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Suggestion: XRP-collateralized Stablecoins


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If you block an amount of a particular asset for any kind of emission (of a stablecoin) there is no workaround (instead of price fixing from the government) to supress the volatlitity of this asset/backing. You can - and that is what I read out of your answer - block at most more of this asset than would actually be necessary at the time of valuation in order to suppress a significant impact of its volatility on the emission, which means that you would (need to) block a much higher amount of variable valued XRP in order to ensure a halfway sufficient backing of the fixed valued emission (of the stablecoin) which unfortunately still would not be sufficient to garantuee a permanently safe backing as history proves. This is one of the most fundamental problems regarding emissions and financial crises, central banks policy, etc. - and the reason why there actually is no "stable" asset of any kind (and therefore no safe stablecoin, ofc).
Usually, the issuer should deliver the corresponding collateral, otherwise its issue loses value. Afterwards, the issuer/market would have to be constantly or regularly audited in order to ensure that his backing is sufficient over time.
What happens, if it is not sufficient anymore? Are there any kinds of sanctions involved?

Yep. Never understood why anybody should call fiat pegged coins stablecoins. Some fiat may have low volatility, but they still move .... thats not the same as stability.
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One of the original use cases for the XRP Ledger (since 2012) was using the built-in decentralized exchange to exchange between stablecoins and to exchange stablecoins for XRP. Currently, only stablec

I made a video giving more details on the proposed design.  

The advantage is that if you hold XRP directly, the value of what you hold changes over time. Some people want that, some people don't. This scheme lets those that want that hold XRP and those that do

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I think this has the potential to be a great addition to the XRPL and the ecosystem you are trying to build. Given the current focus on stable coins from Central Banks and the media as a whole. I think we need further information about the pegging to fiat though before we can provide more compeling feedback. 

Can you explain how you envisage say a central bank maintaing its pegged ratio. Can this be fed via oracles or similar smart contracts? 

Say the peg starts to slip in some crisis flash crash. Would any tools be provided to help with programatically recollatorising the peg? Could you decentralise this as an investment vehicle? 

Personally my biggest initial worry is that living in the post truth age we would have multiple pegs start with baseless pegs, begin to slip, and then devalue the whole concept. 

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I like this idea, but I would like to understand the level of trust and risks the users of the Stablecoin will have to bear.

In the current IOUs model, the users trust that the issuer holds, off ledger, the correspondent USD, EUR, gold ..... to back up the IOU.

In this new proposal, what will happen is the value of XRP drops and the issuer is not able or willing to increase the reserve to fully back up their Stablecoin? If the users panic, would it be like a run on a bank? The first ones will claim their XRP until the reserves are depleted and the last users will finish with a Stable coin with no back up and no value?

 

 

Edited by Odiseo
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42 minutes ago, Odiseo said:

I like this idea, but I would like to understand the level of trust and risks the users of the Stablecoin will have to bear.

In the current IOUs model, the users trust that the issuer holds, off ledger, the correspondent USD, EUR, gold ..... to back up the IOU.

In this new proposal, what will happen is the value of XRP drops and the issuer is not able or willing to increase the reserve to fully back up their Stablecoin? If the users panic, would it be like a run on a bank? The first ones will claim their XRP until the reserves are depleted and the last users will finish with a Stable coin with no back up and no value?

 

 

I think I’ve answered one of my concerns reading with more attention Joel’s post.

The risk of “running on the bank” would be diminished by giving privilege to the last collateralised positions, if I understand it correctly that would be the oposite to a pyramid scheme, as the first ones would feel more the pressure to keep enough reserves or will suffer the greatest losses.

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In his latest blog post (https://coil.com/p/Hodor/Acceleration-/3dawvDvgk) Hodor made a nice summary of two IMF blog posts:

https://blogs.imf.org/2019/09/19/digital-currencies-the-rise-of-stablecoins/

Adoption of new forms of money will depend on their attractiveness as a store of value and a means of payment. New entrants like stablecoins, however, are significantly different from the popular incumbents: cash or bank deposits.

While many stablecoins continue to be claims on the issuing institution or its underlying assets, and many also offer redemption guarantees at face value (a coin bought for 10 euros can be exchanged back for a 10-euro note, like a bank account), government-backing is absent. Trust must be generated privately by backing coin issuance with safe and liquid assets. And the settlement technology is usually decentralized, based on the blockchain model.

Times are changing. USD Coin recently launched in 85 countries, Facebook announced Libra, and centralized variants of the stablecoin business model are becoming widespread. So why are stablecoins taking off?

