Stable coin without algorithm or backing

d5000

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Fortunately such "proof of burn" tokens already exist for a while, so we can analyze how their price evolved. To be fair, none of these had the intention to be pegged to a fiat currency, but the mechanics are the same.

One of the first tokens of this kind was Counterparty (XCP) on the Bitcoin network. It was issued in 2014, with XCP tokens being distributed according to the Bitcoins burnt.

However, this made not behave XCP in a "stable" way, not even compared to Bitcoin:

Source: Coingecko

(orange line is the price of XCP in BTC, blue line in USD).

You see that even if you can argue that XCP always was "backed" by the "collateral" of the BTC which were burnt when they were created, the price lowered year after year, with some spikes in the middle.

The reason is actually: a currency's value is not only determined by the money supply, but also by the demand. If XCP, or your "USD pegged" token, had a perfect stable demand per token then it could hold its value against the USD. But this is so highly unlikely that it becomes totally unrealistic. Demand varies for various reasons, from seasonal changes to economic cycles, and of course cryptocurrency market's own attention cycles.

So you always need a burn mechanism for those times when the demand goes down. And that's what algorithmic stablecoins like Dai actually provide, and that's the reason why they can work.

FatFork

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Quote from: Maximion on June 23, 2024, 06:50:04 AM

You all never take in account that in fact collateral is not excluded from circulation and until no critical demand on it from stablecoin holders this collateral can participate in economy partly or even completely thus multiplying a total money supply
All u can do here is to just believe the coin issuer doesnt do that

That doesn't apply to all stablecoins and doesn't justify creating valueless tokens. Sure, some of them probably create worthless tokens without much backing. But others have ways to keep the value pegged, even if the collateral isn't completely locked up or frozen. The issuers put controls in place so they cant just take the collateral and print more money whenever they feel like it. The assets are supposed to be there as a safety net if people start cashing out the stablecoin all at once. That way the value stays steady.

Quote from: Maximion on June 23, 2024, 06:50:04 AM

And in my case you are sure that collateral is really excluded

But in your case it makes even less sense. Burning real assets to mint tokens with nothing behind them? You'd be destroying value to make something with no value. Maybe I'm missing something, but what's the point of that?

mu_enrico

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Quote from: Maximion on June 23, 2024, 06:50:04 AM

You all never take in account that in fact collateral is not excluded from circulation and until no critical demand on it from stablecoin holders this collateral can participate in economy partly or even completely thus multiplying a total money supply...

Correct! More informed users already know that USDT, for example, is still run on fractional reserves. However, some people still believe it's legit because they promised (in the beginning) that USDT is backed by actual USD. This was the reason it could grow and become mainstream. However, I believe it will crash at some point, just like other examples in history.

But about the case that you are promoting a stablecoin without some sort of pegging mechanism, and the fact that the mechanism involves burning ETH, won't convince investors.

DyllanGM

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Creating a stablecoin without backing or an algorithm is tricky. In your idea, people send ETH to a smart contract, which checks ETH's USD value, gives tokens equal to that value, and burns the ETH. The challenge is keeping the token's price at $1.00.

Since there's no collataral, the price depends on market demand and supply, which can be unpredictable. If demand drops, so does the price. if demand spikes, the price could go over $1.00. Without a stabilizing mechanism, it's hard to keep it steady at $1.00, making this kind of stablecoin risky and likely to fluctuate a lot.

Maximion

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Quote from: Psynthax on June 23, 2024, 03:51:10 AM

USDT backed by USD doesn't mean it generate value out of nowhere brother, it just means your USDT can be exchanged back to USD and the USD that's used to collateral USDT usually put in reserves.
if the USD used as collateral is not in reserve, when someone tries to exchange back USDT to USD and money is nowhere to be found, the stablecoin will lost its peg.

I think you got your logic wrong here mate.

You all never take in account that in fact collateral is not excluded from circulation and until no critical demand on it from stablecoin holders this collateral can participate in economy partly or even completely thus multiplying a total money supply
All u can do here is to just believe the coin issuer doesnt do that

And you should not cause have you ever though what is a whole purpose of issuing stablecoins with 1 : 1 ratio? There is no sense to do it if you are not going to use a collateral to make more money (put back to circulation) or to issue more coins than you backed

And in my case you are sure that collateral is really excluded

Psynthax

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Quote from: Maximion on June 18, 2024, 06:42:13 AM

Have you ever thought that in fact collateral approach multiplies a money supply by 2?

