Tribalization in the cryptocurrency ecosystem is a well-known phenomena. Bitcoin maximalists, the XRP Army and ETH heads joust and troll in search of the “Next Standard”. These tribal “wars” may be exhausting to onlookers but they are hollow and meaningless compared to real conflict. Take the case of Bosnia and Herzegovina. Bosnia was one of the bloodiest wars the world has ever seen. 250,000 people died in the fighting, while 75% of the 4M population were displaced. Most of us have little connection to this scale of disruption and suffering.
In 1996, Dr. Warren Coats was tasked with leading the creation of a single currency for Bosnia. Suspicions between ethnic groups climaxed following four years of war. The Dayton Agreement mandated “one country, one central bank and one currency” for Bosnia. Yet, generating consensus between mistrusting tribes seemed far-fetched and intractable.
Fast-forward a little more than a year. The Central Bank of Bosnia and Herzegovina (CBBH) opened its doors. By the end of 1998 it had doubled its size and was well on its way to a successful launch. Dr. Coats attributed the success of the CBBH to the goodwill of the three ethnic groups represented on the Board. Yet, even getting to that point of cooperation, the three groups required a set of rules that were agreeable, familiar and fair.
Currency Board Rules
What was the secret to the CBBH success? Coats proposed using currency board rules as the foundation of the new central bank. His idea was quickly agreed upon by all sides. They had experienced currency boards before the war and knew the principles could not be co-opted or abused by the other groups. This breakthrough in monetary cooperation become a turning point for one of the most contentious regions of the world.
Currency boards are the simplest form of monetary regimes. They have an externally fixed value, are the easiest to administer and have the highest degree of credibility. They can be anchored to a basket of commodities or another currency (think Bermuda or the Caymans linked to dollars). They are generally backed by stable and liquid assets such as gold, dollars or government bonds.
Decentralized Currency Boards and DAOs
Decentralized stablecoins such as BitShares and MakerDAO function similarly to currency boards.
Although the primary use case for many decentralized autonomous organizations (DAOs) such as Maker is lending and margin trading, the process of collateralizing assets to create a new currency, such as DAI, closely resembles a decentralized currency board (DCB). At present, DAI is anchored to US dollars. Tomorrow, it may anchor to something else. It could also be tied to the IMF’s Special Drawing Rights (which Coats oversaw for more than 2 decades), a basket of commodities or a CPI that makes it more resilient to inflation.
The number of potential assets backing a DCB as well as the anchors used to assign stablecoins value are both almost endless. Anyone that’s been in this space for a few years knows that smart contracts and DAOs are susceptible to being hacked or exploited. Diversification will likely be a wise strategy for depositing in DCBs in the years to come. Yet, despite these risks, the potential for this asset class is enormous.
The Next Standard
As we have seen with Bitshares and Dai, DCBs have already successfully anchored to external values such as the dollar. It is possible that DCBs will become even more stable than central banks engaged in targeting inflation. This would flip conventional wisdom on its head that cryptocurrencies are volatile and thus unsuitable for mainstream adoption. The reality is that they can and, I predict, will produce stronger and more effective monetary policy than central banks do today.
For this reason, I would like to issue a challenge to the entire crypto ecosystem. Consider the creation of new stablecoins anchored to values independent of central banks and fiat currency. A declaration of decentralized independence. Instead of anchoring to dollars, we should explore and discuss the adoption of a global standard that is purchasing power neutral. In other words, we should strive for a currency that holds its value and purchasing power over time as a near-perfect constant.
There are two primary reasons for doing this. The first is the declaration of independence from centralized authority and inflationary money. The second is that we now have an ability to produce more stable currencies than fiat. A more stable currency is one that is even better for global trade and lending.
In other words, the crypto ecosystem is now capable of producing sound money independently from centralized authority. We will continue to miss the mark until we adopt a standard that maintains stable value over time. The minute we do, we can leapfrog the status quo. It is often said that disruptive technologies have to deliver 10X the value to dislodge incumbents. This is the missing piece to this equation that can help shift the emphasis to creating world-class payment networks and user experiences.
