I have an FX multi-bank trading platform background and for me “Oracle problem” is very similar to a price-fixing problem on FX market. (ex. google: “Global banks admit guilt in forex probe, fined nearly $6 billion”)
The solution for FX was to move away from fixings as price Oracles, where there might be some particular interests that can be in billion of $$$, and focus more on the tradeable price. Even if $10 billion would be at stake to get 50%+1 on price Oracle, we are never sure, if the interest is not bigger than $10 billion (imagine Crypto Market Cap of $100 trillion).
This brings me to a basic question: how to create better link between the value of ERC-20 token and the value of USD/EUR/GBP/JPY/… to get more people using smart contracts in the real economy?
From my perspective, the real race to bring more trust to a stable coin market is not a race between price Oracles (we learned from FX that they are vulnerable by its nature), but how to make Tether-like projects (ERC-20 to FIAT “bridges”) big enough to compete with CLS settlement system. If we will get the settlement right (from ERC-20 to FIAT), the instrument price will always follow. Arbitrage will do the rest even if the price of all tokens would drop 99% in 1 minute. This would not be the case for price Oracles.
Currently, CLS is big enough to get the trust of $2 trillion per day (google: “CLS FX TRADING ACTIVITY march 2021”), if Tether-like solutions will get closer to CLS, the interbank market will follow and then a Crypto Market Cap of $100 trillion will become possible. CLS has achieved scale in fully CENTRALIZED way. Our job is to do it in a fully DECENTRALIZED way.
To fully integrate ERC-20 with FIAT we can copy one popular pattern from FIAT:
It is common to see wealthy people putting money in 50-100 banks to get credit risk distributed (done usually by family office). It is not possible to avoid counterparty risk in FIAT, but government deposits insurance of $100k-250k for each individual bank is at least addressing some part of the risk. Having it in different jurisdictions is reducing the risk even more.
Let’s try to replicate this on blockchain:
- Every regulated crypto broker/crypto bank that has access to FIAT system should issue its own stable coins in all supported currencies. The stable coin would represent a deposit with this particular broker/bank. Each broker/bank could have its own rules on how deposit works (ex. if this would be a bank, it would be probably willing to use this FIAT money for its own lending activity, the same way as in case of regular FIAT deposit)
- The only function of the broker/bank would be to redeem their stable coins for FIAT (they don’t need to make markets → this will be done by market participants)
- This would result in 200-300 stable coins in all possible currencies issued by different brokers/banks
- Stable Coin Baskets would be created via smart contracts (ETF like products with stable coin basket redemption to allow arbitrage via FIAT settlement)
- Stable Coin Baskets would compete with each other for the best basket of stable coins/best smart contract structure/best governance
- Even if one or the other stable coin issuer will stop redeeming its own stable coins for one or the other reason the whole system should survive.
- Each Stable Coin Basket/Basket of Baskets can have its own protocol fees and Treasury that would compancate when some coin in the basket would become “insolvent” (= not convertable to FIAT).
Our first task: make it very simple for regulated crypto brokers/crypto banks to issue their own stable coins