Innovation and Cryptoventures. Stablecoins. Campbell R. Harvey. Duke University and NBER

Transcription

1 Innovation and Cryptoventures Stablecoins Campbell R. Harvey Duke University and NBER

2 Campbell R. Harvey

3 Cryptocurrencies are too volatile Bitcoin as a transaction method will not be viable until the volatility is decreased. Currently, it fails as a store of value. Campbell R. Harvey

4 Cryptocurrencies are too volatile Holding for one week: 95% confidence interval is Bitcoin: +/- 25%[from 2011]; S&P500 is -4.3% to +4.3% Worst S&P daily return since 1957 is Oct. 19, 1987 at % Over last 6 years, bitcoin has had 8 days with less than % return Second worst daily return since 1957 is Oct 15, 2008 at -9.03% In 2018 alone, more than 8 days with <-10% return Campbell R. Harvey

5 Four different types 1. Fiat collateralized 2. Real asset collateralized 3. Crypto collateralized 4. Non-collateralized Campbell R. Harvey

6 Fiat-collateralized coins Tether is the largest (USDT) also very controversial TrueUSD (TUSD) exchange directly into escrow so TUSD never touches your USD LBXPeg tied to sterling; BitCNY Candy backed by Mongolian tugrik Sometimes called IOU coins if there was ever a problem with the collateral, the token holders are owed the fiat. Campbell R. Harvey

7 Fiat-collateralized coins USDC (Circle) accepted on many exchanges like Poloniex (which Circle owns) Paxos Standard (PAX) and Gemini Dollar (GUSD) approved by New York State Department of Financial Services Campbell R. Harvey

8 Campbell R. Harvey

9 Real asset-collateralized coins Digix Gold (DGX) ERC-20 and 1 DGX=1 gram of gold. Gold in vault in Singapore and audited every three months. Can redeem (recast) in physical gold in 100g or 1000g lots. Need to be physically present Proceedures fully compliant with AML/CFT regulations set out by the monetary authority of Singapore. Transaction fee of 0.13% Daily Demurrage Fee covers the cost of vault and audit is 0.60% (annualized) 9

10 Real asset-collateralized coins Tiberius Coin (TCX) combo of 7 precious metals used in tech hardware Technology Metals: Tin (14%) and copper (23%) Electric Vehicle / EV Metals: Cobalt (10%), nickel (11%), and aluminum (7%). Stability Metals: Gold (17%), palladium (13%), and platinum (6%). Fees claimed less than 2% p.a. Sale delayed due to credit card companies asking for high fees 10

11 Real asset-collateralized coins Swiss Real Coin (SRC) backed by portfolio of Swiss real estate. Interesting, the holders vote on the investment choices! This is an Security Token Offering (STO) that will take place in Reservations live. 11

12 Real asset-collateralized coins Swiss Real Coin (SRC) backed by portfolio of Swiss real estate. Interesting, the holders vote on the investment choices! This is an Security Token Offering (STO) that will take place in Reservations live. 12

13 Real asset-collateralized coins D1 Coin. Collateralized with diamonds. Each D1 coin is pegged to 1/1000 th of the value of D1 standard grade diamond Ethereum ERC-20 5% fee for receipt of diamonds 2.5% for issuance and redemption of D1 coins White paper 13

14 Real asset-collateralized coins D1 Coin. Collateralized with diamonds. 14

15 Real asset-collateralized coins D1 Coin. Collateralized with diamonds. 15

16 Real asset-collateralized coins D1 Coin. 16

17 Crypto-collateralized coins: Suppose you own a house and want a home equity loan. The bank gives the loan but you pledge your house as collateral. The collateral is worth more than the loan (over-collateralized). If the house drops in value, the loan may be called. If you can t payback, the house is auctioned off. This is an example of a Collateralized Debt Position or CDP Campbell R. Harvey

18 Crypto-collateralized coins: Augmint (pegged to Euro called A-Euro), Uses collateralized debt position ERC-20 White paper Campbell R. Harvey

19 Crypto-collateralized coins: Haven White paper Campbell R. Harvey

20 Crypto-collateralized coins: Havven renamed to Synthetix White paper susd Campbell R. Harvey

21 Crypto-collateralized coins: Sweetbridge Campbell R. Harvey

22 Crypto-collateralized coins: Let s do a deeper dive on MakerDAO s DAI It is an ERC-20 token which means it is native to the Ethereum blockchain. The token represents a small amount of ETH but also represents DAI (which has a much higher value) Campbell R. Harvey

23 Campbell R. Harvey

24 Crypto-collateralized coins: MakerDAO DAI is a cryptocurrency that is has a mechanism that allows it to be pegged to the USD. So $1=1 DAI (approximately). In existence for about one year. Campbell R. Harvey

25 Crypto-collateralized coins: MakerDAO Suppose 1 ETH= $100. In addition, suppose the initial collateral ratio is 1.5 (you must post $1.50 in collateral for every DAI borrowed) You send 1 ETH to a smart contract which allows you to borrow 66 DAI (some rounding). There is also a stability fee which is similar to interest. As long as ETH>$100, then the system is secure. However, what happens if ETH drops in value? Campbell R. Harvey

