An Hybrid Protocol to allow Fast Mass Adoption of Cryptocurrencies for Everyday Use
How to make any Token behave as an “Hybrid Token”
TL;DR: A protocol is proposed which allows to use any low fee token (like BTC via LN, XNO, etc), “LFT” as a generic reference, as a reliable currency (in terms of stability) for every-day use, by diminishing the effects of market instability (not to confuse this with price control). To achieve this, it combines the virtues of stablecoins with the ones of LFTs, hence the term “hybrid token”. It does not implies to make any change to an LFT itself (that would go against the purpose of the protocol). A DEX like SundaeSwap can be used as a basis for this application (it can be an extended functionality of SundaeSwap), since to constitute “Collateral Pools” will require the use of similar techniques than those used to constitute Liquidity Pools.
1) DISCLAIMER:
The main purpose of this specific proposal is to serve as a brainstorming input to start to explore the idea. If at the end this specific proposed method is found to be fundamentally flawed, I kindly invite the reader to at least consider the overall concept and to try to think of a functional alternative proposal.
2) INTRODUCTION and OBJECTIVES:
This proposal do not takes into account the use-cases of traders nor holders, but only the use-case of common merchants and everyday clients and savers, who only need a reliable currency system for daily use, who can not withstand volatility, and who can not wait for the entire crypto ecosystem to become mainstream before jumping into it to avoid volatility, since it’s up to them to make it mainstream. Since most of them can not afford it, they are trapped in a “chicken before the egg” buckle.
The idea/protocol here presented aims to swiftly overcome said buckle, in order to speed up mass adoption while avoiding bumps most people fear too much or simply can’t afford.
This suits the case of a country like Argentina, my country. In countries without a currency-based economy, like in Venezuela (until dollar adoption becomes massive), LFTs are a perfect solution as-is, but that’s not the case in Argentina. We are just in the middle of the spectrum, and while cryptocurrencies are being increasingly used to secure savings from inflation and the greedy hands of the tyrannic State, being a holder is far from viable for the vast majority of the population: while the “peso” (the national currency) has lost it’s use as a mean to save value, the economical crisis, the level of taxation and the inflation are such that the mass of people lives by the day, and they need to spend as soon as they earn to pay all the bills. Their margin to make savings has vanished, and with always increasing bills, there is no possible use for a coin with volatility, since the State demands timely payments, and punishments for straying back are promptly applied (fines and embargoes).
I’m always speaking about the mass of people here, which is locked in the described cycle. Needless to say, there are marginal and sparse exceptions whose conditions can’t be extrapolated to the mass.
Of course, as some of you may point out, one first solution for us is to use a stablecoin paired to the dollar. But that’s not a convenient mid/long term strategy for many reasons:
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Stablecoins paired with the dollar have very expensive fees (an effect augmented by the high cost of the dollar in pesos, so even a tenth of a dollar is costly -yes, the situation is that bad-), thus they are not viable for daily micro-transactions. Plus, they can suffer unwieldy delays, again not viable for daily commerce.
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To avoid both fees and delays, a payment service like “Binance Pay” can be used, but they are susceptible to State intervention and banning (a policy that is actively increasing, currently affecting all local exchanges -Binance may last for some time, but ultimately it can also be forced to comply, just like it already did in many other countries-). Further, all local exchanges must (and do) abide to the State requirements of actively identifying and informing about all customers transactions. Yes, every single one of them, which they later analyze with an AI engine to pin-point every non declared transaction, which puts you in a black list. Sounds dystopic, isn’t? But State owned propaganda announces this, with those very same words, as a vindication of the poor, which they ensured to raise to a wooping 50% to ensure that plundering the middle classes can be approved by enough electors. Sounds insane, isn’t?
Currently, by new laws, high taxes apply to the possession and transaction of cryptocurrencies. We are still curbing all of these measures, but the State is bent in a non-stop race to control everything. Thus, any service that is not a wallet (i.e. exchanges) are used almost exclusively to make P2P transactions.