The strength of stablecoins is their attractiveness as a means of payment. Low costs, global reach, and speed are all huge potential benefits. Moreover, stablecoins could allow seamless payments of blockchain-based assets, and can be embedded into digital applications thanks to their open architecture, as opposed to the proprietary legacy systems of banks.

But the strongest attraction comes from the networks that promise to make transacting as easy as using social media. Payments are more than the mere act of transferring money. They are a fundamentally social experience linking people. Stablecoins offer the potential for better integration into our digital lives and are designed by firms that thrive on user-centric design. Large technology firms with enormous global user bases offer a ready-made network over which new payment services can quickly spread.

Risks abound, however—so policymakers must create an environment that maximizes benefits and minimizes risks. Policymakers will need to innovate and collaborate across countries, but also across functions. Here are six observations for them to consider.

First, banks may lose their place as intermediaries if they lose deposits to stablecoin providers. But banks are not sitting ducks. They will surely try to compete by offering their own innovations (and higher interest rates). Also, stablecoin providers could recycle their funds into the banking system, or decide to engage in lending by extending deposits themselves. In short, banks are unlikely to disappear.

https://blogs.imf.org/2019/09/26/from-stablecoins-to-central-bank-digital-currencies/

As privately issued stablecoins continue to encroach on more traditional forms of money—like cash and bank deposits—policymakers will not simply look on from the sidelines. They will arbitrate. Their rules and actions will determine how we will eventually pay for everyday items like a cup of coffee, and, more importantly, will affect the structure and risks of our financial sector.

Our last blog introduced stablecoins—cryptographic tokens that can be easily exchanged, benefitting from minimal price volatility relative to cash. Consumers might quickly adopt these new, cheaper, faster, and more user-friendly services integrated into their social media platforms. However, these also come with notable risks that require prompt regulatory action.

One possible regulatory path forward is to give stablecoin providers access to central bank reserves. This also offers a blueprint for how central banks could partner with the private sector to offer the digital cash of tomorrow—called synthetic central bank digital currency (sCBDC)

The regulatory imperative

Whether stablecoins are indeed stable is questionable. Stablecoin providers must privately generate trust in their liabilities—the very coins they issue. Many do so by backing coins one-for-one with assets of the same denomination. So if a stablecoin owner wanted to redeem her 10 euro coin for a 10 euro note, the stablecoin provider could sell the assets for cash to be pay out on the spot.

Or could it? Much depends on the safety and liquidity of the underlying assets, and on whether they fully back the coins in circulation. It also depends on whether assets are protected from other creditors if the stablecoin provider goes bankrupt.

Will the stablecoin owner get her money back any time she wants? Even if her peers attempt to sell their coins all at once, in a panic?

Regulation must eliminate these risks. One option is to require that stablecoin providers hold safe and liquid assets, as well as sufficient equity to protect coin-holders from losses. In essence, the call would be to regulate stablecoin providers despite them not being traditional banks; not an easy task we have found out.

Central bank backing

Another approach is to require stablecoin providers to fully back coins with central bank reserves—the safest and most liquid assets available.

The solution is not novel. The People’s Bank of China, for instance, requires giant payment providers AliPay and WeChat Pay to do so, and central banks around the world are considering giving fintech companies access to their reserves—though only after satisfying a number of requirements related to anti-money laundering, connectivity between different coin platforms, security, and data protection among others.

Clearly, doing so would enhance the attractiveness of stablecoins as a store of value. It would essentially transform stablecoin providers into narrow banks—institutions that do not lend, but only hold central bank reserves. Competition with commercial banks for customer deposits would grow stronger, raising questions about the social price tag.

But there are also clearer-cut advantages. Chief among these is stability, as backing is in perfectly safe and liquid assets. Another is regulatory clarity, as narrow banks would fit neatly into existing regulatory frameworks. Moreover, different stablecoins could be seamlessly exchanged thanks to the central bank settling all transactions. This would enhance competition among stablecoin providers. Additional benefits include support for domestic payment solutions in the face of foreign-currency stablecoins offered by monopolies that are hard to regulate; and better monetary policy transmission if pressure on currency substitution were alleviated, and interest rates were paid on reserves held by stablecoin providers—however distant the prospect.

If stablecoin providers held client assets at the central bank, clients would indirectly be able to hold, and transact in, central bank liabilities—the essence, after all, of a “central bank digital currency.” In practice, the coins would remain the liability of private issuers, and client assets would have to be protected against the bankruptcy of the stablecoin provider.

This synthetic central bank digital currency—or “sCBDC” for short—offers significant advantages over its full-fledged cousin, which requires getting involved in many of the steps of the payments chain. This can be costly—and risky—for central banks, as it would push them into unfamiliar territory of brand management, app development, technology selection, and customer interaction.