I.g. if USD has a value then USDT backed with USD also has value - then it means that both have a value and therefore you have existing USD money supply + newly created USDT money supply

This way I can back USDTT with USDT and say that USDTT is backed with USDT an so on
USDTTT backed with USDTT
USDTTTT backed with USDTTT
USDTTTTT backed with USDTTTT
USDTTTTTT backed with USDTTTT

and with your philosophy they all will have a a value but they wont

This is why 99% of ICO tokens can't retain even its initial capitalization that equals to amount of ETH spent , cause you create another supply - not replace existing one

But in my case we burn one supply and create another in another form and even in another place. I burn 1 ETH and emit 3500 USDx - the total value does not change

USDT backed by USD doesn't mean it generate value out of nowhere brother, it just means your USDT can be exchanged back to USD and the USD that's used to collateral USDT usually put in reserves.
if the USD used as collateral is not in reserve, when someone tries to exchange back USDT to USD and money is nowhere to be found, the stablecoin will lost its peg.

I think you got your logic wrong here mate.

X-ray

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This is silly idea, a stablecoin that has no collateral is not stable coin, its shit coin.

if your contract receives ETH and decides to give ERC20 token in exchange to the USD value of ETH received, and later burns it which honestly doesn't make sense at all Grin

. This simply means you're just burning your money, the ERC20 that is minted from that activity will have zero value, nobody gonna buy it as it is deemed valueless since the ETH which can be used as collateral just got burned.

Quote from: Maximion on June 19, 2024, 03:12:56 AM

when you spend ETH for the token you have intention to get something in exchange of ETH with real value, and this "something" really does have a value for you cause you spent real money for that
So the token doesnt need to be pegged to anything the same way like ETH doesnt need to be pegged to anything.

Look at this token not as at regular token with collateral - but as at a product you buy

Things doesn't work that way, exchanging ETH to some random ERC20 doesn't make that ERC20 get valued the same as the ETH that got burnt, instead its just gonna have whatever value that ERC20 is packaged with such as the underlying dapps that utilizes that token or just gonna be another shitty valueless token.
using the same logic, those ICO that raised ETH in exchange for their token will have their token retain intrinsic value that ETH is having but the reality isn't really like that right?

when you burn ETH, this simply means you are burning the ETH and its Value. the ones that gonna benefit is the other ETH holder since the supply of ETH decreases so the value of their ETH increases.

muncuss

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That is like rebase mechanism in algorithmic stablecoin, which algorithm control coin supply based on the price. You said without algorithm but your smart contract is still an algorithm to stabilize price

mu_enrico

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Quote from: Maximion on June 19, 2024, 03:12:56 AM

when you spend ETH for the token you have intention to get something in exchange of ETH with real value, and this "something" really does have a value for you cause you spent real money for that
So the token doesnt need to be pegged to anything the same way like ETH doesnt need to be pegged to anything.

Look at this token not as at regular token with collateral - but as at a product you buy

It's true that a token doesn't need to be pegged, but without pegging, it will be just like any ordinary token (not a stablecoin). By the way, ETH isn't a stablecoin either.
Minting with burning money as "gas" isn't new; look at the BRC-20 tokens. They aren't stable.

What makes a token "stable" is its ability to maintain the same value. If the goal is to have 1 token = 1 USD, then it must be achieved by pegging or backing with real USD. In the short term, this can be managed with an algorithm or other mechanisms, similar to the fixed vs. floating exchange rate scenario in macroeconomics. However, in the long run, people have already learned from events like Soros's actions and the 1997-98 crisis.

FatFork

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Quote from: Maximion on June 19, 2024, 03:12:56 AM

Quote from: mu_enrico on June 19, 2024, 02:54:38 AM

The problem with your idea is that your token isn't pegged to anything. You can't create value that way. Burning ETH will only make ETH's value go up, not your token's. In other words, if you burn 1 ETH, you'll only make ETH slightly more scarce.

when you spend ETH for the token you have intention to get something in exchange of ETH with real value, and this "something" really does have a value for you cause you spent real money for that
So the token doesnt need to be pegged to anything the same way like ETH doesnt need to be pegged to anything.