- The concept of a stablecoin goes straight up against the idea cryptocurrencies where born by in the first place. And we would still be subjected to the inflation of the dollar (which as been raising considerably). Furthermore, while stablecoins are a good option for early adoption, in the long-term they do not represent, by themselves, an effective mean to transition from a fiat based system to a crypto based system. There is gap in the middle.
So, for some aspects, stablecoins are a short-term answer, and for others, LFTs are a long-term answer. In consequence, I’m proposing here an hybrid solution. This solution, of course, can work equally well anywhere else besides Argentina.
3) PROTOCOL:
Actual currency to be used for all client transactions : any LFT, like BTC (via LN), XNO, etc.
Token to be used as a reference value : a virtual hybrid token (VHT) can be used, which encompasses the mix of virtues mentioned before. Te reason to use this virtual token is to bring stability to the economy by means of using numeric values for asset/services prices which are, at least, as constant as possible (at best, deflationary). The token is virtual in the sense that it’s only the result of a mathematical equation, a numerical value defined as a reference for convenience, not necessarily an actual token.
The value of this token will be defined according to the level of adoption of the LFT in respect to the level of adoption of the stablecoin used as reference (this definition is still valid if in the future another coin is used as reference, like Ethereum), in such a way that, by starting in the lowest levels of adoption, the value of the token will be very close to the value of the stablecoin (1 to 1 in the limit), and in the long term, when the level of adoption of the LFT becomes larger (an instance that should be coincident with the stablecoin becoming deprecated), the value of the token will be very close to the value of the LFT (1 to 1 in the limit). Thus, the value of the token is defined by the following equation (the word “limit” is used in the mathematical sense):
limit for low adoption level → 1(USD) = 1(VHT)
limit for high adoption level → 1(LFT) = 1(VHT)
Since 1(LFT) = klft x 1(USD) , and 1(VHT) = kvht x 1(USD) = [ 1(USD) + klft x 1(USD) ] / kw
→ kvht= (1 + klft) / kw
Where kw is the weight coefficient valued according to the level of adoption. It can be best measured by the level of inflation of the fiat used as a reference. Since the most elemental purpose of this protocol is to protect the client’s funds from inflation by ensuring that the total value of his savings remains over or above that line, kw can be calculated as the value that accounts for inflation exactly (this definition is compliant with the above defined limits). Virtual tokens will then increase in the user account when the LFT is valued above the level of inflation compensation.
This definition allows for clients to start by defining prices in the system they are more familiarized with, to then progressively migrate to a full crypto monetary system.
Thus, when “transferring VHT”, it’s the equivalent in the LFT (at the moment of executing the transaction) that will be transferred.
The app can be set to start working with VHTs once a minimum volume in the Collateral Pool as been reached. Once that volume is reached, inflation will start being considered from that point on, starting at 0 (cero).
Stablecoin to be used: we can select USDT for this application, but, as explained at the end of Item 4, another altcoin can be used too in the future, as long as it’s expected to suffer inflation and to be depreciated with time respect to the LFT (for the sake of illustrating this point, lets say that Ethereum could fall in this category).
Inflation: the depreciation of the fiat currency caused by emission, devaluation and deprecation. This process can lead to a situation in which the fiat currency haves no value. That is, in the limit, once full adoption is complete, there will be no 1 to 1 equivalence between the total amount of fiat and the available cryptocurrency, so the system must take that limit into account.
Types of clients of this system:
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“Users”, the ones which only need a reliable currency system.
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“Collateral Providers” or “Investors”, the ones more interested in safe investing.
System Architecture:
User “Wallet”: it’s conformed of (A) and (B).
(A): a Virtual LFT Wallet, composed of (A-1) and (A-2).
(A-1): a Private LFT Wallet. Only the user haves the private key. So, since the A-1 wallet is independent, then the user can receive and transfer from it circumventing the protocol. How can that case be handled? In the case the user receives crypto, they are not accounted for by the algorithm: for it, they don’t exist (it should be easy to identify the amount that comes from the system’s entrance from the amount that doesn’t). Thus, the only way to transfer said amount is also trough direct transaction between A-1 wallets. In the case the user transfers crypto directly to another wallet (i.e. not to another A-1 wallet or at least not from the entrance to it’s system), then nothing changes, since the coins come out of the A wallet anyways. Those coins are the equivalent to the system to “burned” coins, since the collateral remains in the system, hence, not harming it’s function.
