WaykiChain Founder Wayki Sun: Building a New Stablecoin Pegged to Energy Units
Abstract:
The currency is the final consensus of human society after thousands of years of evolution. It is a means of value exchange. All countries are pursuing currency stability to maximize their socioeconomic-development and macro-control possibilities. The emergence of stablecoins is the culmination of these integration efforts.
At present, in blockchain technology, the collateral mechanism related to the issuance of stablecoins is extremely mature. What really prevents stablecoins from entering the mainstream monetary system is the currently unsatisfactory stablecoin anchors. We have a reason to believe that energy is a more reasonable anchor for stablecoins and that its attributes will shift from commodity-related to currency-related. 1 blockchain stablecoin = 1 kW·h of electrical energy. This equation will also be used as the ultimate stablecoin pricing method, from a concept to reality.
Keywords: stablecoin, energy, international monetary system, blockchain collateral mechanism, energy conservation, Energy-based Stablecoin (EBS)
In the autumn of 2021, when most countries were still struggling with the COVID challenges, a sudden energy crisis swept the world.
By the end of 2021, electricity prices in most parts of the world reached record highs, exceeding USD 330 per MW·h in most developed countries and reaching the unprecedented USD 485 per MW·h in Germany. Asia was no exception, where China, a major manufacturing country, started production shutdowns and power cuts. The price of natural gas in Europe rose by over 600% in 2021; and countless households entered the “energy poverty” trap. The situation has since persisted in larger countries and has intensified in small and medium-sized ones. Frequent nationwide power outages were reported in Lebanon, while Kazakhstan even experienced a national turmoil due to high natural gas prices.
The energy crisis has highlighted the instability caused by the transition of the global energy system to a new model. What’s more important, due to their financial attributes, commodities like energy are highly susceptible to price fluctuations.
In the current international monetary system, global commodities are denominated in US dollars. During the COVID epidemic, the United States have adopted massive fiscal support and a monetary stimulus policy, which flooded the system with liquidity, aggravated the risk of energy price instability, and indirectly caused the global energy and inflation crisis.
In order to deal with such global price issues, WaykiChain founder Wayki Sun proposes to build a new type of Energy-based Stablecoin (EBS) pegged to energy units as an internationally accepted currency.
Global Background
The Balance of the Old International Monetary System Is Broken
The old international monetary system started with the establishment of the International Gold Standard in 1880 and transformed into the Jamaican system in 1976. It has undergone many collapses and structural changes. Although some international financial problems have been solved, there has always been a lack of a unified and stable currency standard. This situation has caused international financial instability.
In the current international monetary system, the US dollar is still the main component of the foreign-exchange reserves of countries. Every change in the US monetary policy affects the currency stability all over the world:
In 2008, the subprime mortgage crisis broke out in the United States, triggering the global financial crisis. The quantitative-easing policy adopted by the United States led to a sharp depreciation of dollar and started a chain reaction of quantitative-easing policies around the world, which further aggravated the volatility of the global exchange rates.
After 2015, the US normalized its monetary policy and entered a cycle of increased interest rates. Funds from all over the world returned to the US, which led to a sudden decrease in investment in emerging economies and to increased risks.
In 2020, when the COVID epidemic broke out, the United States started the unlimited quantitative-easing policy. As the international purchasing power of the US dollar reserves declined, this devalued the fruits of labor in many countries…
It can be seen that the current international monetary system dominated by the US dollar has actually contributed to increased fluctuations in the global economy due to the impact of the US economic cycles.
Just a few months ago, over 40 countries, including Russia, China, Germany, France, etc., started the process of de-dollarization. The balance of the existing international monetary system has been broken. The “anchor” of money has become invalid.
Do we really need another anchor that can stabilize global exchange rates and balance the international monetary system?
