Decentralized stablecoins need to be built around beating inflation through yields and chain-level fees

Lately I've not been able to stop thinking about how every decentralized blockchain ought to individually function on a dual-token economy where there's a governance asset whose price actions should mirror revenue growth through free market trading and a stablecoin that's managed by smart contracts and decentralized consensus.

I believe I've mentioned this on two occasions(not very sure), although, in previous mentions, I did not delve into specifics like how pegs should be designed or how exploits can be avoided, essentially security.

This is because firstly, I had not thought beyond what a stablecoin is considered to be, traditionally — that is, being pegged to the dollar, euro or any fiat currency and sometimes gold.

Also, the focus previously was to get the idea out there that it simply makes sense for each blockchain to have its own native stablecoin, it's the perfect way to manage debt and stabilize their individual economies.

That said, with recent developments around stablecoins, specifically the push for stablecoin regulations clarity, I had to revisit the ideas I had laying around on this one.

But before I get to that, ICYMI:

The United States Senate Banking Committee elected to advance the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act in an 18-6 vote.

None of the amendments proposed by Senator Elizabeth Warren made it into the bill, including her proposal to limit stablecoin issuance to banking institutions.

Senator Tim Scott, chairman of the Senate Banking Committee, characterized the bill as a victory for innovation. The Senator said:

"The GENIUS Act establishes Common Sense rules that require stablecoin issuers to maintain reserves backed one-to-one, comply with anti-money laundering laws, and ultimately protect American consumers while promoting the US dollar's strength in the global economy.” — Cointelegraph report

Senator Elizabeth Warren argued that without changes to the bill, it would supercharge the financing of terrorism, adding that it makes sanctions evasion by Iran, North Korea, and Russia easier.

But I don't really care for what Elizabeth thinks, what I do care about is what signals come from this bill being formally signed into law.

Stablecoins, by design, are a proxy indicator of liquidity that exists within the cryptocurrency markets. This is not something a lot of people look at but it is the truth. You look at BTC/ETH and you think that a couple “virtual billions” displayed are the true liquidity when they are really just an indicator of an underlying reserve(the USD values linked back to stablecoins like USDT and USDC printed with real world reserves, which is usually much smaller) betting on each of these assets to not be a total ass, long time.

By this argument, I'm essentially saying that whatever the market capitalization of all stablecoins backed by fiat is, is the true indicator of the base liquidity the entire crypto market has.

This is why people often argue that if USDT crashed, it would be disastrous for the entire ecosystem. It is certainly a hard pill to swallow, especially for Bitcoin maxis, but it's the truth.

If people are stripped of ways to move into stability, the entire system collapses in a panic. That's how much power leans on these centralized coins issued by private businesses.

Decentralized stablecoins are beyond crucial

First off, it's kind of comical how it is called a stablecoin when it isn't actually stable and I am not talking about deppeg events.

I am talking about inflation and other factors that move value. If the underlying currency or asset can move up and down in value, then there's nothing stable about it, it's just a wrapped token representing the USD.

Otherwise, we may as well call WBTC a stablecoin because it is pegged to Bitcoin in the same way USDT is pegged to USD. Bitcoin may be more volatile to USD but it remains true that both are subject to value changes, essentially making neither a safe haven.

So if being pegged to USD doesn't afford a token the true status of stability, what then would make decentralized stablecoins different?

That's a good question and I have a couple of ideas.

I think firstly, what qualifies as a stablecoin is what maintains a value that affords products and services in the same amount despite a rise or fall in inflation.

I thought of a lot of ways that this could be achieved and all included processes that are slippery in terms of security and it came down to two things I think is a near-safe bet for consideration.

Yields and fees can maintain stability as economies evolve

Theoretically, it's a very simple strategy, but I imagine that to execute this, a lot more optimization would need to be applied.

With that soft-hanging disclaimer out of the way, how does yield and fees help us achieve stability above inflation?

I'll start by saying that a decentralized stablecoin would still be pegged to the dollar, unless a stronger currency emerges and beats the dollar in terms of utilization as a unit of account.

The USD here is merely a unit of account that helps the smart contracts track changes in real world markets. If the USD is devalued by 4% for instance, our decentralized stablecoin has to make holders whole for that change.

What this means is that the supply would have to grow(essentially new prints have to occur) that instantaneously gets distributed to every holder, proportionally to the stake held.

So whilst the stablecoin itself remains pegged to the USD, the unique system underneath expands everybody's wealth if inflation occurs.

What happens if inflation reverses? Well, it's simple, fees get applied to transactions based on the percentage change, allowing the network to burn off the excess supply.

What's fun about this system is that it serves only active debt holders, who are taking a huge risk because by this design, a stablecoin with a $200 billion marketcap would have to add $8 billion if a 4% inflation occurred in the US economy.

People who buy in later do not get to benefit from inflation changes that are a factor of a past time and that ensures that a Luna-type event does not occur.

That said, there still remains a critical issue. Whilst the idea of adding fees to eliminate the supply makes sense, the idea of printing new tokens out of thin air does not.

A possible solution to this would be to have a system to subsidize heavy printing. A single side liquidity solution that slowly branches out into a two-token LP position would be a perfect source for stacking up value to handle such events.

This is to say that when people convert the governance token for the decentralized stablecoin, a percentage of the amount should be set aside for liquidity provision, where the network would autonomously earn fees that become a reserve to handle future potential printing of the stablecoin to offset the cost of growing inflation in the underlying asset of peg.

Now, I know this might sound insane at first but hear me out.

Let's use HBD and Hive as a reference.

If I want HBD, I burn Hive and get HBD that's equal to the USD value of the Hive burned. But instead of everything getting burned. A percentage, maybe 20%?

Is autonomously moved into a smart contract account that provides this Hive as liquidity in the open market. If people buy off these tokens, the smart contract earns some fees and now has a secondary token(maybe Bitcoin? USDT?) to pair into another LP position and continue earning fees.

Note that the network now has a perma-liquidity of multiple secondary major assets essentially backing the 20% Hive taken from the conversion process that prints HBD.

These fees — regardless of the assets it's based on(excerpt fees paid in HBD) — are routinely moved into Hive and kept as a treasury(reserve) that would go towards initiating further HBD printing on the blockchain level if inflation devalued the USD that it is pegged to.

Why the system is unique is because the 20% Hive set aside initially is not a major risk because it amplifies the rate of achieving one of the purposes of HBD, which is to increase the value of Hive. The only way the Hive tokens return to public heads is if it gets bought and that moves up the price of Hive, potentially by a percentage that ensures that its market capitalization is much higher than the HBD printed, and also puts secondary assets earning perma-trade-fees for the blockchain, ensuring the network doesn't fall into bad debt.

Also, the fees earned also pumps Hive because they all go towards purchasing Hive for the treasury.

This piece has become longer than the average reader would like, so to conclude, the system of debt is not really threatened because it's sort of money that should have already been burned but it was turned into a vehicle for generating revenue for the network and also pumping the price of the native asset at the same time.

Certainly, there could be flaws that I can't spot at the moment, but I'd argue that it's something worth considering, either in parts or full.