(A-2): a Virtual LFT Wallet, which is defined by the Collateral Pool as the fraction that corresponds to the user.
(B): a Virtual Stablecoin Wallet, which is defined by the Collateral Pool as the fraction that corresponds to the user.
Already existing wallets (like Muun for BTC-LN, Natrium for XNO, etc) could be used as a basis or even as clients (which besides saving enormous work, also ensures total independence of the user in the future, like noted in the Item 4).
The entire application should be fully decentralized. For example, and just like the liquidity pools, the collateral pools should also be built as a DeFi platform, for the same reasons. In line with this principle, the App could later be further extended by using Kleros Escrow to add decentralized P2P functionality (much needed to provide a full solution to the concerns expressed in Section 1 ).
Of course, the app should hide the complexity of this scheme behind a UI that will only show to the user the same basic functions as the Natrium wallet, plus different metrics, like showing only the total from (A)+(B), in VHT, LFT, and in dollars/pesos. It should be possible to make payments by directly inserting the amount in dollars or in pesos, until users get used to the VHT (which is expected to happen due to it’s greater convenience for the “calculation” process, in Von Mises terms).
It must be noted that the Collateral Pool (CP) is fundamentally different to the Liquidity Pool (LP):
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The CP, contrary to the LP, can not be used for AMM. No one can trade with the CP, which is only used by the Regulator Algorithm to stabilize the total amounts in the user’s accounts. Therefore, they are used to virtually control the supply of the LFT (to emulate an algorithmic stablecoin behavior), and to backup its value (similar to how asset backed stablecoins work). Funds deposited directly in the CP by investors must then be locked for a considerable amount of time, from 1 to 3 months, similar to LPs (and with a similar reward scale). As for the users of the App, the application can (and must) ensure the access to the entirety of their funds all of the time (in exchange for less rewards than the ones earned by investors).
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Another key difference between the CP and the LP is their governing laws: while the CP aims for x=k.y , the LP aims for x.y=k (taking the most basic case of Uniswap, just to illustrate the point). This way, the existence of both pools allows for the continuous operation of the Regulator Algorithm necessary to ensure as much stability as possible around the projected staggered augmentation of the VHT. The x=k.y equation for the CP comes from the same logic used for the definition of the VHT: as the inflation of the stablecoin increases, the fraction it represents in the CP must decrease respect to its LFT counterpart, to allow for a full switch to a LFT based system (this also respects the idea that the altcoin devaluation will be coincident with an increase in the LFT’s value, which will be representative of it’s level of adoption). Thus, for the CP , k is defined as k=(1+inflation/100) . This way, if there is no inflation, the CP will respect x=y, which is the starting case represented in the above diagram . Of course, as k increases it will define the new proportion to be respected when deriving the funds to the respective wallets and pools. In the limit, when stablecoins in the pool get deprecated (zero value due to complete transition from fiat to cripto), investors will get minimal losses for the stability they gained during the transition by having a part of their assets in stablecoin (which also helped the investment in the LFT), and greater gains (than normal users) for the instability they accepted by having part of their assets in the LFT. This protocol is never going to be nor intends to be as good has direct trading nor holding, it’s a compromise between the extremes which will be just good enough (and preferable) for the vast majority of the population.
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The Collateral Providers do not own a proportional portion of the funds in the Collateral. Instead, and similarly to users, they earn in terms of VHT, but more than the Users (at the expense of having their funds locked and by accepting higher instability). Thus, the Collateral Pool will also collect trough time its own portion of collateral which can then be used to further stabilize Users and Investors funds. This portion will be depleted in the limit, by transferring proportional amounts to each account.
For all assignations within the CP, if needed, the same tokens used for the LP can be used too.
