Meet the unpegged, uncollateralised ndau, courtesy of finely-tuned tokenomic and governance elements.
Stablecoins have been proliferating in the last few months. All of them are curious and flawed creations in their own way, and there are growing concerns that stablecoins of any kind, in principle, are economically impossible.
But maybe ndau can buck the trend. The coin was just unveiled today, and is perhaps the most distinctive and advanced stablecoin that has been created to date.
The best of both worlds, for the best of both worlds
"Stable is good. Buoyant is better," ndau says.
The ndau Collective came together as a group of early bitcoin enthusiasts who aimed to map out the biggest limitations for long-term use of cryptocurrencies. One of the key issues they found was the difficulty of using cryptocurrency as a long-term store of value.
Most cryptocurrencies have a built-in monetary policy to maintain cryptocurrency value. In the case of bitcoin and many others, this takes the form of relatively straightforward deflationary elements. For example, a hard cap of 21 million in the case of bitcoin, coupled with an assumption of ever-increasing demand.
But as has clearly been shown, this does little to decrease volatility or create ongoing price rises. Part of the problem might be that volatility becomes a self-fulfilling prophecy, where there are profits to be made directly from the volatility itself (buying low and selling high, shorting, etc). Eventually, when volatility itself becomes the main drawcard, most of the people to touch the coin are doing so with the intention of selling at a profit in the near future. This naturally limits the kind of rises that a coin might see, while ensuring near-constant volatility.
Neither is great for someone who wants a cryptocurrency to serve as a long-term store of value, immune to fiat mismanagement, government collapse or anything else, and able to move independently of other markets. At the same time, constant volatility makes it hard to actually use bitcoin as an actual currency.
Some people pray to Satoshi in the "digital gold" church, while others prefer to worship in the "electronic cash" church. But in some respects, both will always be equally under-served by bitcoin and its variants. Hyper-volatility is a downside for both digital gold and electronic cash.
"When a group of early bitcoin enthusiasts came together a few years ago to map out the biggest limitations to wide adoption of cryptocurrencies, it was clear that those looking to use crypto for long-term value storage had problems that weren't being addressed," said Ken Lang, an advisor to and early member of the ndau Collective. "ndau was created as a solution to these problems."
Balance in all things
Stablecoins like ndau are, as the name suggests, built to prevent volatility. But that's a tall order.
The first and simplest generation of stablecoins, such as Tether or the more recent Gemini Dollar, take a very straightforward approach to the problem. They hold fiat (or sometimes gold or other valuables) as collateral and then issue tokens based on the collateral held.
One of the main criticisms of these kinds of coins is that they undermine the point of bitcoin and other cryptocurrencies, which are specifically intended to be an immutable hedge against central bank mismanagement or falling fiat. There are some practical advantages to these in that they're programmable money, able to be easily moved anywhere in the world. But there are also inefficiencies in the form of the need for intermediaries, such as the Tether company or the Gemini Exchange, to maintain their value. It's basically just trading one central bank for another central bank, albeit a (probably) less regulated and reliable one.
Then you have the more complex second and third generation stablecoins. These fascinating projects usually work as self-sustaining economies, typically running on paired token systems which expand and contract in line with supply and demand to maintain their pegs.
These also run into the same problem as the earlier model – if fiat pegs are so good then why not just use fiat? – as well as issues around the balancing mechanism itself and the likelihood of snowballing into oblivion. To a certain extent, these systems also depend on constant growth, just like bitcoin and others, while also being less resilient to bank runs or economic contraction than fiat or the collateralised stablecoins.
The seemingly impossible solution, then, might be a cryptocurrency that's stable without being pegged to anything.
The ndau way
The ndau Collective is a semi-anonymous group of experts from institutions including Goldman Sachs, Columbia University and Carnegie Mellon. It's one of the only stablecoin projects to be entirely privately funded. It sold $15 million worth of ndau in private sales and picked up a sizable paycheck from COSIMO Ventures, a VC fund focused on finding the most unique projects.