Look at this token not as at regular token with collateral - but as at a product you buy

Look, you completely missed the mark on pegged tokens. Your claim that collateral multiplies the money supply? That's wrong.

Again, burning something valuable for your token doesn't magically make it valuable. Seems you're forgetting the other half of the equation. Imagine this: a wacky billionaire buys all the sand in the Sahara for some eccentric reason. Does that magically inflate the value of every grain of sand on Earth? Of course not! The same thing applies to your token.

Maximion

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Quote from: mu_enrico on June 19, 2024, 02:54:38 AM

The problem with your idea is that your token isn't pegged to anything. You can't create value that way. Burning ETH will only make ETH's value go up, not your token's. In other words, if you burn 1 ETH, you'll only make ETH slightly more scarce.

when you spend ETH for the token you have intention to get something in exchange of ETH with real value, and this "something" really does have a value for you cause you spent real money for that
So the token doesnt need to be pegged to anything the same way like ETH doesnt need to be pegged to anything.

Look at this token not as at regular token with collateral - but as at a product you buy

mu_enrico

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Quote from: Maximion on June 18, 2024, 06:42:13 AM

Have you ever thought that in fact collateral approach multiplies a money supply by 2?

I.g. if USD has a value then USDT backed with USD also has value - then it means that both have a value and therefore you have existing USD money supply + newly created USDT money supply

This way I can back USDTT with USDT and say that USDTT is backed with USDT an so on
USDTTT backed with USDTT
...

It shouldn't multiply the money supply if it's backed 1:1 and if there are no shenanigans, since the money in circulation will remain the same. For example, 1 USD kept in the safe equals 1 USDXXX in circulation (and vice versa). This is definitely not like USDT, where who knows what happens with the real money (USD).

The problem with your idea is that your token isn't pegged to anything. You can't create value that way. Burning ETH will only make ETH's value go up, not your token's. In other words, if you burn 1 ETH, you'll only make ETH slightly more scarce.

Belarge

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Quote from: Sayeds56 on June 18, 2024, 05:48:31 AM

You have explained in details the mechanism that governs the issuance and supply of stable coins in response to their demand. This is very complex task to maintain the value of stable coins such as DAI, USDT or USDC close to 1 US dollar. Which is very crucial for the stability of the market, if this peg is broken, it can cause significant disruptions in the market. We have witnessed collapse of UST token of LUNA foundation rapidly losing its value to the extent of 99% when its peg was broken.

The demand of the stablecoin in the market is general mechanism and its important they exist in the system. The value of these projects are acknowledgeable but on the other hand, always make instructs that will be safer for everyone of us. The stability of the market is based on the projects opposed and also volatility triggered. We've witnessed how these trembling dump projects in the space but we should also know what's coming in.

Sayeds56

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Quote from: EarnOnVictor on June 18, 2024, 04:49:50 AM

There is no guarantee in that, which is why you will always see some stablecoins quoting a little less than the value of a USD or a little higher than the value of a USD. Most claim that they have their stablecoin backed by the USD, but this is truly not so, and it is due to many factors including their selfish gain in rate manipulation and what you just explained above.

I can only believe that a Stablecoin will always be equal to $1 if the stablecoin has its own blockchain and is truly backed by the USD.

You are correct that that there is no guarantee that stable coin will be always equal to one dollar, because there are various variable assets behind its backing and those keep fluctuating in value such as treasury bills, Bitcoin or any other fiat currency such as Euro or British pound, we exactly don't know what are the real asset being used as collateral to support stable coins are often unclear.

betswift

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Quote from: Maximion on June 18, 2024, 06:42:13 AM

Have you ever thought that in fact collateral approach multiplies a money supply by 2?

I.g. if USD has a value then USDT backed with USD also has value - then it means that both have a value and therefore you have existing USD money supply + newly created USDT money supply

This way I can back USDTT with USDT and say that USDTT is backed with USDT an so on
USDTTT backed with USDTT
USDTTTT backed with USDTTT
USDTTTTT backed with USDTTTT
USDTTTTTT backed with USDTTTT

and with your philosophy they all will have a a value but they wont

This is why 99% of ICO tokens can't retain even its initial capitalization that equals to amount of ETH spent , cause you create another supply - not replace existing one

But in my case we burn one supply and create another in another form and even in another place. I burn 1 ETH and emit 3500 USDx - the total value does not change

USDT is not purely backed by USD, it has a lot of various support collateral such as treasury and BTC, $ and other assets!

