The Killer App: Low Risk Stable Token and Compound Interest
tauchain·@dana-edwards·
0.000 HBDThe Killer App: Low Risk Stable Token and Compound Interest
<html> <p>In this post I will again go back to what Ohad said about derivatives to discuss what in my opinion is the holy grail "killer app" for the crypto community. To put it in short the market wants stability during bear markets or in highly volatile markets. The purpose behind this post is to make the argument to the Tau/Agoras community on the need to have this low risk stable token with compound interest. If we remember, Ohad used the phrase "risk free interest" which essentially is the main part of the equation of what people want but the question then is what exactly does that potentially look like and how would it work?<br> </p> <p><img src="https://cdn.pixabay.com/photo/2016/03/31/21/29/compound-interest-1296451_1280.png" width="1280" height="640"/></p> <h1><br> Stable tokens are a necessity and Tau at minimum needs this<br> <br> </h1> <p><br> Not everyone understands how vital stable tokens are. Facebook seems to understand it with Libra and the Steem developers understood it with Steem Dollars. I will state that if we look at the charts the demand for Steem seems to be based on the demand for the stable token the Steem Dollar. The problem is the Steem Dollar didn't hold the peg and the product could not keep up with the demand. The current state of the art in decentralized stable tokens is in my opinion the multi-collateral Dai. Multi-collateral Dai is backed by different kinds of collateral such as wrapped Bitcoin (WBTC) or Ethereum, or potentially security tokens (STOs). The ideal collateral is low risk, as the idea here is to have stable wealth storage with the least amount of risk of wealth loss.</p> <p><br></p> <p>The wealth preservation function is the main driving force in crypto. People who are wealthy want to preserve and grow their wealth over time. The idea was that Bitcoin could act as a hedge but as Bitcoin integrates more and more into the institutional and legitimized financial system (Bakkt, etc) the less Bitcoin will be this sort of hedge in my opinion. The problem with Bitcoin right now is it's not currently acting as a good store of value and there is no guarantees that the market cannot be manipulated or that the Bitcoin price cannot be shorted (using Bakkt) to control or cap the price of Bitcoin to some maximum.</p> <p><br></p> <p>Bitcoin had the hype that people would buy it in the hope that their wealth could grow 1000% or more. The ICO boom which led to the 2017 hype also seemed based on the hope that people had to grow their wealth quickly by making the right investment. In the current market this 1000% growth isn't happening, the ICOs are becoming much more regulated, and so now the mood is fear rather than greed. When the market is in fear the people want to preserve their wealth and seek stable tokens to solidify their wealth while the market is being shorted (if it is being shorted). While the daily traders can and do make a profit off volatility the every day person just wants to grow their wealth consistently over time in the lowest risk way they can.<br> <br> The stable tokens also provide a means of actually spending and using crypto. The latest IRS guidance presents a very confusing unworkable situation. First the potential capital gains makes it no longer feasible for most people to use Bitcoin as a currency. The fact that Bitcoin can be a different price as much as 40% loss or gain in 30 minutes, is a reason why Bitcoin cannot work as a currency. At the same time people in crypto want to stay in crypto or spend the crypto they are earning and so for this reason they need a stable token which has the same value guaranteed. The dollar is not stable enough because any fiat currency fluctuates due to inflation, sanctions and other political unpredictable. A true stable token is backed by a basket of assets which can include fiat, so that even if the political worst case scenarios were to play out the people who hold this crypto stable token would know they have a true hedge against political unrest.</p> <p><br></p> <p>So why does Tau need a stable token so badly? Tau or to be more specific Agoras, is supposed to provide enhanced market functions. In order to have enhanced market functions you need a means to transaction in a way where the person or machine being paid can store it long term safely. For example Agoras as it is now has a price range from 20 cent to almost 3 Dollars, and such a wide range makes it too volatile to want to use it as a transaction token. On the other hand Agoras could act as collateral to provide utility for the network such as if participants want to buy storage from the network or other computation resources. The collateral is what can back a token, just like on Steem where Steem Dollars are backed by Steem, but I think Ohad has something more sophisticated in mind.