Stablecoin Based on Bytom (BTM) – Some Thoughts
In the recent Bytom Global Dev Competition, some stablecoin projects have been seen. It is no surprise as stablecoin has been really a buzzword in the recent crypto market, and these projects are mulling over stablecoins based on Bytom Blockchain.
Stablecoins have been embroiled in controversies and they have been dissected and studied by some of the smartest minds in the cryptospace. This article is going to do a deep dive on the buzzword stablecoin and visons about its design on Bytom.
What is Stablecoin?
The creation and development of stablecoins have a complicated history. We think it’s not necessary to present all of them, but it will be more interesting to introduce the concept with a short story.
A primary school student named Leek would get some pocket money from his dad every day, while his dad did not allow him to use the money to play online games in internet cafés. Leek then came up with the idea that to use cigarettes as payment for internet access fees since the internet café owner likes smoking, and the owner agreed.
The owner of the internet café later opened a cigarette store after realizing that lots of pupils used cigarette as their internet access fees, and announced only cigarettes bought from this store were accepted by his internet café.
The business went quite well and seeing this, many cigarette shops were opened to sell cigarette to pupils. Though they tried hard to tout their products, they were not welcomed as they were not accepted by the internet café.
Things began to change when Leek’s father found out all this. He reported the shop and asked local authority to strengthen regulations on it. To respond to that, the cigarette shop owner tried his best to win regulatory support and figured out an “acceptance dealer system” which allowed a few pupils to buy cigarettes in bulk and resell it to others. The internet café also opened a special transaction counter for the convenience of selling and buying among those pupils and charged some commission fee for it.
The story stops here and let’s change the roles in it. In the cryptospace, Leek is those crypto investors, Leek’s father is the government, the internet café is those crypto exchanges like BitFinex and Gateio, the cigarette store is the issuer of stablecoin like Tether, and then cigarette is the stablecoin such as USDT or GUSD. Now we may have a basic understanding about the necessity and importance of stablecoins.
The value of the stablecoin at the current stage is mainly to act as a means of payment other than legal tender, to enable the transaction of cryptocurrency in situations where fiat money is not allowed. Created out of the market demand and regulations, stablecoins in itself can become a tool to accumulate wealth, and their issuers and crypto exchanges are going to benefit the most. In this aspect, government shall regulate the crypto market starting from the regulation on stablecoins.
Some expressed their concerns that dollar-backed stablecoins may have great impact on the international monetary and financial system; while in my view it is a gross exaggeration. Data shows that, USDT, which accounts for 87.33 percent of the stablecoin market share, currently has a market value of only $2.8 billion, with 24-hour trading volume at $3.3 billion (according to data collected from CoinMarketCap.com on Sep.26, 2018). For another, the international monetary and financial system is quite huge, compared to the $83.6 trillion in national money supply (according to HowMuch.net), the impact of the USDT on the monetary system is almost negligible. So at present, the impact of stablecoins is mainly confined to the cryptocurrency market.
Visions about Stablecoin
Following are some thoughts about stablecoin. First, a country can issue a stablecoin as a regulatory tool and see it as an exploration of digital currency; or explore the possibility of crypto-collateralized stablecoins.
- State-issued stablecoin
A majority of the current stablecoins were issued by private individuals, but it is not ruled out that there will be stablecoins issued by a state in the future. If a stablecoin pegged to a certain legal tender (such as U.S. dollar and Chinese Yuan) is issued directly by a state, it would be truly stable. This kind of stablecoin is born with natural stability and the main concern about it is whether it will be accepted and massively adopted from the commercial aspect.
Imagine if a country uses a stablecoin as a regulatory means with KYC (Know Your Customer) and AML (Anti-Money Laundering) regimes, it will be a gateway for the entire crypto market and the crypto market will be more controllable. The country will be able to know how new money flows into the crypto market. At the same time, the relationship between stablecoins and the existing fiat money can be eased. In this context, if a state-issued stablecoin is only to meet the demand of the crypto market, it will have no conflict with the existing monetary system.
- BTC-collateralized stablecoin
Most current stablecoins are pegged to physical assets such as U.S. dollar. In the future, there may be currencies anchoring cryptos or tokens like bitcoin – some countries even may issue fiat money backed by bitcoin. It’s a counterintuitive prediction because intuition tells us that bitcoin is a volatile asset. But I think it is exactly a trend in the future, a significant step for the crypto world to influence the atomic world.
Actually it’s not absolutely impossible. For one reason, more and more people want to fight against inflation via cryptocurrencies, especially those in Iran, Turkey, Venezuela, Argentina and Zimbabwe, suffering from economic and currency crises; for another, the fluctuation of bitcoin price has been seen on a decrease at an annual rate of 25% since 2010.