In fact, scholars from all over the world have reached a consensus on this issue. Abbas Rizvi et al. believe that an anchor of the international monetary system can link the exchange rates of national currencies and reserve currencies and play a key role in promoting the global-economy development. If the global monetary system lacks an anchor, then devaluation of currencies, currency wars, and financial crises will repeat inevitably.
Thus, the crux is not whether we need it but what should the anchor be. If it is not the US dollar, can it be another sovereign currency or even multiple sovereign currencies combined? Or are there any other more suitable anchors?
The Unstable Cornerstone
It’s Hard for a Sovereign Currency to Be the Anchor for International Currencies
To answer the above questions, we need to first identify the requirements a sovereign currency has to meet to become the anchor for international currencies.
Judging by the history and reality, if a sovereign currency is to become the anchor for global currencies, the first condition is that its issuing country has a sufficient economic volume to support it.
Let us look at the United States. When the Bretton Woods system was established in 1945, the US economy accounted for 60% of the combined GDP of capitalist countries, laying the foundation for the US dollar’s reserve currency status. However, as of 2020, the share of the US economy in the world economy has dropped to 24%. China, Russia, and other countries have already reached agreements on de-dollarization. It can be seen that the economic foundation of the US dollar as the anchor of global currencies has been weakened, not to mention the size of other single sovereign currencies.
Second, government credit is another important factor for the anchor currency of the international monetary system.
According to IMF’s December 2021 quarterly report data, as of 2020, the global debt has risen to $226 trillion, while the global debt to global GDP ratio is close to the highest in history, 256%. The United States, Japan, and most European developed countries have all become major contributors to the global debt. This has led to public doubts about the creditworthiness of major national governments. Sovereign currencies have thus lost their credibility as the anchor of the global monetary system.
More importantly, even if a sovereign currency that meets these anchor conditions is found, the monetary system established on its foundation can only solve problems in stages, because periodic financial crises are inevitable, and the system will tend to collapse again. In this regard, history is the best witness: during the Bretton Woods system, gold reserves could not expand along with the development of the world economy, the fixed exchange rate system limited the dynamic fluctuation of exchange rates, and the US government credit was recklessly abused. All of these demonstrate the limitations of previous monetary systems.
Therefore, to solve the problem of periodic financial crises, it is necessary to find a more reasonable anchor.
The First Appearance
Existing Stablecoins Still Have Limitations
A more reasonable anchor needs to decouple from sovereign currencies, maintain the long-term stability of the currency value, and weaken its national private attributes, which will reduce the volatility of the global economy.
The emergence of stablecoins on the international stage, in a sense, is in line with the needs to develop a new anchor for the international monetary system.
In September 2014, BitUSD issued on BitShares became the first stablecoin. Currently, the USDT stablecoin issued in November the same year has the highest share.
According to ways of value anchoring, the design mechanisms of stablecoins can be roughly divided into collateralized and algorithmic.
In the former, a commodity (e.g., gold) is the anchor; and the stablecoins in circulation must be fully backed by commodity assets. Taking DGX as an example, users mail their physical gold to Digix in Singapore or buy gold bars directly from the company. When the asset certificate is sent to the minting smart contract, DGX stablecoins of the corresponding value are generated.
Anchoring to real currencies is also possible. Taking USDT (Tether) as an example, originally, USDT and USD were pegged at a 1:1 exchange rate; and Tether claimed to back the stablecoin with 100% USD deposits (later, it became not strictly enforced). That is, for every 1 USDT issued, there was a corresponding deposit of 1 USD in the reserve.
There is anchoring to on-chain assets, such as WBTC, too.
In the above mechanism, stablecoins either need to be based on trust in a central institution, or are extremely dependent on the market state of the collateral asset itself. This approach has different hidden dangers and problems of its own.
Next, there is the algorithm-based stability mechanism. It does not have any assets as collateral and only relies on algorithms to adjust the supply. Sometimes, it is even more volatile than normal cryptocurrencies and hard to stabilize.
