Making Sense of a Stablecoin Basket


The State of Stablecoins

Stablecoins are becoming a defining application for blockchain technology, as evident by the growth of fiat tokenization in response to last year’s turbulent market conditions. The rise in numbers of stable coin projects and the growing interest in these tokens show a cognitive shift in the wider crypto space, away from unwieldy volatility and towards a new horizon of tangible use cases that signify real interest to tokenize real assets.

Despite the potential of stablecoins, their problems are becoming evident with their proliferation, which we think of as ‘stablecoin fatigue’. Many stablecoins try to offer the same value proposition to the end user, making it hard to differentiate amongst one another, which in turn dilutes the messaging of what a stablecoin is, general understanding of how stablecoin business models work, and the distinctions between what stablecoins can serve different needs for users. Secondly — contrary to the name, most stablecoins aren’t stable. They also can’t guarantee liquidity as they advertise, meaning that tokenized assets may be somewhat inaccessible for investor usage. When people begin to use different stablecoins, the liquidity of stablecoins become fragmented and can even be disparate when trying to transact amongst one another.

Stablecoin arbitrage is advertised to promote liquidity, but operational and real-world restraints limit opportunities from being more efficient. Liquidity is dictated by market participants, and dominant activity needs to be driven by processes observable and accessible by actors. Lack of liquidity can result either in stale pricing or price instability — both of which heavily diminish the utility of a stablecoin. The importance of this concept is paramount — but unfortunately many people have a convoluted view of how markets function, which can lead to irrational understandings and poor behavior of market participants.The messaging that is advertised by many stablecoins that they always remain a dollar parity and users shouldn’t be worried about any concerns whatsoever serve as a guise to influence a user into being comfortable with what is told to them, when in reality the user should understand the business models and risks associated with stablecoin issuers.

These shortcomings however can be mitigated by Neutral’s clever mechanism design, one that promotes liquidity and collective price discovery for component stablecoins. This can be done through the construction of the Neutral Dollar, a metastable basket which can aggregate stablecoins in a decentralized manner. A complementary, unifying solution to help users both overcome this ‘stablecoin fatigue’ while demonstrating every stablecoin use case that exists.

Decentralized Aggregation

The concept of aggregation in financial markets is not a novel idea. This idea has been conceived in traditional assets, which has met great success as far as maturation (larger inflow as a result of accessibility, leading to tighter spreads and more efficiency). Aggregate products such as asset-backed securities or ETFs redefine such markets, promoting activity via the product itself, or derivatives alike. Instruments like these offer simplicity for end consumers by structuring complex processes to repackage risk and promote liquidity, which are attractive for both retail users and institutions alike.

Decentralization is also not a new concept either — and with blockchain technology changing how market participants can engage in decision making, we can begin to see much better benefits. Many aggregate products in traditional markets are subject to certain regulations to promote transparency and quality, but incorporating a decentralization aspect into the creation of such products can lead to very beneficial traits. Construction and deconstruction of these assets can happen in continuous time and away from centralized management, which helps promote visibility. Decentralization can also improve liquidity if designed appropriately, allowing more users to participate within a more global ecosystem. The combination of decentralization and aggregation shows innovation in changing how people can work together and accomplish better ways to obtain exposure to crypto assets.

What is meant for stablecoins in context with this idea of decentralized aggregation, is to have users understand the nuances of the assets they interact with, and use what is needed to suit their purposes. Many stablecoins have opaque business models, or have limitations that are intended to be hidden at the benefit of the issuers. A decentralized aggregator allows for actionability on discrepancies on the underlying stablecoins, all while creating a lower risk exposure that is metastable and can be purely defined by the market, rather than a resemblance of an inefficient bridge for tokenization.

The Compelling Use Cases of Neutral Dollar

Neutral Dollar is a decentralized aggregator of stablecoins provides an umbrella solution to the crypto industry’s myriad of problems regarding stablecoin usages.

  • Fragmented liquidity: Neutral Dollar aggregates liquidity in the stablecoin market by allowing on-chain swaps between its constituent coins in a seamless manner, dictated by market pricing.
  • Lack of transparency: Neutral Dollar can serve as a clearinghouse where the collateral is visible on-chain. This means that anybody can interpret the exposure and risk profile of the underlying, while proving solvency and asset reserves in real-time for supported stablecoins.
  • Poor Risk Management: A stablecoin basket inherits diversification properties, and autonomous rebalancing of the Neutral Dollar allows for better practices related to managing stablecoin positions while protecting investors against risk and loss.

On the corollary, Neutral Dollar also can be useful for many types of users from its traits:

  • Institutions: resolve liquidity imbalance and avoid compliance complication of any centralized management, all while managing operations and exposures effectively
  • Traders: a more stable and liquid instrument with low friction for hedging purposes while having the option to tap into underlying collateral
  • End consumers: better instrument for medium of exchange, store of value, and unit of account as a result of lower volatility and liquidity
The ecosystem for a new stablecoin standard

Toward Mainstream Adoption

Cryptocurrencies, and stablecoins in particular, were designed as a direct result of shortcomings in financial markets and in the global economy — lack of capacity for cross-border payments, high transaction fees, opacity on banking systems, investor risk, market hours and exchange limitations, etc. Neutral Dollar exists to push crypto to reach its full potential, by addressing every stablecoin use case and more as a result of its metastable basket properties. Having Neutral Dollar be the exemplary stablecoin in the forefront towards the wider growth of blockchain adoption is the solution that we hope to achieve.

— — — — — —

If you’re interested in learning more about our team and products, check out our website or start a conversation with us on Telegram or Twitter.

Making Sense of a Stablecoin Basket was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.