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Now taking the whole thing even further. Who's got the large amount of XRP (billions...)?  Who's working with 200+ FIs? Imagine Ripple and its partners come together and issue a (XRP collateralized) stablecoin on XRPL. One or several of them of them could become a "narrow bank" . Etc., etc...

Here you can really talk about the store of value as well as means of payment... However, many will probably see too many middlemen in this proposal that crypto, originally, tried to kill if I'm not mistaken... :)

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On 10/3/2019 at 9:01 AM, MikeH said:

1.  How will your stablecoin implementation be superior to the MakerDAO / DAI setup which is what I thought of first when I read your proposal?  They have VERY HIGH fees and we need to make sure XRP stablecoins avoid that same fate.

It has several significant advantages over the DAI setup but one significant disadvantage.

One key advantage it has over DAI is that any stablecoin issued by this system is guaranteed (assuming the system as a whole doesn't collapse) to be liquid to XRP at face value at all times the system operator has provided a current price. So you can safely use "niche" stablecoins pegged to a large number of different things such as stock or precious metal prices.

Another advantage is that the only system fee is a fixed cost when XRP is locked as collateral. This can be set by the system operator and we expect it to be around 0.1% -- there are no fees that must be paid to redeem or close positions. The peg is held by the redemption and margin call logic, not by any attempts to control supply.

The significant disadvantage it has is that a person who holds a position may be redeemed against because the token is liquid. So if you lock up XRP and issue a stablecoin, you may later find that some of your XRP was taken. Your position holds the same total value, but you lose leverage. This is done to the least-collateralized positions first, so you can reduce this risk by overcollateralizing. But avoiding losing leverage by having less leverage in the first place is not really a perfect solution.

 

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I love the idea, but I think it lacks a fundamental aspect.

Who is setting the value of the coin w.r.t. XRP? If it is the owner of the coin then it's useless, because he could value the coin very low and take back all the XRP.

We need a decentralized oracle which could provide the price, but it's a huge project itself.

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On 10/5/2019 at 10:53 PM, tar said:

If you block an amount of a particular asset for any kind of emission (of a stablecoin) there is no workaround (instead of price fixing from the government) to supress the volatlitity of this asset/backing. You can - and that is what I read out of your answer - block at most more of this asset than would actually be necessary at the time of valuation in order to suppress a significant impact of its volatility on the emission, which means that you would (need to) block a much higher amount of variable valued XRP in order to ensure a halfway sufficient backing of the fixed valued emission (of the stablecoin) which unfortunately still would not be sufficient to garantuee a permanently safe backing as history proves. This is one of the most fundamental problems regarding emissions and financial crises, central banks policy, etc. - and the reason why there actually is no "stable" asset of any kind (and therefore no safe stablecoin, ofc).

Usually, the issuer should deliver the corresponding collateral, otherwise its issue loses value. Afterwards, the issuer/market would have to be constantly or regularly audited in order to ensure that his backing is sufficient over time.

What happens, if it is not sufficient anymore? Are there any kinds of sanctions involved?

I’ll let David explain the specifics of why you’re incorrect. DAI survived a 93% drop in ETH. The scheme that David proposed taking advantage of XRP Ledger marketplace. The loan is typically over Collateralized and you can add more XRP if it starts to get close to liquidation. 

There’s always going to be a buyer ready to scoop up a loan falling below 100%. 

There will always be ample XRP in Reserves. Secondly, who’s to say other assets can’t be added to the collateral pool to diversify Risk?

BUT most importantly, you do realize Ripple has up to 1 Billion XRP released out of escrow every month. 

You can’t compare this to traditional markets. It’s apples to oranges plus Ripple acts as lender of last resort. 

BTW it’s most likely a soft peg to whatever fiat it’s pegged to in beginning. There’s no hard rule that forces the stablecoin to always be pegged 1:1 to that fiat. Maybe in the future it moves away from 1:1 with Fiat to its own unit of account. 

If an immature experiment only 6-8 months old, DAI could survive a 93% drop from ETH and still going strong, I feel extremely confident and safe with a reserve pool of XRP and a monthly escrow release as a final safety net. 

Giving usets option to Collateralize their XRP vs selling, this will decrease downward sell pressure and increase the institutions and RippleNet banks to hold now that they have a tool to hedge that keys them hold 2 complimentary assets that each have unique benefits and are most liquid asset as possible in world in a couple years. 

There could be multiple different Stablecoins pegged to different fiat currencies  Asset backed tokens, security tokens, and maybe even tokenized Gold can be diversified into the collateral pool

Incentivized Market Makers and a solid governances framework can easily manage stability. 

