XMX. A bridge of trust between the Mexican Peso and Cryptocurrency. April 2018 (v1.7)

Transcription

1 XMX A bridge of trust between the Mexican Peso and Cryptocurrency fh@kampio.com April 2018 (v1.7) Abstract There is a great divide between cryptocurrency and fiat, and until we build a bridge of trust they will remain separated. The current financial system dependent on banks is inefficient, and reliant on trust. Cryptocurrency is extremely volatile, and holds little value as a currency, its value is instead derived from speculation. We need to bridge both ways of storing value in a way that we can transfer the trust of fiat into cryptocurrency. In this paper we explore the potential that asset pegging has to be this bridge through XMX, a representative token for the Mexican Peso. It is important to add that although this paper concentrates on XMX, most concepts are applicable to other fiat-pegged tokens.

2 Table of contents Abstract 1 Table of contents 2 Introduction 3 XMX 4 Asset Pegging 4 System architecture overview & scaling roadmap 6 Basic implementation 7 Full implementation 7 Autonomy 7 Currency 7 Main applications 8 Businesses/organizations 8 Individuals 9 Public sector 9 Further notes and concerns 9 Reliance on banks 9 Illicit use 10 Government regulation 10 Profitability 10 Conclusion 11

3 Introduction In God we trust is written on every US bank note. Indeed, every fiat currency completely relies on trust: trust on the financial system, on the banks that hold your money, and on the other agents you make transactions with. This trust is very easily broken: the massive debt most central banking systems have, the quite common event of people who run off with millions to foreign countries without fulfilling their end of the deal, and banks lending more than they have are all a result of this blind trust. Ever since the start of storage of value we have had to rely on other means to make up for this fault in economic systems. Primarily, we rely on the law to ensure that this trust is fulfilled. This is problematic in two main ways: firstly, it being after the fact of a wrongdoing, the law cannot prevent these problems from happening, it can only make up for them. Even this is not completely true: after all, if the person that ran off with your money is nowhere to be found, the law can t do much about it. Secondly, the government is in many ways a facilitator to these breaches of trust: even the most developed countries have cases of corruption. Take the housing crisis in the US for example, where no restitution was given to the people detrimented by it, and instead the banks that caused it received billion dollar bailouts. With the development of Bitcoin in 2009 by Satoshi Nakamoto, the ability to have no centralized issuer and controler became possible, taking the necessity of trust in central banking and financial systems away. Later, with the introduction of Ethereum by Vitalik Buterin in 2013, the potential of this technology was taken a step further, taking the necessity of trust away from transactions with other parties (through smart contracts) and even organizations (through decentralized autonomous organizations). Paradoxically, however, public trust in cryptocurrencies is in an all time low, and fiat is still seen by most people as the safest way to store value. This is because cryptocurrencies have faults of their own: primarily their volatility. The volatility in cryptocurrencies facilitated (and is fueled by) its use as a speculative asset. Most of the money going into it is for this use: rather than as a valuable way of storing and transferring value, most people see it as a way of making money through speculation, mostly with the final objective of cashing out. Its use as actual currency so far has only seen fruition in markets where one would want to escape the law ( dark web markets such as the Silk Road). This has only delegitimized cryptocurrencies for individuals, corporations, and governments. An additional barrier is purchasing power, which is also a limitation caused by volatility and limited trust. However, purchasing power alone wouldn t lead to public adoption: many

4 solutions have sprung up for allowing merchants and companies to take cryptocurrency for their product or service (coindesk pay in the US and Bitso Pagos in Mexico), and crypto hasn t gained much credibility as a result. Lastly, the adoption of cryptocurrency (when it implies decentralization) is against the interest of banks and governments. We can see this with Bank of America openly stating how cryptocurrency will "negatively affect our earnings" or affect "the willingness of our clients to 1 do business with us.". This being the case, these institutions will not make it easy for the economy to transition to a, decentralized system. This is done by ensuring that public trust remains in fiat for as long as possible. A feat that isn t hard to achieve through regulation, investment restrictions, and fear mongering. There is a great divide between cryptocurrency and fiat, and until we build a bridge of trust they will remain separated. The current financial system dependent on banks is inefficient, reliant on trust. Cryptocurrency is extremely volatile, and holds little value as a currency, its value is instead derived from speculation. We need to bridge both ways of storing value in a way that we can transfer the trust of fiat into cryptocurrency. XMX The intent of xmx is to create such bridge through taking advantage of the value currently given to fiat, and transfering that value into a decentralized solution. This should be done through Asset Pegging: Asset Pegging Cryptocurrencies using asset pegging is not a new concept. Most notably, Tether popularized and put into practice fiat backing through maintaining a one-to-one reserve ratio between 2 USDT (tethers) and it s associated real-world asset, the USD. The problem with this however, is that it relies on audits to ensure that this happens, and the bank account is controlled by Tether Ltd. (a private company). This has therefore spurred a wave of controversy and fear around it, many referring it as the biggest scam in crypto history and the greatest threat to cryptocurrency. Tether Ltd. very explicitly tries to solve what is called the counterparty risk with their Proof-of-Reserves model, and fails miserably. This is partly because the sale of USDT and the funding of the reserve owned by Tether Ltd. are completely different systems, which means that for it to theoretically work Tether Ltd. would have to fill their reserve in advance of people buying USDT. Therefore significant outside funding is required for it to work properly. This model for fiat pegging requires trust that Tether Ltd. is keeping their part of the bargain by 1 Cheng, E. (2018, February 23). Bank of America is worried about the threat of cryptocurrency to its business. CNBC.com 2