</p> <p><br></p> <p>The point here is that with derivatives you can create a stable token. If you can do security tokens (STOs) you can then use these to back a stable token with stocks and other assets. A security token for example could be real estate or a company and it can be used to back a stable token as part of the collateral. At the same time a stable token can also be backed by a diverse portfolio of low risk collateral such as treasury bonds, precious metals, fiat currency, it can be mixed with high growth potential assets like Bitcoin (WBTC), it can even be backed by a crypto index token representing the top 10 crypto assets, as all of this is possible.</p> <p><br></p> <h1><br> Stable token + compound interest = guaranteed wealth builder over time</h1> <p><br></p> <p>The mathematics behind compound interest makes it obvious that if you have a stable token which can be staked in such a way that it pays interest in itself then you have what is called compound interest. This compound interest stable token in my opinion is the holy grail best wealth preserver function crypto can provide. Ohad in his blog mentioned risk free interest but I don't even think it has to go that far. Low risk interest or choose your risk interest could be just as good depending on the setup.<br> </p> <p>For example a basket of currencies and treasuries is to hold, and if interest grows on top of this then you have a win for every new dollar gained, but if it's low risk to generate that interest then great, and if it's risk free interest (which is theoretical) then even better. The demand for mining equipment was based on the fact that people think the Bitcoins mined will continue to be worth something, but miners need a stable token to hedge. So we can see that demand already exists in the crypto community for hedging and of course it exists outside of crypto as well because anyone with a savings will likely want to find some way to safely grow it or reduce the risk of losing it to market volatility, politics, etc.</p> <p><br></p> <p>Conclusion</p> <p><br></p> <ul> <li>Tau/Agoras needs a stable token and so does the crypto community as a whole.</li> <li>The ultimate application of a stable token is a stable token which pays compound interest.</li> <li>The combination of low risk stability and compound interest is almost irresistible for those looking to preserve and grow their wealth.<br> If you can do derivatives you can do a stable token with interest.</li> <li>If you want tax efficiency you need a stable token (capital gains are a problem for daily use)</li> <li>If you want micro-payments or long term holding you require stability and interest.</li> </ul> <p><br></p> <p>Of course things can go wrong. The code could fail, and this nearly happened with Dai. In addition if you go the hardware route (trusted execution environment) then the hardware could fail instead of the code. This means even if decentralized, and even if done right, there is the possibility of something failing, and for this reason fail safes need to be built in and carefully designed to minimize the damages which are possible due to failure. This could mean not putting too much trust on any hardware or software or it could mean having the legal system (SEC and others) protect investors should the hardware and or software fail, in which case if there is a company for example and the courts recognize that there was a hack then it can be handled legally, but ideally the code and hardware should not fail.</p> <p><br></p> <p>If for example the security tokens work perfect in code and in hardware but the companies behind those tokens fail then for sure the legal system would have the ability to get involved. Bitcoin on the other hand if it's the collateral might not fail as easily as a company but the risks are different. Overall using multi collateral reduces the risk of any one collateral failing and bringing down everything and if we look at Steem Dollars it is backed only by one collateral (Steem). Perhaps if Steem Dollars were backed multi collateral by SMTs this could save Steem by providing a true stability to the Steem Dollar, and maybe if the Steem Dollar paid 5% to holders it would increase demand. These examples show that the main aspect of getting things right in dealing with derivatives and stable tokens is managing risks.</p> <p><br></p> <h3><br></h3> <h3>References</h3> <p><a href="https://hackernoon.com/security-token-derivatives-158758c6a301">https://hackernoon.com/security-token-derivatives-158758c6a301</a></p> <p><br></p> <p><br></p> </html>
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