In Search of the Holy Trinity: Decentralised, Stable and Scalable.

Failed Attempts

There has been a search for a stable cryptocurrency that fulfils the these three criteria for many years. All attempts have endeavoured to maintain a peg to USD and all attempts have failed.

There are broadly two types of attempts that have failed. The first group, the algorithmic stablecoin group, failed through ponzi economics. In this scenario, the value of the collateral and the stablecoin produced on top of it are based purely on faith rather than any real underlying economic activity distinct from the currency itself. The collateral exists purely to mint the stablecoin and has no demand for any other reasons. When a run on the currency begins, there is therefore nothing to stop it, resulting in these attempts collapsing spectacularly. So although they maybe decentralised and scalable, they're ultimately not stable.

The second attempt uses collateral that is demanded for other reasons such as cryptocurrencies like ether that are demanded in order to be able to write to the Ethereum ledger, something many people wish to do. These pegs work because they are overly collateralised and the positions can be liquidated before the stablecoin breaks its peg with the dollar. This prevents a collapse but reduces the supply of the currency at precisely the time people demand it. These currencies are both decentralised and stable but are constrained from scaling by their collateral. Banks and central banks are not constrained like this as they can create money when it is demanded at will as long as it is required in their economies.

This is this reason why nobody in the decentralised money space has achieved the holy trinity. The creators of stablecoins are pegging to currencies that are in turn tethered to economies whose performance is largely distinct from the collateral used to back the pegged stablecoin.

A Tried and Trusted Formula: Fiat Currencies

What is required to achieve the holy trinity is real economic activity both the collateral and the currency are intrinsically linked to so that the currency can scale with demand. This is analogous to the relationship between economic growth, demand for government bonds and demand for currency in nation states or economic blocks that issue their own bonds and currencies.

If economic activity is rising, so too will demand for the collateral, meaning more currency can be issued as it's needed. Conversely if economic activity is down, the value of the collateral will decrease, but so too will demand for the currency. As long as the supply of goods and services are elastic to demand, meaning supply and demand is always quite well-matched, that can provide a base which monetary policy can target in order to produce a stable currency much like the CPI basket is used by central banks.

Olas will have real economic activity in the form of donations, tips and information markets for articles written. The supply of information will be extremely elastic to donations and tips (demand) as most information can be produced quickly at little cost. Conversely, the lack of sunk costs means production can cease quickly too. The value of OLAS, the native asset, is also expected to rise and fall in line with demand on the protocol. We therefore have a ready-made base upon which we can launch a decentralised, stable and scalable currency using OLAS as collateral and recommended tip prices and/or velocity of money as a target for issuance.

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