It’s not necessary to make the entire transaction in LFT: since, from the transferred amount, the same proportions will remain within the same respective type of wallets, the only transaction needed is of the proportion that is in the original A-1 wallet to the new A-1 wallet, while in the others only a re-assignation within the pools is needed.
In the case of users, deposits (funding) must be entirely in stablecoin. It all goes to the Stablecoin Collateral Pool, where it gets divided according to k . For the case of k=1 (the case displayed in the above diagram), half is assigned to the (B) wallet, and half remains locked (i.e. not taken into account for the re-balancing procedure of the CP, for one or two months). A corresponding amount of the LFT equivalent to this half is assigned to the (A) wallet (this is the point where the “fractional banking” technique can come into play if needed, until the system compensates the lack of the LFT during buying periods). That way, the system can deal better with the situation when a user gets his LFTs during a spike, since the original amount in fiat is available as collateral for some time.
Basic Operation:
As shown in the previous diagram, every incoming transaction is derived to the (A) and (B) wallets in the specified proportions. When a user transfers money from his account to another, (A) and (B) are rebalanced again according to said proportions.
To ensure that the total value of the (A-B) wallet remains, at a minimum, the same respective to the VHT (at least 90% of the time, to say), the system proceeds as follows:
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If the price of the LFT falls:
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The CP can add some LFT to the (A-2) wallets to keep the amount of VHT close to the original value.
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It can use the stablecoin in the collateral to trade with the liquidity pool by buying more LFTs. This also haves an effect similar to how algorithmic stablecoins work, by reducing the offer.
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A small and circumstantial percentage of Fractional Banking can be used to help to avoid noise.
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If the price of the LFT rises:
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The CP can take some LFTs from the (A-2) wallets to keep the amount of VHT close to the original value.
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It can use the LFTs in the collateral to trade with the liquidity pool by selling LFTs. This also haves an effect similar to how algorithmic stablecoins work, by augmenting the offer.
The augmentation of the amount of VHT in the user wallet is set in a staggered form, with a permanent offset of 1 month of delay (to allow for better calibration of parameters). Each month the amounts remain constant, and rise to a new level (or not) for the following month according to market behavior, the level of collateralization, and a minimum level of market prediction. The percentage of VHT earned is calculated on the total value of the user account averaged by day during that previous month. The earning is calculated to ensure that enough is left as collateral, the same as for Collateral Providers, but this client’s earnings will be less than those of Collateral Providers in exchange of full time availability of 100% of their funds and greater stability. Indeed, Investor’s gains are greater than user’s in exchange of greater risk, short-term instability, and limited availability due to the required locking periods.
This way, both kind of clients can cooperate: the ones who are more worried about stability than gains and need daily access to their funds, and the ones who can withstand more instability in exchange of greater gains and can afford to lock funds for long periods.
It can also be interpreted that, while everyone wins from the overall rise in LFT value respect to fiat, the greater gains of the Collateral Providers are essentially the fees normal users pay to them in return for the short term stability they provide by enduring short term instability while still providing collateral, in exchange for medium term net gains.
Of course it’s possible, if needed, just like other AMM platform, that a fraction of the gains will be taken as fees in order to fund the development and maintenance of the entire project.
This is not trading, in which case the trader waits for the price to go up to sell. This is similar to algorithmic stablecoins, in the sense that the “automatic regulator” starts selling the moment the price starts to increase above the determined growing path.
This is not a protocol for “price stabilization” of LFTs, like a stablecoin, but for stabilization of the VHT amounts around a dynamically defined staggered curve. The staggered nature of this curve obeys the need to have a time delay (of 1 month at least) to better calibrate and define each one of it’s steps, to ensure (as best as possible) that the levels of collateral and liquidity allow for such augmentation without sacrificing the robustness of the system.
Of course, there is the possibility that a sudden rise in price will surpass the ability of the system for keeping the amount of VHT of an (A-B) wallet around said staggered curve. While beneficial in the short term, this phenomenon will make the system unstable, so to minimize such occurrences the proportions in which the A wallet is divided between A-1 and A-2 is defined by the following equation: xa1=ka.xa2 , where ka=(MC/100)/[1-(MC/100)] . “MC” is the percentage of Market Capitalization, which is an indicator of the maximum possible growth (hence, it’s a conservative measure), thus, it’s also an indicator of the level of adoption and, indirectly, the level of deprecation of fiat currency.