5 increasing the amount of money in the reserve proportional to the money in tether (resulting in a very considerable counterparty risk). Considering that at the time of writing the total amount of USDT in circulation is around $2,520,000,000 and Tether Ltd. hasn t ever published an 3 official third party audit for proof that it is backed up in their reserve, it is understandable that many are extremely concerned with the legitimacy of their claims. Lastly, this is damaging cryptocurrency as a whole, because the use of that massive amount of unbacked USDT would mean that the inflation of many cryptocurrencies has been artificial, something that if proven true would severely crash the crypto market. The counterparty risk is solved through our model by making the organization that issues the funds and manages the reserve completely autonomous through smart contract technology. Additionally, in contrast to Proof-of-Reserves, Real-Time-Transparency, and Proof-of-Solvency, which claim that the token is representative of the asset in the reserve by matching the amount of tokens with the asset, asset pegging doesn t involve matching the value of the asset through the reserve: it issues and burns tokens directly from the presence of assets in reserve. This means that for asset pegging there is a flow of value that is consistent, whereas other methods have value that is matched. Figure 1: Model for our implementation of asset pegging The DAO being autonomous and working with smart contracts would mean that all of its transactions and movements would happen in the public ledger, removing the need for audits. With this model, abuse of the system by any party would be completely visible, making it practically impossible for foul play to occur. 3

6 When it comes to market risk, asset pegging proves extremely resistant. We have seen a rise 4 in non-pegged stablecoins such as Dai, that instead of using the backing of assets to get their value, they use market incentives to ensure that they remain at a certain price; a very impressive and valuable model that no doubt will prove important in the long-term development of cryptocurrency. However, in the case of a total market crash (a plausible 5 scenario, as stated by Vitalik Buterin himself ) asset pegging would still remain $1 MXN, while stablecoins such as Dai would also plummet in value, as market incentives still rely on market value to function. In the (also increasingly plausible) case of fiat crashing, a mechanism could be put in place to un-tie the asset pegging token from fiat in the face of a total crash, returning to a state of volatility but maintaining value. System architecture overview & scaling roadmap Though subject to change, we shall refer to XMX as the use of this model of asset pegging specifically regarding Fiat and the Mexican Peso. This technology is highly scalable: it could be used on an very small scale or for the whole Mexican economy. We take advantage of this in the development plan for XMX, which is divided in 5 steps: 1. Proof of concept 2. Basic implementation 3. Full implementation 4. Autonomy 5. Currency Though the monetization and value proposition of each step is more thoroughly explained in our business plan, in this section I will explain the technical aspects of the system architecture as well as how it can be scaled. With that objective in mind, we will start at stage 2, as the proof of concept is only relevant for investors. For this context, we will talk about four types of transactions that stand to gain from this architecture: Type of transaction Through banks/exchanges Through XMX A B (fiat to fiat) C B (cryptocurrency to fiat) C D (cryptocurrency to - Requires trust - Slow - Requires trust - Slow - Volatile - Market risks - Requires trust - Volatile + Secure + Stable + Fast + High purchasing power + Private + + No market risk

7 cryptocurrency) - Market risks A D (fiat to cryptocurrency) - Volatile - Market risks Figure 2: types of transactions and their improvements through XMX Basic implementation For the initial development of XMX, we concentrate on A B transactions, as we believe it is the type of transaction that stands to gain the most from this type of intermediary. Therefore, we implement a system that issues and burns XMX tokens and is able to execute smart contracts and move the money around different accounts Full implementation Figure 3: stage 3 xmx implementation Full implementation entails adding in C and D, allowing for the service to truly bridge cryptocurrency and fiat. Autonomy As seen in figure 3, full implementation still requires reliance on two actors: the Bank controlling the reserve, and the Exchange controlling the buy and sell orders through which one would turn cryptocurrency into fiat. In this fourth step, then, the objective would be to get rid of that reliance. There are many ways of achieving this, but it would most likely entail setting up our own institutions.