New Idea
Building a New Stablecoin Pegged to Energy Units
Since the current stablecoin design mechanisms have their own advantages and disadvantages, we believe that we can use their respective advantages and integrate on-chain collateral, central credit, and specialized algorithms to build a new stablecoin.
As for anchor selection, more advanced criteria are proposed. According to the current stablecoin problems pointed out in the report by the G7 Working Group on Stablecoins, we believe that to build a new stablecoin, its anchor needs to meet the following conditions:
1. It is uncontroversial in more than 200 countries/regions;
2. It is valuable in itself and does not require void credit endorsements;
3. It exists in reality, but is not a precious metal like gold or silver with limited traditional reserves;
4. It is related to the greatest needs of mankind and can support future economic activities;
5. It can become the common pursuit of mankind and the material basis for building a global community with a shared future.
After researching and comparing most of the potential anchors, we finally focused on energy sources and electric energy, specifically.
Broadly speaking, by energy source we mean some resource that can provide energy. Energy usually includes thermal energy, electrical energy, light energy, mechanical energy, chemical energy, etc.
Human civilization is built on energy; and everything we see is supported by energy. Countless wars in history, in the end, are wars about resources and essentially energy. Arguably, the consensus on energy demand is self-consistent.
In simple terms, using energy units as the anchor for a new stablecoin means anchoring the stablecoin to the energy quantity of 1 kilowatt-hour (kW·h) (it can be other energy units, too).
As an important factor in the survival and development of human society, energy circulates globally. As long as there are people, there is a demand for energy and a need for energy circulation. With the advancement of human technology, the efficiency of energy utilization will continue to improve. Still, as a general energy measure, 1 kW·h is universal in the world; therefore, its stability goes beyond that of ordinary commodities. Scientists are also making progress in the development of new energy sources. Solar energy, tidal energy, geothermal energy, nuclear energy… With the progress of energy storage technologies, the volume of EBS will not fall into the dilemma of gold that cannot expand. Instead, it has more room to meet the balance of supply and demand.
Therefore, energy fully conforms to the stablecoin anchor requirements and is currently the best anchor.
Realization
The Macro Model of the Energy-based Stablecoin System
How to implement it, exactly? The process can be roughly divided into stages to be carried out step by step.
At the first stage, before EBS establishes a global consensus, the US model can be adopted, where financial institutions, companies, and other relevant parties can be approved or authorized by relevant government departments to issue EBS pegged to fiat currency and pilots are carried out locally.
At the second stage, when governments of multiple countries reach a consensus, they can authorize the IMF, the World Bank, the European Investment Bank, or the United Nations agencies to issue EBS to be used in multinational groups.
At the third stage, after humanity reaches a general consensus, the anchor (energy units) can be directly converted into a basic digital currency, and stablecoins containing units of energy can be directly issued in the global market.
Then, the macro-level EBS operation will follow the mechanism shown in the figure below.
First, energy data is uploaded to energy nodes from production centers all over the world. They can be local energy management departments or their authorized agencies. Then, the energy distribution system distributes energy to the supply–demand system and the energy storage system according to the actual demand of the global energy market.
The above energy storage system will serve as an emergency mechanism and ensure the stable operation of the entire EBS system. When there is an imbalance between energy supply and demand in the market, e.g., due to energy policies (such as carbon neutrality), wars, or economic blockades, etc., that results in periodic shortages of the global energy supply, the energy storage system can quickly fill the gaps and maintain the energy market stability.
At this point, it’s more about the energy supply–demand distribution. Next, dedicated EBS function centers will be backed by the economic indicators and data of the global macro market. According to the data of each center and previous stablecoin issuance/burns on the blockchain, the supply of EBS will be adjusted. The energy asset management center will adjust the parameters and weight of EBS pegged in each region according to the algorithm based on the development of various global economies and the consensus of each center. Finally, cross-regional stable operation of the entire system will be achieved.