Bitcoin price volatility has been decreasing year by year (according to highchars.com)
It is expectable that bitcoin would be a stable cryptocurrency in the far future. But why not directly use bitcoin as a payment means? As some users may still tend to use their own fiat money, and problems like congestion may emerge on the bitcoin network along with the large volume transactions in the future. While the maturity of sidechain technologies could make stablecoin more advantageous. Therefore, there may come up a BTC-backed stablecoin.
How to Create a Good Stablecoin?
First of all, we need to get straight the function of a stablecoin. At present, stablecoins are a patch affiliated to traditional currencies to address specific problems in a certain sector. Precisely we should call stablecoin “pegged coin”, as the value of a stablecoin is not that stable but fluctuates with the price of the peg. Stablecoin has to accomplish two “leaps” to achieve the practical goal as a popular stablecoin.
The first leap is to technically achieve anchoring to real-world assets, by building reserve mechanism, algorithm regulation and interest rate adjustment. There have been many articles about the stablecoin mechanism. I will not go into details here, but recommend A History of Stablecoins to you. In summary, it mainly focuses on “decentralization”, “usability”, “stability”.
Centralized stablecoins like USDT are easy to use and stable, but lack in decentralization. Decentralized stablecoins, such as BitUSD (a crypto-collateralized stablecoin), are featured by a high degree of decentralization, but its stability is greatly affected by fluctuations of the collateral.
The second leap is to commercially achieve mass adoption. Only when a stablecoin is widely adopted, could it have values. Currently stablecoins faces the influence from government policies, acceptance of exchanges, the prosperity of C2C (customer-to-customer transaction) market and other commercial factors.
Stablecoins Based on Bytom
Bytom is a public blockchain dedicated to asset blockchainization, and stablecoins are in fact a part of the blockchainization of “currency” asset. Stablecoins based on Bytom will have three advantages:
- Based on the BUTXO model (Bytom Unspent Transaction Output) and sidechain
- Based on the system of asset blockchainization
- Based on the national cryptographic standards
1. Based on the BUTXO model (Bytom Unspent Transaction Output) and sidechain. The UTXO (Unspent Transaction Output) model is the underlying data structure of bitcoin blockchain, featured by safety, stability and extensibility. However, the current stablecoins market is overwhelmed with tokens based on the account model of Ethereum, lacking stablecoins based on UTXO architecture. In my view, the model architecture based on UTXO is the future trend, because the tokens with asset attributes, especially stablecoins, require the most secure data storage structure. The decade bitcoin being around is a decade of tremendous stability and security, and a stablecoin based on the UTXO model will also have this trait. Bytom’s extended UTXO architecture can unify all kinds of stablecoins into a blockchain. As you can imagine, stablecoins backed by U.S. dollar, Japanese yen, Hong Kong dollar and euro can all be on a public chain.
A stablecoin system based on BUTXO
2. Based on the system of asset blockchainization. Asset blockchainization is a systematic job as we elaborated in the serial articles.
Six major systems of asset blockchainization
Taking the onchain identity system for example, there must be an identity system behind stablecoins. Imagine we have a Chinese yuan-pegged stablecoin, when we obtain all accounts related to CNY, we need to go through the procedures of KYC (Know Your Customer) and AML (Anti-Money Laundering). However, the account system on blockchain is mostly based on public key or private key, so it needs to build a layer of account system on the top layer to match that of the real world. By building tools such as distributed identity and blockchain contract, Bytom builds an identity system on the blockchain to provide underlying support for the stablecoin. This is also something that most underlying public chains cannot make or have not focused on.
3. Based on the “national cryptographic standard”. In the narrow sense, the national cryptographic standard refers to “the public-key cryptography algorithm 2 based on M2 elliptic curve and SM3 cryptography hashing algorithm 3”, two pieces of standards deemed as domestic cryptography algorithm by the State Bureau of Cryptography Administration. It will enable Bytom to be friendly to domestic standards in terms of security. Broadly defined, the national cryptographic standard means that Bytom is a public chain protocol with Chinese elements. In the exploration for the development of state-issued digital currency and the creation of a stablecoin, we need to take Chinese elements into consideration. After all, codes have no national boundary, but the currency has its nationality.
Translated from “基于比原谈稳定币“ by Ma Qianli, vice president of 8btc News and director of operations at Bytom, responsible for the scenario realization of asset migrating onto Bytom Blockchain. Having competitive capability in IPO, M&A and asset securitization with many successful cases, Qianli was the director of investment banking arm in Codi Capital, and securities affairs representative of vöhringer after graduating from Shanghai University of Finance and Economics.