Maximion

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Have you ever thought that in fact collateral approach multiplies a money supply by 2?

I.g. if USD has a value then USDT backed with USD also has value - then it means that both have a value and therefore you have existing USD money supply + newly created USDT money supply

This way I can back USDTT with USDT and say that USDTT is backed with USDT an so on
USDTTT backed with USDTT
USDTTTT backed with USDTTT
USDTTTTT backed with USDTTTT
USDTTTTTT backed with USDTTTT

and with your philosophy they all will have a a value but they wont

This is why 99% of ICO tokens can't retain even its initial capitalization that equals to amount of ETH spent , cause you create another supply - not replace existing one

But in my case we burn one supply and create another in another form and even in another place. I burn 1 ETH and emit 3500 USDx - the total value does not change

Sayeds56

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Quote from: kotajikikox on June 18, 2024, 02:39:28 AM

Quote from: Maximion on June 18, 2024, 01:30:12 AM

How do you think would the the price in USD of such stablecoin always stay close to 1.00?

Stablecoins are backed by collateral assets that are usually controlled to help manage the price of the stablecoin itself. Any entity or organization that holds these stablecoins (if it is a centralized platform) or those who hold the collateral that is used to back up stablecoins usually try to control the supply and demand so the price stays as close to $1 at all times.

You have explained in details the mechanism that governs the issuance and supply of stable coins in response to their demand. This is very complex task to maintain the value of stable coins such as DAI, USDT or USDC close to 1 US dollar. Which is very crucial for the stability of the market, if this peg is broken, it can cause significant disruptions in the market. We have witnessed collapse of UST token of LUNA foundation rapidly losing its value to the extent of 99% when its peg was broken.

EarnOnVictor

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Quote from: Maximion on June 18, 2024, 01:30:12 AM

-snip-
How do you think would the the price in USD of such stablecoin always stay close to 1.00?

There is no guarantee in that, which is why you will always see some stablecoins quoting a little less than the value of a USD or a little higher than the value of a USD. Most claim that they have their stablecoin backed by the USD, but this is truly not so, and it is due to many factors including their selfish gain in rate manipulation and what you just explained above.

I can only believe that a Stablecoin will always be equal to $1 if the stablecoin has its own blockchain and is truly backed by the USD.

asriloni

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Quote from: Maximion on June 18, 2024, 01:30:12 AM

Lets assume we have a ETH smart contract

It watches at ETH/USD pair using some oracle like Chainlink

Now, some user sends some amount of ETH to this contract
The contact takes a current value of ETH/USD , for example 3500 and credits the user with exactly 3500 tokens and also burns received ETH

You missed key point; your stable token will have 0 value. You are burning ethereum utilized to back the value for your stable token; hence, this explains One cannot issue stable tokens without supporting assets, such gold or fiat money. People will never ever believe your token using this method.
In conclusion, the value of a stable token derived from the asset used to back your stable token;Therefore, If you were sending ethereum to the burning address, your asset will be zeroed back again.

Quote from: Maximion on June 18, 2024, 01:30:12 AM

This way our user receives amount of tokens which exactly equals to amount of USD he spent

Though, the total amount of USD spent will not be equal to the total amount of tokens emitted - but nobody can say the exact ratio

How do you think would the the price in USD of such stablecoin always stay close to 1.00?

That stable token will be clearly useless because no asset to back it; it will never work. It's the same as you were printing stable token, but you have no nothing to support the value of your token. The value owned by ethereum can't be transferred to your new stable token with that method. In conclusion, your token will be a valueless token.

Maximion

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Quote from: FatFork on June 18, 2024, 02:01:02 AM

Quote from: Maximion on June 18, 2024, 01:30:12 AM

How do you think would the the price in USD of such stablecoin always stay close to 1.00?

So your contract can only issue new tokens, without the ability to take them back? In this case, the value of such a token would likely be worthless.

Try to look at such coin not as at another one USDT but as at a value transferred from one token to another, cause here we destroy ETH in exchange of emission of our new token

Topic: Stable coin without algorithm or backing (Read 249 times)