"COSIMO Ventures is a team of highly experienced former entrepreneurs who invest in the tech space, and we currently focus on blockchain projects that have something really unique to offer," said managing partner at Cosimo Ventures Robert Frasca. "We surveyed the landscape of cryptocurrencies, and we invested in Oneiro because the ndau coin is leveraging blockchain technology to create a really groundbreaking buoyant currency. ndau challenges many of the assumptions held by current cryptocurrency thought leaders today, especially in the realms of digital governance and combining value growth with stability."
How ndau stability works
ndau is designed in broadly similar strokes to other uncollateralised stablecoin systems, except with the intention of minimising price downsides and gently encouraging rises based on token demand. When demand increases, the system responds by both increasing supply as well as letting market forces push the price higher.
The idea is that growing demand pushes the market price of ndau upwards along the "target price curve". This curve includes different price levels, each of which has 1,000 ndau in it. As these ndau are released, they go into the Endowment, which is intended to manage ndau's monetary policy and implement market operations like a semi-automated central bank.
Price stability mechanisms are triggered if market forces start pushing prices down past a certain threshold. One such mechanism, for example, is a penalty for traders who want to sell on a downswing, in the form of forfeiting a portion of the ndau they want to get rid of.
Another is that the Endowment funds can start buying up in the event of a severe market downturn, at a specific price floor. This price floor is dynamically determined as half the value of the Endowment, divided by the number of ndau in circulation. When this ndau is repurchased by the Endowment, it gets burnt and removed from circulation to contract the total supply. This formula means that the price floor rises as rebuying occurs, providing an inherent element of buoyancy.
Price rises, meanwhile, are determined by that target price curve. At any given time, there's a formulaic target price for ndau along that curve, dictated by current supply and demand.
When the market needs to expand in line with growing demand, prices are intended to rise along that curve. The threshold which determines that the market needs to grow is when demand for ndau rises beyond the limit of what's currently available in the market at the target price.
The market maker releases new ndau into the market by selling it at the current target price. With every 1,000 released, the target price will inch upwards and the Endowment is given another cash injection.
The end result is a system that's semi-automated and partly governed according to pre-determined formulas.
The Blockchain Policy Council (BPC) is the key governance element of the system. It's a democratically elected council, with the power to create and vote on rules and oversee other entities in the ndau ecosystem, within programmed and contractual boundaries. Other entities in the system include:
- The Endowment managers. These managers invest the Endowment to achieve sufficient long-term capital generation and investment income to support ndau monetary policies.
- Node operators. Straightforward ndau-powered proof of stake node operators.
- The market maker. The market maker, who's contractually obligated to follow the instructions of the BPC.
Beyond these balancing mechanisms, ndau also supports elements like basic contract functionality to give the currency more usefulness, and other blockchain features.
Overall, ndau seems like it might more closely resemble a semi-decentralised private-ish central bank than a completely decentralised cryptocurrency, if there is such a thing. If all goes well, ndau might be an extraordinarily lucrative proposition for the governing council, the Endowment managers and the market makers, all of whom it's safe to assume will be handsomely incentivised.
A critic might dismiss it as a bunch of chaps who think they can do a better job than the federal reserve, but that might be overlooking the intended dual functions of ndau the cryptocurrency.
On the one hand, it's intended to be a spendable and useable currency with a relatively predictable value. On the other, it's intended to be a reliable long-term store of value with prices intended to move upwards at a reasonable rate more easily than they move downwards.
Assuming it all works as intended, this combination might leave ndau functionally closer to "the real Satoshi's vision" than any other project to date, as both "digital gold" and "electronic cash".
The odd part out of the original vision might be the Blockchain Policy Council, as a central power structure in the system. But it's also bound by democracy and programmed boundaries, which arguably leaves ndau more decentralised and less prone to interference than bitcoin.
The only thing that's for certain is that it will be interesting to track the coin's progress along the target price curve.