Pegged: keeping bitcoin stable

Thursday 26 March 2015

Anyone who has been around bitcoin and the crypto-world for more than a few minutes will realise that one of virtual currency’s most noticeable features is its volatility. Price swings of several percent a day are still commonplace, and double-digit movements movements are not unusual.

Read also: BTER bounces back 

This has endeared bitcoin to speculators, who have flocked to reap the rewards that such volatility offers - though of course, for every winning trade there is a losing one. What it does not do is attract mainstream users. Who wants to see the balance of their account cut by 10 percent if they look away for a couple of days? Fixing volatility is a critical element of bringing crypto to a wider audience.

Inside or outside the protocol?

Marmot

There are various solutions to the problem, but none of them are perfect. On a decentralised level, it’s an extremely difficult problem to solve. BitShares has a solution, of sorts, though it’s not clear how robust it is. Preston Byrne, COO of Eris Industries and well-known Marmot fan, has written extensively about the issues BitShares faces. His skepticism is summarised by the title: Don’t Walk Away. Run.

BitMarmot: there is no marmot, but we can fix BitMarmot to today’s dollar price of a marmot as expressed in BitShares (qua currency), lend the BitMarmot into existence and collateralise it to the tune of 200% of Marmot Amount Outstanding in BitShares (qua shares in the BitShares Bank), charge interest at 5%, and pay dividends to our shareholders in respect of the BitMarmot loan (because, as we said, BitShares are shares in the bank). Despite the fact that nobody has actually introduced a marmot into the system or has an obligation to deliver a marmot, a BitMarmot is just as good as the garden-variety marmot we know and love, except it’s liquid and can be easily traded over the public internet. Although at the end of the day it’s really only just a BitSharesX derivative contract which we want people to think is a marmot. Because cryptography.
Never mind that our borrower could easily go out in the world and buy three real, live, fuzzy, adorable little marmots with the money he’d have saved if he’d never bought BitShares/a BitMarmot in the first place.
This is actually how BitShares is supposed to work.

Nubits has another approach; again, under extreme conditions, it’s unclear how this will fare. We’ll be looking more closely at these and other approaches to the problem in the future.

Ultimately the problem is that it’s a knotty issue, to say the least, to ‘peg’ a decentralised crypto to fiat without reference to that fiat (such as a big stack of it locked in a bank somewhere). And such a backed solution would inherently be centralised.

Coinapult

And, of course, none of these cryptos have the reach of bitcoin. Centralised solutions are far easier, and this is what a number of companies are now doing. One of them is Coinapult, which allows users to peg their balances to a number of real-world currencies (GBP, USD) and even commodities like gold and silver.

The service is called LOCKS, and it appears to be centralised around Coinapult itself. That is, instead of maintaining value through some kind of cryptographic magic and decentralised wizardry, Coinpult effectively act as an broker and take the liability onto their own books. It’s a bit like cashing out your bitcoin to an exchange, then buying BTC again when you want to send them cheaply and quickly. The real innovation here is the legal niche they occupy: Coinapult do not buy or sell bitcoins for cash (or gold), they simply quote an equivalent amount when you lock your coins. You can’t withdraw gold or USD. To get your money back, you have to unlock it and turn it back into BTC.

‘We think we've hit a sweet spot on the legal front, nothing like this has existed before. And where we choose to operate from, that's all very fine balance that we spent a lot of time working out,’ say Coinapult CEO, Ira Miller.

It’s a rather sneaky solution to the legal and regulatory challenges, since everything is kept in crypto, but it does serve a purpose in stabilising bitcoin while you hold it in your account so that it will still have an equivalent value when you convert it back again. It raises questions of what happens if the market moves too far against Coinapult, though, so this is one we’ll be watching with interest.

 


comments powered by Disqus