H2O: A Crypto Native Stable Currency

Markets and Macro
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Overview

Stablecoin demand has exploded recently with even questionable launches like FEI bringing in over $1B USD in protocol locked value. There is also an emerging demand for stablecoins that are not pegged to a fiat currency. The Float protocol is an example of a stablecoin that is aiming to be a “non-fiat pegged” stablecoin. Float has accumulated over $30M USD in total value locked through the release of their governance token before even launching their main token. Ultimately, we believe that a currency that is more stable than the dollar can be created in the crypto economy. In addition, we think demand for a crypto native stable coin will grow as the ecosystem develops and governments grapple with pegged stablecoin legislation.

Enter Icewater.money. The Icewater team is developing a stablecoin (H2O) that uses internal market forces to define stability. Specifically, stability is defined by a market prediction of the future value based on the price of an interest bearing asset called “ice”. H20 maintains stability by keeping the price of the ice stable (see this article for more details). The result is a currency that avoids the extreme volatility of a fixed supply without being tied to any fiat currency.

We built a prototype of H2O on an Ethereum testnet, but we think that Terra Luna would be a great home for the project due to the success of the platform in using crypto currencies in real world applications. We are looking for community support and involvement to migrate the H2O project to the Terra Luna blockchain.

Benefits to Lunatics

H2O will be independent from any one government. Its independence will make it well suited for a global currency.

Long-term stability will enable long-term contracts like corporate bonds, insurance, and employment agreements in the crypto ecosystem to be more effective than fiat contracts.

By leading the charge in crypto native stablecoins, the Terra Luna platform will be well positioned to gain additional ground in the race to become the gold standard for global finance.

Deliverables

The migration of the project would include:

  • Rebuilding the smart contracts in CosmWasm
  • Building a governance model
  • Connecting the web app using Terra.js library.
  • Getting an official audit of the code.

System Design

H2O is a single token protocol that includes three “phases”: ice, water, and steam. “Ice” refers to a bond-like phase that pays out regular amounts of water forever. “Water” refers to the “liquid” phase that has a stable value and can be freely traded between addresses. “Steam” refers to a volatile phase that derives value from speculation about future growth.

Short-term stabilization is achieved by adjusting the supply using water/steam transactions. Long-term stability is achieved by observing the water/ice market and adjusting the short-term target accordingly.

Timeline

  • 3 Months of development to migrate smart contracts, build a governance model, and connect the webapp
  • 2 Months of testing.

Team

  • @RedBeard: Inventor
  • @LizardBrain: Evangelist
  • @bigba_daboom: Technical Artist
  • @T. Ruxpin: Designer
  • @ctown4vida: Developer
  • @NibblerExpress - Engineer
  • @theThrill - Advisor

Price

  • $60K UST - 2 Rust Developers for 5 months at $6K per month
  • $20K UST - Audit and Hosting

We are also planning on participating in the DeFi Connected Online Hackathon. Come join our team if you are interested in participating. https://eventornado.com/submission/icewater

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Wouldn’t this compete with UST and other current stablecoins on the platform?

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That is a good question. I don’t expect that it would compete initially with UST or other Fiat pegged stable coins. It might in the long run, in which case, it will better to be on Terra rather than another chain.

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Just to expand on the question above:
1/ You say you don’t expect it to compete initially with UST. Curious to hear what you see as the primary use case for this?
2/ If you see this competing with UST in the long-run, why would it be better for it to be on Terra rather than another chain? Increased utility of UST and other Terra-stablecoins will accrue value directly back to LUNA. Trying to understand the thinking here.

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^ I don’t really mind H2O competing with UST, but how would “Stability” be measured here? What is H2O stable against? And why would this find product market fit?

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‘How would stability be measured here?’

This is the key question, and what makes H2O unique. Stability is measured by comparing the present value of H2O to the future value of H2O by creating an instrument that pays out coins in the future. By measuring the market price of this instrument (called ice) we can infer the yield. From the yield (i.e., the interest rate) we can tell whether the market expects inflation and adjust accordingly.

When you peg to anything external you just defer the definition of stability to that other asset or currency. By relying on interest rates you effectively get an internal oracle…ultimately it amounts to just asking the market what stability means.

As long as the dollar is the global reserve currency there will be demand specifically for dollar denominated stable coins like UST. But there is value in beginning to develop technology now that could eventually replace the dollar. UST can’t really do that.

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One additional point. Initially market for such a thing is necessarily speculative—people who want to make a bet on technology to replace the dollar. But ultimately it will enable even more stability than the dollar, which will enable new kinds of long term financial instruments.

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I would add that using the interest rate as a measure of stability does not preclude it using outside oracles as well like a CPI or other historical data. It might be useful to combine the interest rate data with some historical CPI data at some point.

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A couple of thoughts.