Regardless of what cryptotribes we belong to, we can share a price stable anchor in common, while choosing to create DAOs and DCBs backed by very different assets. One DAO could be backed by ether, another by BTC (and so on in almost endless configurations) and yet they are anchored to the same global unit of account. This would allow for cooperation and alignment on one level and competition on another to deliver value to the global community.
In this approach, the base layer unit of account would be rock solid and representative of value independent from any DAO or crypto project. It would remain immune to hacks, poor incentives, (mis)governance or bad code. The second layer would be the stablecoin projects seeking to align to the global anchor. Each project could then compete with every other project in the space based on risk exposure, security, speed, UX, and value. It should not take long for the best code, incentives and governance practices to take hold and produce an array of compelling and anti-fragile stablecoins.
Principles of Consensus
The number of crypto projects is always going to grow. Those hoping the entire ecosystem is going to evaporate so that their project will win are living on hopium. It’s a young space with tons of untapped potential. We should encourage innovation, experimentation and novelty while also tackling scams, bad ideas and poor accountability. If you agree with this, you’ll probably have to concede that your crypto of choice is never going to be the Next Standard and gain 100% market share. What it could be is a really great store of value. An inelastic coin supply will never deliver price stability unless anchored to an external index.
By introducing a stablecoin standard, the crypto community could offer real value as a superior unit of account to dollars and other fiat. A standard could grow into becoming an optimal native version of internet money. Some DAOs anchored to the Standard would be backed by the cryptoprojects and traditional assets that you support. Others would not.
If you think Bitcoin is the best crypto, then BTC backed DAOs, anchored to a common index gives BTC even more value and utility in the real world. The standard could easily be programmed to indicate value in other units of account such as Satoshis, Bits or otherwise.
Back in Bosnia, the central bank hit a major hiccup when one of the ethnic groups insisted on having their own version and brand of the new currency. This first appeared to be a potential dealbreaker, but they soon realized it was no problem to have two currencies with the same external anchor. The same principles could be effectively applied to decentralized currency boards. If Bosniacs, Croats and Serbs can align on currency board rules, shouldn’t it be even easier for hodlers of Bitcoin, Ethereum and Ripple?
If we look past the tribalism, there are many values and features inherent to decentralized currency boards shared by all cryptotribes:
· Currency boards require fiscal sustainability: government spending cannot be subsidized by monetary policy and inflation;
· Currency boards cannot function as the lender of last resort. Banking and finance must be set up with optimal stability;
· This would incentivize full-reserve banking (ala the Chicago Plan) to ensure the separation of deposits from risk-taking activities such as lending;
· This in turn creates an anti-fragile system where banks and institutions can fail without threatening the whole or requiring the society to pay for their risk-taking and mistakes;
· DCBs have the potential to more perfectly align incentives in the monetary system so that costs are internalized. Externalizing costs can create misincentives that, through the Butterfly Effect, produce major global imbalances within markets.
By encouraging the development and adoption of DCBs, an anti-fragile global financial ecosystem is the natural destination. It can be a major rallying point for the entire crypto ecosystem to build consensus and alignment. This can be done even while permanently disagreeing on the best coins and projects.
This approach will make our entire industry more appealing to a broader audience and user base. Many have become disillusioned with money and politics but see very few viable alternatives. Offering a better way is the least we can do.
NOTE: This paper is based on an earlier draft submitted to the SNB in January. In the next piece, we’ll look at how to implement more fully operational and accurate DCBs using floating savings rates.
Jordan MacLeod is the author of New Currency: How Money Changes The World As We Know It. He is co-founder of Cornerstone Global Associates and heads their New Economics Unit. He is also the founder and CEO of Convergency, Inc. They are building Strue, a decentralized currency board, and sceni.us — a decentralized purchasing power index. He can be reached by email: firstname.lastname@example.org.