Of course, this is just an oversimplified operating mechanism. In fact, the core hubs, including energy nodes and energy asset management centers, are composed of multiple nodes and centers that exist in a distributed manner. To ensure sufficient security, all decisions can only be made after multiple signatures. At the same time, a high degree of decentralization is ensured.
The Core Mechanism
Energy-based Stablecoin Collateral and Adjustment
The core of the EBS mechanism is over-collateralization of financial assets through smart contracts and issuance of stablecoins with an anchor relationship of 1 EBS = 1 kW·h. It means that Energy-based Stablecoins are backed by financial collateral (such as the sovereign currency US dollar, the digital currency Bitcoin, etc.). Assuming you hold USD and intend to generate EBS, you just need to send USD to a place we call a Collateralized Debt Position (hereinafter referred to as CDP). CDP is a smart contract that runs on the blockchain.
See this analogy. Suppose you request a mortgage loan from a bank. You put your house as collateral; and the bank gives you cash as a loan. If the value of your house drops, the bank will ask you to repay the loan. If you can’t repay the loan, the bank will take the house away.
In terms of the EBS system, the financial products you pledge are the house, the smart contract is the bank, and Energy-based Stablecoins are the loan from the above example. You deposit USD into the CDP smart contract and get a loan in EBS. If the USD value of your collateral is below a certain threshold, you have to repay the smart contract loan just like a bank loan. Otherwise, the smart contract will take your USD and sell it to the highest bidder at an auction.
All in all, in the EBS system, a CDP is the place where the collateral (USD or other currencies) is held.
Once your financial collateral is sent to the CDP smart contract, you can create EBS. The number of EBS you can create depends on the value of your financial collateral in the CDP. This ratio is fixed but can change over time. We call the ratio between the value of collateralized financial products and the value of EBS the Collateralization Ratio or C-Ratio.
How does EBS maintain stability?
Assume that we encounter an undesired situation: the value of collateralized financial products declines and is not enough even to support the corresponding number of EBS. Then, the value of EBS will also decline, and the system may collapse.
At this point, the stablecoin system solves the problem by liquidating the CDP and auctioning the collateral before the collateral value is insufficient to support EBS.
Basically, if the price feedback in the CDP shows that the value of the collateral has fallen below a certain threshold (let us say 125% of the value of the created EBS), the CDP is liquidated and the financial collateral in the CDP is auctioned until EBS borrowed from the CDP is paid off.
Additionally, at the macro level, the linked security mechanism will also play a role in the EBS stability regulation.
The first layer is the multi-center distributed guarantee. If the local price of EBS goes up due to market speculation, then these centers have the right to directly issue a certain additional amount of stablecoins to lower the price to the energy price. Vice versa, each center also has the responsibility and obligation to use its reserves to buy back EBS so that the price can recover. This multi-center is preferably the local power management department or its authorized agency.
The second layer is the on-chain collateral guarantee. When a new center wants to join the EBS system, it needs to obtain its initial EBS through pledging of financial assets. These on-chain pledged assets will serve as a guarantee for all EBS in an emergency. In order to ensure sufficient security and decentralization, and obtain more anchoring information from the lower layer, all transfers of pledged assets on the blockchain can only be executed by collecting multi-signatures from multiple centers.
The third layer is the bottom algorithm adjustments. According to the consensus and on-chain data on additional stablecoin issuance/burn of each center, the parameter weights of the pegged EBS in each region are adjusted through algorithms. Thus, the cross-regional use of the entire system is achieved and pegged EBS are more reasonable and stable.
When it comes to the application layer, EBS no longer has to be priced in fiat currencies of various countries. It can become a unified global pricing unit itself. When users and enterprises need to buy goods, they will only need to consider how much energy, that is, EBS, the goods are worth.