I  fail to see your concerns. There’s more details that haven’t been released yet. There’s already been years of proven stability 

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2 hours ago, tulo said:

I love the idea, but I think it lacks a fundamental aspect.

Who is setting the value of the coin w.r.t. XRP? If it is the owner of the coin then it's useless, because he could value the coin very low and take back all the XRP.

We need a decentralized oracle which could provide the price, but it's a huge project itself.

Chainlink..

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1 hour ago, XRPboi said:

Chainlink..

The stablecoin is always available to obtain at 1:$1 on XRP Ledger when you Collateralize some XRP and it’s always redeemable for $1 on the XRP Ledger. 

This will literally eliminate any deviation on the open market exchanges from $1.

Who would sell for less than $1?? 

Who would buy more than $1??

Also, we have to keep in mind Xpring is building a strategic ecosystem of DeFi. @JoelKatz wow, I always thought it was advantageous to launch Decentralized crypto backed Stablecoins on the XRP Ledger due to the unique features and benefits of everything the XRPL has  

Then you drop another brilliant advantage, not having to have special mechanisms to control the market price on exchanges  

The only 2 aspects I’d like to know more about in the future are, the governance framework for each stablecoin issued

It’s quite possible there’s already a few protocols in mind from RippleNet Financial Institutions to issue a stablecoin with a set governance framework and chosen entities to be the oracles  

Any chance Coduis and/or Smart Oracles could be used that Stefan Thomas talked about a few years back in 2015  

@JoelKatz Am I correct in thinking that, this appeals perfectly to RippleNet members and Liquidity Providers as a way to hedge XRP volatility and have the best of both worlds by being able to hold XRP and the stablecoin???? 

They will feel more comfortable holding XRP on their balance sheets with less considerably less volatility risk, plus retaining nearly all of the benefits of any upward XRP price movements, and also having the ability to provide ODL for  RippleNet Payments into their domestic corridors?? 

Plus, they will now have the ability to tap into the derivatives and other financial products ecosystem Xpring is building. And also, obtaining the benefits of a decentralized stablecoin that could speed up domestic payment rails in countries without a RTGS. Stablecoin will have nearly the identical features in speed, scalability, costs and other characteristics of XRP but with a stable value. XRP will gain considerable utility from retail and institutional markets as a “Store of Value” and decreasing level of downward sell pressure because everyone will be less likely to sell their XRP on open market when they can Collateralize it and still access profits as XRP value climbs. 

Have some Ripple partners and/or Xpring projects already discussed “niche” use cases in mind for these Stablecoins?? Like Micropayments for Web Monetization or as a bridge onto the XRP Ledger from traditional markets???? 

 Lastly, I would like to express my adamant opinion that Ripple should pre-fund the collateral pool with XRP prior to any collaterized Stablecoins are issued.

Or use the monthly escrow release to fund and  maintain a Reserve Percentage of XRP in the collateral pool, on top of what is Collateralized. 

Ripple has this unique ability to press their advantage to show that there’s a safety net in place and there’s no chance the Stablecoins would ever become under Collateralized. I know Ripple could probably step in at any point if necessary but I think it would mean a lot to the XRP community, RippleNet members, critics, and fiat stablecoin supporters to step up before launching and also reaffirming that Ripple or whoever will be a lender of last resort. Even going as far as saying, if necessary a portion of monthly escrow release could be used to refill the pool of collateral to the percentage level over that is determined. If it’s feasible and legal I wholeheartedly believe it will make dramatic positive effect. The XRP community is unfamiliar, completely new territory for traditional institutions, don’t give the media critics & old guard anything negative to say to scare potential users. 

I truly believe that these collaterized Stablecoins are a vital opportunity to boost XRP adoption and DeFi ecosystem but maybe more importantly prove XRP & Ledger have superior capabilities and none of the flaws of tokenized Fiat stablecoins and we’ve only scratched the surface. 

David, you and the Ripple developers built a masterpiece in the XRP Ledger. Making these proposed changes at this time is perfect. Keep up great work!!!!

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20 minutes ago, yxxyun said:

Did I need create trustline first to hold collateralized stablecoin?

There are four ways you could wind up holding some of a stablecoin:

  • You could create a trustline indicating that you are willing to hold the stablecoin and then someone could pay it to you.
  • You could create a trustline indicating that you are willing to hold the stablecoin and then make a payment to yourself denominated in the same currency as the stablecoin.
  • You could place an offer to acquire the stablecoin and then someone could take that offer. You do not need to create a trustline in this case.
  • You could lock up some XRP and issue the stablecoin. You do not need to create a trustline in this case.

Notice that in all four cases you have to do something to explicitly indicate your willingness to hold/accept the stablecoin. In two of the cases, it's creating a trust line.

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