample", more liquid coins), for deflation (increasing the minimum "sample", less liquid coins) or for maintaining the status.

Voting is automatic by default and is tied to the target BAY rate which is set as 1/100,000 of the bitcoin high. Somewhere around $0.64 at the time of writing. And the value of liquid coins really stabilizes at this level. (illustration from BitBay Wallet).

From the point of view of the system user, his wallet balance is divided into two values - his reserves (BAYR) and liquid coins (BAY). In a sense, each user is his own reserve bank and can vote for inflation / deflation in the system. Its total balance remains stable (liquid + reserve coins) and coins can move from reserve to liquidity and vice versa depending on inflation or deflation in the net.

The contour of the movement of reserves is limited by the speed of transactions - 1 month. This was done specifically to limit the possibility of manipulating the exchange rate - you can instantly transfer liquidity to the exchange for sale, but in order to credit the reserve there, you have to wait a whole month.

From a security point of view, an attacker must capture 51% of the coins in order to win the vote and manipulate inflation/deflation. Which is quite unprofitable for the attacker, since buying more volumes will have to trigger inflation processes in the system and the attacker will need to spend more money to buy.

    + decentralization

    + new approach to stabilization

    + progress compared to Ample forth

    + full-fledged cryptocurrency, not a token, bitcoin script, multisig, locktime, etc.

    + control of inflation/deflation in the system

    + investment opportunities

    + working system

    - pilot project

    - entry difficulty

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IdeaPad

An interesting way to freeze money, but I think this will not suit everyone. In the TON cryptocurrency of the Durov brothers, a mechanism was laid to combat volatility through a reserve fund, which is replenished and sold to maintain the course. But that is done by some community in manual mode, which is not very reliable. And it is not clear what will happen if the reserve fund runs out or the funds to replenish it run out.

At the moment, there are many stable coins pegged to the dollar: DAI, Tether, BUSD, USDC, UST, TUSD, PAX and a few dozen more. Somehow they exist quite stably, but the question is whether it is necessary to tie the cryptocurrency to fiat, where the emission goes in trillions?
In my opinion, it is better to be tied to a commodity basket or to energy (a basket of energies) in any way. At the same time, the possession of a crypt gives the right to receive energy directly, for instance, by compensating for payment for electricity or for gasoline at a gas station at a certain rate.
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Sildymas

Most cryptocurrencies have one serious drawback, similar to what it was before the abolition of the gold standard by Nixon, namely finiteness. This restriction on the amount of money when using the proof of work approach when issuing leads to an increase in the complexity of calculations, which ultimately will one day lead to the impossibility of issuing new coins and an even greater increase in the cost of transaction fees.
That is why I think such an approach is not suitable for the new financial system, but generations in theory can get around it due to the fact that there is a generational change, the complexity of operations is not growing, commissions for operations are penny, the number of transactions per second is very large (1.5 years ago I was last interested, then this there were several million transactions per second).
And this approach still has a lot to grow. That's it..
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