26 Stablecoin Campbell R. Harvey

27 Crypto-collateralized coins: MakerDAO Suppose ETH drops to $75. In addition, the maintenance margin collateralization ratio is The drop in ETH triggers the equivalent of a margin call. If you are close to the maintenance margin, you need to repay by sending 66 DAI to the contract. After doing that, you would be refunded the ETH (about 1 ETH, there is a stability fee) If you do not repay and you go below the collateralization ratio, you will be liquidated. Campbell R. Harvey

28 Crypto-collateralized coins: MakerDAO There is a group called keepers that are constantly checking the blockchain for contracts that have fallen below the maintenance margin. They can trigger a liquidation. Keepers is a general term for those that maintain a blockchain they are not specific to MakerDAO Campbell R. Harvey

29 Crypto-collateralized coins: MakerDAO Now let s consider liquidation. In our contract, there is 1 ETH. These ETH are auctioned off for DAI. To be clear, the trade is selling ETH and buying DAI (which should have a positive price impact on DAI) The auction is looking to sell enough ETH to obtain 66 DAI Price of ETH is $75. Usually, this would cost 0.88 ETH (66/75). However, in the auction you might need to pay more than 0.88 ETH (which means the price of DAI increases relative to ETH) Campbell R. Harvey

30 Crypto-collateralized coins: MakerDAO After the 66 DAI are purchased in the open market and returned to the CDP (which is just a smart contract), the residual is paid back to the borrower. Suppose the DAI are bought in auction for 0.90 ETH. This means that 0.1 ETH is returned to you. So you have 66 DAI and 0.1 ETH. You could also sell the 66 DAI for ETH and you would end up with approximately 1 ETH (where you started). Note, the 66 DAI are destroyed (reducing the supply of DAI) The stability mechanism works the other way too if DAI increases above the peg, then the collateralization ratio is changed. Who changes the collateralization ratio? 30

31 Crypto-collateralized coins: MakerDAO There is much more to the system than my explanation The maker token (MKR) holders determine the collateralization rates and they regulate the system (and get paid for it) However, MKR are the buyers of last resort if there was ever a situation where there was not enough collateral to cover the DAI, MKR is created and sold to cover the residual MKR holders are, hence, strongly incented to responsibly regulate. Campbell R. Harvey

32 Crypto-collateralized coins: MakerDAO There is also a fail safe called Global Settlement If the system under attack, a Global Settlement is triggered where you can exchange the DAI directly for ETH through a smart contract and collateral will be released to the owners Campbell R. Harvey

33 Crypto-collateralized coins: MakerDAO DAI also allows for leveraged ETH positions Suppose you have 1 ETH = $100 and you enter into a CDP and get 66 DAI. You use DAI to buy more ETH (0.66 ETH). [Assume do this only once.] Now you profit (or lose) with leverage. Suppose price rises, e.g., ETH=$200 You would usually have profited by $100 or 100% return You have 1.66 ETH which is worth $332. You buy 66 DAI for $66 and repay the CDP leaving you with $266 (a profit of 166%) Campbell R. Harvey

34 Crypto-collateralized coins: MakerDAO Note as the collateralization ratio decreases, the amount of leverage increases. Theoretically, as leverage approaches 1:1, you can get infinite leverage! However, importantly, the lower the collateralization ratio, the more DAI are created Campbell R. Harvey

35 Crypto-collateralized coins: MakerDAO Finally, currently the system allows for only one type of collateral: ETH In the future, they will generalize this to any ERC-20 or ERC-721 token This opens a range of interesting ideas. For example, you might have an ERC-20 that represents an investment in a diversified portfolio of stocks and bonds. Essentially, almost any collateral (as long as it is tokenized) can be pledged. Campbell R. Harvey

36 Crypto-collateralized coins: MakerDAO Other information Andy Milenius at Devcon4, December 10, Campbell R. Harvey

37 Non-collateralized coins: Basis, Kowala, Fragment/Ampleforth Common feature: a dynamic monetary policy to target a particular exchange rate (much like Central Banks attempt) For example, the Swiss National Bank was worried about CHF appreciating. They tried to peg to Euro. Wednesday January 14, 1.2 CHF= 1 Euro Thursday January 15, 0.85 CHF = 1 Euro Daily CHF= BarOHLC, CHF=, Bid 1/19/2015, , , , , , (+2.02%) 1/20/2005-7/29/2015 (GMT) Price /USD Campbell R. Harvey Auto

38 Basecoin Basis protocol. Dynamic monetary policy that uses a three token system (coin, bonds and shares). They had to shut down December 18, 2018 because regulatory issues (bond and stocks were securities). Nevertheless, let s explore their idea. 1. Coin (Basis): Supply shifts to keep demand at, e.g., $1 to maintain peg If price increases, more coin is created; if price decreases, coin is purchased to decrease supply A stable cryptocurrency with an algorithmic central bank Campbell R. Harvey