As it can be noted, the protocol aims to allow to naturally and seamlessly migrate from the fiat to the crypto ecosystem, using stablecoins as a temporal bridge. In the same way, the protocol allows to migrate from a centralized payment system to a decentralized and independent one (the direct use of wallets). Other payment systems, like “Binance Pay” for instance, do not allow for this transitional behavior.
Regarding the staggered curve and the balances of the different wallets and pools: the algorithm should be able to follow those parameters the majority of the time with as much fidelity as possible. It will not be perfect, but variations must be negligible for practical purposes. Another way to improve stability is to update
Of course, in extreme cases like a massive drop in the LFT’s price, the system will be unable to compensate and both users and investors will inevitably suffer from a degree of loss, alleviated in part by the collateral. In those extreme cases, the purpose of the protocol is to stabilize and compensate for loses in the medium/long-term. It must be noted that the more the currency (and moreover, this protocol) is used, the less likely this situation will be.
4) IN THE LIMIT: ONCE ADOPTION IS COMPLETE
While full adoption may very well never happen due to the competence within the crypto market which so far ensures a place for every cryptocurrency, it’s a more robust approach to ensure that the system is able to deal with such a theoretical instance. That’s why the A-1 wallet is ensured to be fully independent, so that it can be the sole remaining functional part of the system after the pools reach a stale point (to then proceed to be depleted according to the proportions that belongs to each participant).
So, in the limit, the following circumstances are verified with the proposed system:
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All of the corresponding cryptocurrencies will have been poured into the A-1 wallet (in an automatically progressive manner, as described in the “Basic Operation” section).
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The stablecoin in the collateral pool represents a minimal (or null) fraction of the total value contained in the CP, due to the deprecation of the stablecoins/fiat system. In this case, the collateral pool helps adoption by providing a final fool: the one that will keep forever the deprecated stablecoins. Strictly speaking, the stablecoin minter’s collateral will then fulfill this purpose. Considering at the same time, as initially stated, that full adoption of one sole crypto will never happen, but that the fiat system will indeed be fully dumped, then there will be still volatility within the crypto market itself. This is why the proposed method considers the possibility of switching to using one of the most stable of the no-finite-supply-cap altcoins available (possibly Ether) as a future collateral to deal with volatility within the crypto market itself. While Ether may not be used right from the start, the infrastructure must be there and ready for that future moment. Again, the use of collateral provides short-term stability and lower risk, at the expense of less gains compared to direct trading, since it’s expected to have no value at the end. The progressive deprecation of the stablecoin can be considered the cost of such stability, which for a vast majority of people is preferable in place of dealing with high risk and instability. This protocol is then a compromise between both extremes: both users and investors will not lose as much as if they stay solely in fiat, but wont earn as much as if they stay solely with the LFT. The stability gained by staying in-between is already an excellent deal for most people.
5) SIMULATION:
The following step is to make a simulation of the proposed protocol to validate it’s stability, but this is going to be a complex and time-consuming task, so I preferred to first present the idea as comprehensively as possible, and then proceed to develop it further based on the observations/reception of the community.
6) NOTES:
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Since the (A-1) wallet is totally independent, the DEX can be developed to consider a vast range of Collateral Pools, associated with their correspondent Liquidity Pools, using the respective existing types of wallets as clients (to be created by the app for this purpose), which can be connected to the application. That is, the modular nature of the proposed architecture can be used to progressively extend the functionality of the DEX.
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While the protocol architecture was defined to allow for decentralization and independence, early versions can be implemented within existing centralized and custodial payment systems, and thus these early applications can even use fiat instead of stablecoins. Since the logic is the same, VHT tokens generated this way should be naturally compatible with future decentralized applications and vice-versa.
This are already like eight A4 pages so if you made it to the end, from the bottom of my heart: thank you for your priceless time.
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