Token economics
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Stablecoins
Fully-collaeralized, redeemable coins issued by central entity
AML/KYC compliant coins: need approval to hold/trade
StrongholdUSD, AnchorUSD (Stellar); USDCoin, TrueUSD (Ethereum)
Some coins require KYC to hold (stronghold), some to issue/redeem (TUSD)
Former likely works better with FDIC insurance
Latter easier. E.g., TUSD can only buy/redeem > $10,000
Less compliant coins harder for issuer to maintain banking relationships
Tether USDT (Bitcoin omnilayer)
In general depend on counterparty (issuer) for solvency, availability
E.g., suspicions that Tether may not really be full-reserve
Fear more centralized coins could be attacked/shut down
Algorithmic - non-redeemable but more decentralized
Growth-backed stablecoins (a.k.a. pyramid schemes) - basis
Collateral-backed stablecoins - MakerDAO DAI
Basis (basis.io) has three kinds of tokens:
basis - supposed to be always worth $1
bonds - convert to basis or expire useless in 5 years
shares - receive newly mined coins after bond holders paid off
Oracle says if price is above or below $1
Above $1? Convert bonds to basis or pay to shares if no more bonds
But don't sell bonds below $0.10 hard floor
Below $1? Sell bonds (at a discount) to suck basis out of circulation
Or use proceeds from shares and share sales to defend the peg
Limitations
Off-chain stabilization has at most 80% reserve funding, worse than Tether
Vicious cycle if people lose confidence in coin
Bonds are not fungible: each has unique queue position/expiration time
Illiquid bonds will require higher interest rates
As bond queue lengthens, bonds sell for less and less until $0.10 floor
$0.10 floor can break peg, possibly for years until bond queue clears
Ultimately, require sufficient growth to pay demanded bond premium
MakerDAO Dai has two tokens:
DAI - a stable coin pegged to $1
MKR - equity/governance token
Collateralized Debt Position CDP = locked-up assets when issuing DAI
Must lock up $1.50 in collateral to get $1 of DAI
150% is ongoing maintenance requirement, so probably lock up more
The $1 is a loan to repay in DAI with 0.5% annual interest
MKR holders can change interest rate and 150% collateral requirement
MKR holders also elect oracles to specify asset prices
If collateral dips below 150% loan, liquidate CDP with two auctions:
Repay DAI by auctioning off new MKR tokens for DAI (that gets burned)
Auction off collateral for MKR (that gets burned)
Note must repay debt + interest ("stability fee") + 13% penalty
Note interest and penalty reward MKR holders (like share buybacks)
Remaining collateral returned to original CDP borrower
Why would anyone want to issue DAI by taking on a CDP?
To buy ETH on margin (can use recursively for more margin)
Because you have some non-ETH asset that is illiquid
Because you need cash but don't want to incur capital gains on your ETH
Initially collateral is ETH, but intended for multi-collateral
Would protect against big crypto crashes like this past week
Each asset has own parameters (reserve ratio, interest rate, penalty)
Global settlement = reset button held by committee elected by MKR holders
Each DAI holder claims $1 of collateral, rest is returned to CDP borrowers
Used to upgrade contract, deal with vulnerabilities or "irrational" markets
What causes DAI's value to stay around $1?
Global settlement (the nuclear option) liquidates DAI at exactly $1
Arbitrage in anticipation of eventual global settlement
Both DAI buyers and sellers and CDP borrowers will drive price to $1
Limitations
What if not enough CDPs compared to stablecoin demand?
Will they really get diversified collateral, not just crypto?
Augur (https://github.com/AugurProject/whitepaper):
REP - new token for creating markets, reporting, governance, NOT trading
ETH - used for actually trading predictions
To create a market:
- Define event time, designated reporter, outcomes, resolution source
- Set creator fee
- Post validity bond in ETH (forfeited if real outcome not in set)
- Post no-show bond in REP (forfeited to other reporter if designated bails)
Trading predictions, e.g., between two outcomes A & B:
Shares created in complete sets: 1 ETH <-> 1 A + 1 B
Order matching creates/destroys shares and matches buyers to sellers
Reporting happens in 7-day periods (fee windows)
Reporters purchase participation tokens using REP tokens
At end of window, reclaim REP plus get share of reporting fees
Incentivizes REP holders to know how to use system, check in once/week
7 phases of reporting (see Figure 2 of paper):
1. Pre-reporting
2. Designated reporting - 3 days for designated reporter to report
Report on time? market creator gets back no-show bond, go to phase 4
Not on time? market creator forfeits no-show bond, go to phase 3
3. Open reporting - entered if designated reporter doesn't report on time
Anyone can report, but first reporter gets no-show bond as stake
So if their report agrees with outcome, will get REP tokens
Note don't need to stake your own REP to be first reporter!
