Paper currency started as receipts for gold kept with the bank. Uptil the 70s, you could even redeem it for gold.
Current decentralized stable coins (DAI) merely mimic this model, with blockchain assets transposed.
This old model is weak. It has too many moving parts that need supervision to maintain the peg.
Every moving part costs resilience and independence.
For, what needs to be maintained, needs control. What needs control, requires authority. Thus creating power centers.
We can do better.
x+(Δx - Δx)=x
In trading, this is a representation of a market neutral-position.
In financial trading:
If I take a long trade, and price goes from 100 to 110. I make 10 profit.
If I take a short trade, and price goes from 110 to 100. I make a 10 loss.
If I take 1 long trade and 1 short (same-sized) trades simultaneously, irrespective of where the price goes; I make no profit and no loss.
In other words, the value of my portfolio remains the same.
This is called a market-neutral position.
A $100 market-neutral portfolio
The purpose of a stablecoin is to main its ‘value’, not price. Price is merely a denotation of value.
Hence, value with net zero change, is 'stable' in price by consequence. A token that can peg it, is thus a stablecoin.
A token that pegs itself to a market-neutral portfolio and hence, remains stable in value.
It's value is preserved by opening a 50% long + 50% short position in decentralized markets.
Input: $x value of ETH/USDT/USDC or any erc-20 token.
Output: 1 SOCH for each $ value of the net balance of the account are minted.
Output:$x value of ETH/USDT/USDC (whatever the original asset was)
Simplicity is a super power, indeed.
Attack: Similar to Black Thursday event at Maker DAO.
Attack: The pricefeed from oracle could be manipulated or become stale due to network congestion. Similar to a past Bax exploit.
View: Since both positions use the same oracle, net effect of inaccurate price would be 0.
This vector was used in a past bzx exploit.
Attack: If the price of SOCH goes above or below a $ in the open market.
View: Then it would be foolish to buy more expensive SOCH, when you can simple mind more at the exact 1:1 price. And vice-a-versa.
Attack: The underlying collateral gets seized or loses value. Example.
View: There isn't any collateral, hence this risk doesn't exist.
There is however a base currency (for eg. ETH/USDT pair uses USDT as the base currency). By using a synthetic pair like ETH/USD, this risk can be eliminated.
This creates a risk of the settlement currency losing its value. (Settlement currency is the token that is used to measure the final value of both positions.)
This leakage can be plugged by using markets that use ETH as the settlement currency. This dydx contract is one such example.
Attack: Eth network gets clogged and eth price plunges.
View: Since price is not an attack vector, portfolio value even with stale pricefeed is accurate.
Congestion may hamper minging/redemption function temporarily, at best.
Attack: If the underlying market's orderbook is thin, there may be slippage when opening and closing positions and that may leak value.
View: This is invalidated by design since both positions are opposites of each other and hence, trade into each other.
Attack: If the exchange breaks, and/or there is an error/leakage in position opening/closing.
View: This is a valid attack vector. This vector should get resolved as the DeFi tooling matures. Current view is that the tools available today (specifically dydx) are good enough to test atleast a prototype, if not some more.
Welcome to the first neutralcoin.
In traditional investing, simultaneously going long and short serves no purpose.
It is Purposeless. That’s exactly what we need.
Money is purposeless. Its value comes from what it can be transformed into. When that transformation is value positive, progress occurs.
With no parts that require supervision, the system becomes self-stabilizing, autonomous, and resilient.
The system is pegged to itself. And hence, only needs efficient markets, not resilient assets. Even if the underlying asset goes to 0. The net value will still maintain its peg.
150% collateral ratio as in the case of DAI is not needed. Whenever you need some SOCH, just mint some at 1:1 $ value.
Because the system doesn’t peg to any collateral, it doesn’t need to account for buffer. Buffer is value that is locked away and not available to be spent forward. Not having to need one, unlocks more wealth.