For example, in power consumption scenarios that first come to one’s mind, e.g., electric vehicle charging stations, mobile power banks, and household and industrial electricity consumption, there is no need to consider the electricity price fluctuations. The same amount of energy can be charged directly according to the consumed EBS. Transfers and trading of EBS will be possible through portable energy storage devices; and value storage for energy storage devices will be possible using special energy banks.
In daily life and corporate procurement, EBS is also a good solution to the inflation problem. In the past, you paid $3.50 for a loaf of bread from your favorite bakery; and it may have gone up to $4 in just one day. In the market where EBS is used, bread worth 3.5 EBS will have a stable price for a long time. Because the average energy consumption level of bread production in the society can be deemed stable for a long time, it is worth this many energy units.
Even countries of production and energy production companies will no longer be able to take advantage of market demand to raise energy prices. This, to some extent, will solve the so-called “energy poverty” that affects many households during an energy crisis.
In the past, due to the currency crisis caused by the global economic crisis and the unlimited quantitative easing policy of the US dollar, international trade was exposed to the risk of currency exchange rate volatility for a long time. In trade, EBS will act as a stable and reliable intermediary currency, allowing countries to avoid possible exchange rate losses, reduce the intermediate trade costs, and even no longer limit the scale of trade due to low foreign exchange reserves.
The proposal of the new Energy-based Stablecoin concept breaks through the limitations of traditional anchors in the international monetary system, reduces the potential risks of government credit crises and global financial crises. Thanks to the true stability of EBS, under the international monetary system, the global economy can enter a path of truly stable and balanced sustainable development.
The Limitless Future of Energy-based Stablecoin
The Fundamental Laws of the Universe and Computer Program Rules Merge
In fact, throughout the human history, the currency is like an organism that has evolved into different life forms in different times. From shells to copper coins, to gold and silver, to banknotes, and finally to cryptocurrencies, each new form of currency will continue to erode or even replace the social function and status of the old one. It is conceivable that fiat currencies such as the US dollar will one day disappear as the currency like shells and copper coins did.
The basis for the currency form evolution is value exchange; and energy conversion is its essential core driven by giants like science and technology. Even though the form of currency in human history has undergone groundbreaking changes, the basic demand for energy will never change.
Therefore, as the focus and embodiment of the ultimate law of energy conservation and transformation, EBS built on the energy system has the eternally universal application and manifests the inevitability of historical development.
With the continuous development and innovation in energy storage equipment and related technologies, the applications of EBS will transcend national boundaries, which is determined by its super-sovereignty. It can even seamlessly connect to the Metaverse, break through the barriers of value exchange between the real and virtual worlds, and provide the Metaverse with a non-depreciating currency base. Even in the future space age, interstellar residents will be able to exchange value online and offline through energy storage crystal cards.
It can be said that as long as the law of energy conservation and conversion remains unchanged, the cornerstone of the universality of EBS in the universe will not be broken.
Of course, it is a rather long process from the proposal and demonstration of the Energy-based Stablecoin concept to the final pilot, implementation, and global participation. However, we have a reason to believe that through the international research and discussion of stablecoins at the early stage, we will gradually accumulate more experience and optimize the EBS model to make it in line with the international needs. No matter what the ultimate direction is, the ultimate goal is only one, that is, to use stablecoins and blockchain technology to let the humanity share the economic prosperity brought by technology and the better life it carries.
References:
[1] The Global Financial Cycle and US Monetary Policy in an Interconnected World, Banco de España Working Paper №1942 (2019).
[2] Syed Kumail Abbas Rizvi, Bushra Naqvi, Nawazish Mirza. Choice of Anchor Currencies and Dynamic Preferences for Exchange Rate Pegging in Asia [J]. The Lahore Journal of Economics, 2013, 37–49.
[3] Global Debt Monitor: Confronting Climate Change and Policy Normalization, Institute of International Finance (IIF), 2021.
[4] IMF Global Debt Database and IMF staff calculations, 2021.
[5] Investigating the impact of global stablecoins, The G7 Working Group, 2019.