4. Waiting for the next fee window - after 2 or 3
5. Dispute round - 7 days to disagree with tentative outcome from 2 or 3
To dispute, create a *dispute bond*
Stake REP on some outcome w other than tentative outcome
Can crowdsource dispute bond (many people staking)
Is bond + stake on w >= 2 * stake on other outcomes? Success
Is dispute bond >= 2.5% of all REP? If so, go to phase 6
Else, refund dispute bond other than w
Add bond w to w's stake and go to phase 4
No success? return dispute bonds, go to phase 7
6. Fork - freeze parent, create a child augur universe for each outcome
Halts new prediction markets for 60 days
REP holders can move REP one way to one of the child universe
Initial reporting stake can only move to corresponding universe
One-way move, but 5% bonus if you move within 60 days
Idea: REP in bogus universes should be worthless
7. Finalized - can settle shares directly with the market
Note all tokens and bonds are tradable
Don't have to wait weeks to get paid if can trade shares earlier
What are the risks/limitations of Augur?
Parasitic markets - betting on the outcome of Augur to avoid Augur fees
If larger than Augur, reduces integrity of Augur
Huge bet (bigger than market cap of REP) could incentivize forks
Though could also increase the price of REP, providing some protection
Resolution source could be hacked
Self-referential predictions: Will a designated reporter fail to report?
Forks are highly disruptive
Ambiguous markets: Tradesports bet on DPRK missile landing outside airspace
Missile did land outside airspace, but US DoD didn't confirm the event
Contract had specified DoD confirmation, so those betting on missile lost
Token Curated Registries (TCR) to maintain list of best X for various X
E.g., best 10 restaurants, CS departments, adchain.com
Three parties:
Candidates - people who want to be included in the list
Consumers - don't necessarily have tokens or want to use blockchain
But if they make use of the list, it gives the list value
Token holders - incentivized to make list useful to consumers
So create a token for the list, and play the following game
A candidate who wants to be listed deposits a token with application
TCR has MIN_DEPOSIT parameter specifying how much it costs to be listed
If accepted, can get refund at any time by withdrawing from list
But token holders can challenge an application
If candidate rejected, loses its deposit, which is given to challengers
So revenues come from candidates at the margin
Enough change to be accepted to apply, but still get rejected
Why not challenge everyone?
Empty list is useless, so token will have no value
Token holder stakes deposit of MIN_DEPOSIT to challenge application or listing
Upon successful challenge, token holders vote on candidate
Votes are weighted by token holdings
Votes held in commit-reveal fashion
Vote in rational way because can't see how others voting
Uses Partial-lock commit-reveal (PLCR) voting
Commit stage: Submit commitment to vote {tokens, H(r, vote)}
Locks up tokens so can't cash them out (and hence double-vote)
But can use the tokens to vote in parallel on a different question
Reveal stage: Everyone publishes their (vote, r), so can count votes
If you don't reveal by deadline, your vote doesn't count
However, can still rescue tokens
Note: no penalty for voting wrong way
Whoever loses vote (candidate or challenger) forfeits deposit
Winner gets DISPENSATION_PCT (e.g., 50%) of forfeited funds
E.g., at 50%, must have 67% certainty of winning challenge
(1/3 chance of 100% loss, 2/3 chance of 50% gain)
Remaining forfeited tokens distributed to majority voters by token weight
Minority voters neither lose nor gain tokens
What if MIN_DEPOSIT increases, old listing's deposit below gas of challenge?
Special case lets anyone instantly remove listings below MIN_DEPOSIT
Both challenger and candidate get their deposit back
Why not just use ETH to curate registry? Kills incentive for list quality
What are some limitations of TCR?
What if high quality candidates don't place a deposit?
E.g., Stanford won't pay to be included in "top CS department" lists
Maybe token holders stake Stanford to make list useful?
Related problem: how to bootstrap a list from empty
Maybe air-drop tokens to potential consumers and candidates
What if very few token holders vote (cost-effective bad listings)?
What if people vote randomly on questions they know nothing about?
Reward for winning vote, no penalty for losing vote
Worse than random is "memeing"--e.g., vote low bit of SHA256(candidate)
If many people do this, will always be in majority
But will destroy value of token holdings