USD Stable Coin That Prevents a “Run On Reserves”
Introduction to problem:
I was going through different ideas on how to save $USTC from its de-pegging event. While thinking of ideas I thought about how would someone go about creating a crypto coin that held 1 USD with out a second crypto as the coins reserve because this is what $USTC would need to fully recover because it’s reserve coin (now $LUNC) essentially went to zero making $USTC backed by nothing and trading on pure speculation. Many proposed burning $USTC but at this point the algorithm is lost without its pair $LUNC. In this short essay I will explain a solution that I came across which might have even more benefits than any other crypto weather it is a stable coin or a regular fluctuating price coin.
How stable coins are supposed to work:
Stable coins are supposed to provide immediate liquidity of exactly 1USD when a seller wants to sell. The key to this is by either having 1USD to give to a seller of the coin, or if at the time the seller wants to sell their coin it is worth less then 1 USD, Allowing the seller to swap to a separate crypto reserve for 1 USD in that crypto to receive their money that way. The issue is that both of these methods can create a run on their reserves. Wether the company who says they can always give you a dollar for each coin runs out of dollars or the reserve runs out of value. Both end up with a large collapse. What if I told you there might be a way to create a reserve through the buyer and seller without causing a collapse? The basic premise is that the farther away from 1USD the coin becomes the more it costs per transaction for the same USD in crypto. The extra money per transaction (buy/sell) goes towards the natural reserve of the network. This means that as the coin starts to de-peg down, it becomes backed by more USD and gains trust back that there coin is worth 1USD.
How this works out in sudo-code:
Seller price per coin if slips below 1 USD = $1.01
Buyer percentage fee per coin if slips above 1 USD = 1%
If (coin price < 1 USD){
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Sellers will sell their coin with a transaction fee per coin where
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Transaction fee per coin = (Seller price per coin if slip below 1 USD / coin price) - 1)
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//This extra fee will be used by the network to buy and burn the coin until back to 1 USD. This creates many different pressures on the coin as it 1. reduces the number of people willing to sell at a loss of the percentage fee 2. decreases the supply of the coin 3. Buyers will want to buy more as they can take profits when it re-pegs to 1 USD.
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//Please note that the buyer does not pay a transaction fee only the seller does.
} Else If(coin price > 1 USD){
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Buyers will buy their coin with a transaction fee per coin where
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Transaction fee per coin = coin price * buyer percentage fee per coin if slips above USD
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//This extra fee will be used by the network to mint new coin 1USD to 1Coin. This also creates many pressures on the coin as it 1. Will cause buyers to not want to buy the coin at a loss of the fee percentage 2. Increases the supply of the coin 3. Causes sell pressure because anyone holding the coin would make money selling at above 1USD.
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// please note the seller does not pay a transaction fee only the buyer does.
} Else if (coin price == 1USD){
- Create New coins for buyers at 1 coin per 1USD and liquidate sellers per usual.
}
other points:
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Many might wonder why someone would buy or sell at the cost of a transaction fee at all? In the case of ask and bid prices it works similarly. The benefit of those paying that extra fee is simple, transaction time. It gives those paying the fee the ability to get in and out fast instead of setting some limit order at 1 USD and waiting for the supply to increase or decrease back to a stable price.
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The fundamental Theory behind this coin is it uses the same principles as brokerages use to steal your money except it can be implemented in a way that only takes the max amount of USD needed to keep your coins safe at the 1 USD price point. While also not being used for a profit.
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Why might this hurt exchanges? An easier question to ask is why go back to USD and normal banking transactions when you can invest in crypto that will always be 1 USD. You can swap your token into long term Bitcoin investments and if you think Bitcoin will go down or you need to pay for things in USD it will always be there waiting. The exchanges will no longer be able to steal their commissions from you going fully in and out with actual USD.
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The transaction fees can also be increased or decreased as if there is a lot of momentum towards a de-peg up or down it can be pulled back to 1 USD much faster.
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The benefits of this are that it essentially can grow and shrink with the demand of the market and is hard coded to be backed 1:1 instead of having to trust people (like with USDC where they have been found to lie) that the coin is backed 1:1
Math to show can’t use a ton of money to crash the value it is nearly impossible and will always gradually go back to 1USD:
Coin price = .09USD
Transaction fee for seller per coin = 1.01 - .09 = .82USD
Coins repurchased and burned by network using the transaction fee = .82 / .09 = 9.111111 coins
Making it near impossible for any large exit of coins to cause a crash in value
More pressure can be added by increasing the original value of 1.01 USD to something more and once peg is re-attached decreasing back to 1.01 USD or whatever preferred value is decided.
Final Words/ Call to action:
If any developers would like to work with me my name is Gavin Bogdan and please message my Reddit (u/Signal_League_8929) or reply with your thoughts.
Final Thoughts:
I spent a lot of time working out in general how it would work but, I still need a better way of picking the seller price per coin and buyer percentage per coin. A way I thought of doing it was with an inversely related equation with a constant that can be changed to make the fee move larger the faster the price falls or rises. However, I think the core design is strong enough that the fee does not have to be so dynamic and can be set to one number and changed later on in the project if there is abnormal moves away from 1 USD per coin.