8 Currency In this final stage, once large scale adoption and full autonomy is achieved, XMX could be transformed into a currency. This would mean that instead of being a middleman for transactions, it could be used for sending and receiving that token as storage of value. This could be seen as the ultimate goal of the project: to ease the transition into a fully cryptocurrency-based economy. It is important to point out that this final stage is only hypothetical, and should only be taken into consideration if previous requirements are met. Before this final stage, it is important to emphasize that XMX would not be a cryptocurrency. Figure 4: stage 5 xmx implementation Main applications Businesses/organizations For businesses and organizations XMX has the clearest benefits: preventing chargebacks, eliminating counterparty risk, gaining privacy, and reducing fees on every financial activity they incorporate XMX on, including: Taking Peso payments Taking cryptocurrency payments

9 Smart contracts between organizations International/Inter-institutional payments Additionally, we believe that with the availability of XMX, we enable for new businesses to incorporate its core technology: allowing for Decentralized Autonomous Organizations to run on smart contracts that are reliable and stabilized by the Mexican economy. Individuals The mainstream use of cryptocurrencies for individuals is as a speculative asset. Unlike most cryptocurrencies, XMX would have no use as a speculative asset. Instead, the value that XMX would pose for individuals is what we believe is the true value of Cryptocurrencies: private,, and fast financial activities without the need of a centralized issuer, such as: Value storage Transactions and payments Middle-point for investing in cryptocurrency Public sector Even though right now the public sector in many countries (Mexico included) seems hesitant to support and use cryptocurrency, we believe that soon the benefits for the public sector to become involved in cryptocurrency will become apparent, especially once other countries set a precedent for this. For example, Russia s crypto-ruble, set to launch in 2019, could bring 6 massive benefits to russia, which might compel other countries to follow suit. Additionally (though less directly), with bodies like the EU putting their eyes on supporting and 7 standardizing the development of distributed ledger technologies, it is clear that the public sector is opening up to the use of this technology. These are some ways in which XMX (and other fiat-based asset pegging tokens) could be used by the public sector: Foreign Investment incentives Smart government contracts Smart contract based loans and debt Voting validated by smart contracts

10 Further notes and concerns Reliance on banks The fact that Asset Pegging and its implementation as XMX require the validation of tokens through reserve means poses a big problem: a very large dependency on banks. Primarily, it poses many obstacles that have the chance of slowing down the flow of value. Banking hours, for example, pose a very large limitation for the large-scale deployment of XMX as a financial service. It is of utmost importance, then, for XMX to operate as a financial service. Illicit use The privacy that cryptocurrencies bring can be both extremely empowering for people but also detrimental to certain governmental pursuits. XMX would provide such benefits and detriments: it could be used for tax evasion, money laundering, illegal transactions, etc. The DAO, being autonomous, could not cooperate with law enforcement. However, the ledger being public, crackdown on large-scale criminal operations that use this type of cryptocurrency are possible. A precedent for this was the arrest and takedown of the Silk Road, in which the FBI managed to arrest many individuals through the acquisition of the private Bitcoin address of a single user, which led them to all the addresses related to the illegal site. Government regulation The aforementioned ease that cryptocurrencies provide for illicit activities might compel local governments to regulate this type of asset. There are two factors worth evaluating here: The likelihood of this happening from a straight benefit/detriment analysis from the government, and what impact it would have on this type of token. Profitability The act of separating the service into a DAO and a Private company raises questions about it s profitability. This is because one of the tradeoffs that come with making the organization that controls the token completely autonomous is the danger of other private companies using the token for similar profit motives, potentially cutting out the original private company as the middleman. One way around this to consider is a founder s reward: to add into the DAO s contract that a certain amount of money in each transaction will go to the founders.

11 Conclusion We have proposed a system and service for truly, stable transactions. We started with the concept of cryptocurrency, which provides very strong benefits: such as privacy, security, and control of ownership. This however does not have the stability needed for it to be integrated into everyday transactions. To solve this, we proposed an extension of the system architecture known as proof-of-reserve, that allows for pegging cryptocurrencies to fiat. By making this system completely autonomous, the risks associated with other proof-of-reserve services are fixed.