How to advance the stablecoin ecosystem and build the financial networks of the future

In a year that has been marked by numerous milestones for the cryptocurrency sector, one of the most overlooked was the growth of the Stablecoin asset class that has overtaken Bitcoin in transaction volumes. The range of Stablecoins is huge with some backed by fiat currencies and others by commodities or a pool of crypto assets. Each of these Stablecoins’ designs involves drawbacks in that collateral either has to be stored by a centralised authority (which the users have to trust) or the users need to put in collateral that exceeds the value of the Stablecoin (to cover margin calls).

Bonded Stablecoins take a different approach. The general idea behind bonding curves is to allow minting of some new token in exchange for a reserve asset, with minting happening strictly according to a mathematical formula — a curve — that connects the total supply of the token issued and the total amount of the reserve deposited to back the issue. The opposite operation — redemption of the token for the reserve currency — happens according to the same formula. The issue and redemption of the token as well as storage of the deposited reserve is managed by an autonomous decentralized entity driven only by code and math, the entity is called Autonomous Agent (the concept is similar to a smart contract on Ethereum).

Particularly at large scale, bonding curves tend to suffer from big variations in price, making them less likely to keep their price-peg and therefore difficult to use in practice. The Obyte platform already took blockchain to the next level by introducing a Directed Acyclic Graph tying transactions rather than blocks together. Now, Obyte introduces a new Stablecoin design based on Multidimensional Bonding Curves – an improvement that at the cost of more complex math, eliminates the flaws of the traditional stablecoin design. Multidimensional Bonding Curves introduce a 2-dimensional plane where its predecessor uses a 1-dimensional curve.

Stablecoins based on multidimensional bonding curves can be understood in terms of a children’s playground seesaw. On one side, you have a “counter token” (T1) and on the other, you have the stablecoin (T2). When you buy the stablecoin, the seesaw will start tipping and cause imbalance between T1 and T2. The imbalance will cause T1 to become undervalued. This movement creates an incentive for speculators to buy T1 as that is now cheaper than its new target price. As T1 gets bought, the seesaw returns to balance. If T1 doesn’t get bought but someone keeps buying T2, the seesaw tips more and more making the buying price of T1 more and more attractive. Speculators, knowing that the T1 tokens will sooner or later be bought, can basically pick up the additional price paid for T2 tokens by buying T1 tokens that will now have become very cheap because the seesaw tipped a lot. There is an incentive for speculators to keep the seesaw relatively balanced. It means that the price of the seesaw will always keep more or less balanced at any time unless someone buys a very large portion of one of the “sides” in one go.

The benefits of Multidimensional Bonding Curves principally lie in the way in which the levels of collateral aren’t as stringent as other mainstream alternatives. The ratio in terms of the number of tokens varies according to the curves, in terms of value it remains constant and defined by a pre-set formula. The terms of engagement can also be agreed by the people issuing their personal credit using the Obyte platform. The ecosystem of participants sets the supply and demand for bonded Stablecoins and the price they are willing to pay, Obyte merely provides the tools to enable these exchanges and to allow users to issue their own multidimensional stablecoins with their preferred set of parameters.

Decentralized finance (DeFi) is continuing to grow at an exponential rate with the number of new DeFi assets increasing by almost tenfold over the same time last year, the total number of users stands at over 550,000 and is well on its way to reaching a million. As more people begin to put digital assets to use they will want to use products that are tailored to their needs. Obyte’s multidimensional bonded stablecoins provide users with the tools to send Stablecoins without having to provide excessive collateral or place trust in centralised vaults that lack transparency. And to do so at virtually no transaction cost. Participants can use the tools designed by Obyte to issue Stablecoins according to the set terms of a bonding curve, Dollars and Euros can be bought for the equivalent rate using Bytes – the native currency on Obyte – and distributed instantly over the DAG. Empowering people to use cryptocurrencies on their terms in a clear and transparent environment will see DeFi users reach not just one million but exceed that goal many times over.

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Author: Lauren Towner