39 Non-collateralized coins 2. Bonds: (Bond token) Generated whenever supply needs to contract Bonds are redeemable for 1 coin in future if: Supply is expanding Bond hasn t expired (5-year window) Your bond is next in line (oldest redeemed first, FIFO) Sold for less than $1 to achieve yield (here is where the regulatory issue kicks in because qualifies as a security) Campbell R. Harvey

40 Campbell R. Harvey Non-collateralized coins 3. Shares: (Share token) Supply is fixed Not pegged to anything. Value determined by dividend policy. When demand for basis goes up and blockchain creates new basis, new basis paid to shareholders (after outstanding bonds) Payments are proportional to ownership (again seems like a security) Thus bonds incentivize contraction of supply and bond and shareholders are recipients of expanding supply and the peg can be maintained via game-theory and economics

41 Kowala protocol Vision is a series of k-coins, kusd, keur, (each coin has its own blockchain) White paper Three stability mechanisms 1 second confirmations in Go Ethereum (Using Ethereum code but important change to consensus mechanism for their own blockchain) There are three popular clients, eth client written in C++; geth client written in Go (language designed at Google and similar to C), pyethapp client written in python. All of these interact with Ethereum (and testnet) blockchain. Think of you being able to send an using Outlook to someone else who uses Gmail. Campbell R. Harvey

42 Kowala protocol Stability mechanism #1: Minting algorithm If kusd rises above $1, then more supply is added (so the block reward is variable) If kusd falls below $1, mining reward goes to zero however, that might not be sufficient to drive the price back Campbell R. Harvey

43 Kowala protocol Stability mechanism #2: Stability fee Like Ethereum, every transaction sender is charged a fee (in part to compensate miners for maintaining the network). This fee also includes a stability fee which is 0-2% of the transaction amount. The fee serves to reduce coin supply when price is below $1. Note the max is 2% and usually the stability fee would be zero (in normal conditions). Also, no one pockets the fee. The coin is destroyed. Campbell R. Harvey

44 Kowala protocol Stability mechanism #3: Trading activity First two mechanisms are first order effects and are designed to keep kusd close to $1. There is a second order effect. Given that market participants understand the peg, there exists a natural Schelling* (focal) point ($1=1 kusd). That is, arbitrageurs will enter the market if the price falls below $1 and start to buy. *In Game Theory, a solution that people will use in the absence of communication. Named after Thomas Schelling (Nobel 2005). Campbell R. Harvey

45 Kowala protocol Other Two token system: kusd and musd, where musd is a mining token. There is a fixed number of musd for every kusd. Consensus mechanism (Konsensus) derived from Tendermint and uses Practical Byzantine Fault Tolerance* (pbft). They believe superior to Proof of Work. There are miners. For every block, a leader (called proposer) is deterministically elected from miners. All other miners are validators. Proposer assembles the next block and the validators decide whether to accept or reject. Proposer gathers pending transactions of offers to the validators for formal verification. If two thirds or more vote to accept the block, proposer commits it to the blockchain. If block is rejected, a new proposer is elected. The likelihood of being elected as a proposer depends on the number of musd you have. * 46

46 Kowala protocol Other Dishonest or free-loading miners punished by becoming ineligible to propose blocks (need to be active to participate); Also, in order to be eligible, miner needs to stake musd tokens (currently 30,000); Maximum number of miners; Based on Ethereum for smart contract purposes Energy efficient 7,000+ tps with processing time of 1 second Campbell R. Harvey

47 NuBits If demand exceeds supply (usually price would go up), NuBits introduces additional circulation into supply. The new supply is authorized by NuShareholders If supply is greater than demand (usually price falls), excess digital taken out of circulation. NuShareholders buy the excess supply. Depending on performance of NuBits, NuShareholders are issued dividends by platform. If demand low for prolonged period of time, NuShareholders can authorize creation of more NuShares. Example of Seigniorage shares category of stablecoins Campbell R. Harvey

48 NuBits 2016 saw large deviation from peg At this time, bitcoin and other cryptos were sharply appreciating Large selling of Nubits by those wanting to buy non-stable cryptos Campbell R. Harvey

49 NuBits However, notice that it returned to parity. Perhaps arbitrage traders? But oddly, at a number of points it goes to more than $1.25 at the end of 2017 around the same time bitcoin is crashing. Uncertainty about bitcoin caused demand for NuBits, driving the price beyond parity. Campbell R. Harvey

50 NuBits Converting bitcoin to USD is slow (and in a crash situation, you need to be fast). Also, there are tax consequences. Converting to NuBits was quick. NuBits printing money and selling it to bitcoin holders. As cryptomarket crashes, demand for stablecoins increases (less so with collateralized) Tether Campbell R. Harvey

51 NuBits NuBits crashes again March 21, Lack of reserves. As price starts to fall there is a bank run, and people try to sell the NuBits One factor was that NuBit reserves were stored in bitcoin! Essentially, the collateral was not diversified. Campbell R. Harvey

52 NuBits Campbell R. Harvey

53 NuBits Other Campbell R. Harvey