  1. Right now we think labor contracts for global decentralized organizations would be the best initial use case. Any long-term contract would be good where people may not want exposure to fiat inflation, and there would be some benefit to have one currency for a global organization that wants to pay people with crypto. When H2O gets some speculative traction, this would be the first solution that we build or partner with someone to build.

  2. Any transaction on Terra will accrue value to Luna holders. If a more stable coin gets developed on a different chain,then people may decrease usage of UST and use a completely different chain.

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10

So, you are describing the mechanism by which H2O attempts to achieve stability. There is also the question of how can we judge whether H2O was successful in achieving stability. In order from least ambitious to most ambitious, here are a few metrics I am considering:

  1. No death spiral
  2. Less volatility (versus major fiat currencies) than crypto native currencies that do not attempt stabilization (e.g., BTC, ETH, DOGE)
  3. Volatility (versus major fiat currencies) similar to or better than emerging market fiat currencies
  4. Volatility (versus major fiat currencies) similar to or better than other major fiat currencies (e.g., volatility similar to that in the Euro/Dollar market)
  5. Appreciation (versus major fiat currencies) when the major fiat currencies are experiencing inflation or are aggressively expanding the money supply

While the ultimate goal is for numbers 4 and 5 to be true, I would consider this a major improvement in the state of cryptocurrency if we achieved limited volatility (e.g., achieved 2 or 3) and limited depreciation (e.g., no death spiral and depreciation is less than x% per year where x is in the single digits or at worst low double digits).

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Good point. There will always be some point at which we have to accept that judging whether something is stable depends on some theoretical assumptions. For example, we could measure the value against an inflation adjusted dollar. But the problem is that in the long term, we think our measure of stability is even more reliable than the inflation adjusted dollar!

Ultimately the problem is that in the very long term, even things like CPI breaks down…so in my view the best we can do is to institute some algorithm, ask the market whether they think it’s going to work (i.e., via checking the ice price) and then adjusting the algorithm accordingly (and of course, the adjsutment itself will be algorithmic).

One version of this is to have a peg, and algorithm to reach your peg, and an algorithm to adjust your peg. But eventually (say, if H2O becomes the world reserve currency – I know, thinking long term here) the peg doesn’t do you any good because there is nothing more stable than the coin itself…so you just have the ice price alone.

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I was listening to the GMO-Trust Panel on Stablecoins the other day and one theme that stuck with me is that one of the next potential big use cases for Stablecoins will be ForEx. I am not familiar with ForEx at all, but I am going to look into it to see how H2O could potentially be beneficial.

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I think this is an interesting project, with some compelling theory behind it. I think cracking the “pegged-to-nothing stablecoin”, whoever manages it, will be a major milestone for our industry.

However, personally I don’t think I’d vote community pool funds for projects that don’t drive adoption of a Terra stablecoin, even tangentially. The promise of future network fees from transactions just don’t seem compelling enough.

Additionally, Terra is a great ecosystem because of its stablecoins. If you’re building something separate, and are interested in building from scratch in Rust, would Solana make more sense? Cheaper, lower fees, faster.

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Yeah great points. One of the reasons we love Terra is the focus and demonstrated ability to bridge the gap between crypto and real world demand like Chai.

Also, we built out a mechanism to both bootstrap H2O development and drive adoption of UST and Anchor during the Hackathon this week. It is called “Tributary” https://tributary.icewater.money/tributary

This is only a front-end right now and is based off of Do Kwon’s post about value exchange using Anchor. It is a way to raise funds and it is cool because it acts as collateral for H2O that is independent so it doesn’t require making the protocol more complex.

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15

One way to look at it is that eventually, Terra will need an autonomous stablecoin.

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Hey is that the right url? Seems like a broken link. I’m interested in learning more.

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Ah good catch. That link was for our Hackathon project which changed. Here are some links to learn more.

Discord: https://discord.gg/kVwSxRPrk5
Website: https://icewater.money/
Introduction Article: https://medium.com/icewatermoney/introducing-h2o-259c14df133f

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18

Very interesting! Bummer that you have to resort to rebasing for medium term volatility, but seems like an elegant solution otherwise. I joined the discord, curious to see if this goes anywhere.

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19

Same.
I think if ICE, which seems to be non-inflationary? would only be available by burning Luna, this could be an interesting avenue. Just something to tie it to the Terra Ecosystem the same way our other stablecoins function. Since H2O has it’s own balancing mechanism, we can’t burn Luna for Water without messing up the H2O function (if I understand correctly) but we could burn Luna for Ice and make Ice swappable for Water on the H2O dapp or something?

Not an expert but I enjoy brainstorming

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Yeah we have thought about burning Luna to generate more H2O instead of using Steam. This basically becomes a type of collateral. We are developing a system where you can stake UST to get H2O.