State of the Stablecoin: Talking kUSD and More with Kowala CEO Eiland Glover
Over the past two years, stablecoins have become an increasingly emergent, even pivotal, element in the cryptocurrency ecosystem. Bitsonline linked up with Kowala CEO Eiland Glover to talk about his team’s kUSD stablecoin, recent debates in the field, and more.
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‘It’s Not Easy to Build a Robotic Federal Reserve’
William Peaster, Bitsonline: As opposed to the conventional stablecoin dynamic, kUSD – an “asset-less” stablecoin, as Kowala describes it – maintains its price peg through minting and burning rather than being pegged directly to physical assets. What are the main advantages and challenges of this model?
Eiland Glover, Kowala: Decentralization. Using the Kowala Protocol, we can create a true cryptocurrency—one that is distributed, decentralized, and trustless—that maintains stability through an elegant combination of math and market forces, software, and self-interest. We view this as a natural extension of the underlying principles of Bitcoin, a network and crypto which is also not backed by any assets. Instead, Bitcoin is an unalterable distributed ledger with a built-in incentive system that rewards miners for expensive mining in exchange for permanence and security.
Our network simply takes this concept and alters it to incentivize the mining and market behaviors, which creates a stable cryptocurrency, as well as a high-speed, efficient, and inexpensive network. These features are achieved through utilizing a proof-of-stake consensus protocol and a dual token system.
Miners must own our mining tokens in order to earn block rewards. This means that they do not have to compete in a hashing power arms race. Because the kUSD stablecoin is not asset-backed, 100 percent of its value is available as a reward to miners when end users buy and utilize kUSD as a payment means, trading tool, or savings vehicle, etc. In other words, a currency. In this way, we are the only stablecoin in the field working to fulfill the promise Satoshi wrote about in his original whitepaper: to create a cryptocurrency that has the speed, stability, and security that can finally lead to a decentralized currency for global transactions.
“The architecture of Kowala is an underlying fork of the Ethereum codebase” — Eiland Glover
The challenges to this model are largely technical, as it’s not easy to build a robotic federal reserve and self-regulating blockchain. As such, we have taken the time to ensure that our development process has been as scientific as possible. Fortunately, 98 percent of the build is now behind us, and our development team has brilliantly persisted through any and all roadblocks that the protocol has presented along the way.
We are a testing-based organization, and we’ve had to build our own testing tools along the way—especially because the architecture of Kowala is an underlying fork of the Ethereum codebase with a fully functional Proof-of-Stake consensus mechanism. This culture of stringent technology testing has allowed us to run the protocol through its paces under a large variety of possible scenarios to ensure it’s ready for prime-time. Soon kUSD will launch, and the marketplace will be able to see our stablecoin in action. We think this market performance will give users further comfort that the protocol works as intended and creates a unique tool that allows cryptocurrency to go mainstream.
William: With Tether, users have to trust that the company’s reserves back USDT 1 to 1. kUSD is a bid to go the opposite way, to take trust itself out of the picture. To this end, could you speak a little bit deeper on the nuts and bolts behind the “robotic” minting and burning process that kUSD employs – is it entirely decentralized already, or will it progressively achieve that status?
Eiland: We’ve got about 70 different miners already, so we already know we’ll launch with around 100 nodes (larger mining token holders intend to run multiple nodes). So this means we’d be decentralized even if we launched today. However, because we see true decentralization as a tenet of any proper cryptocurrency, we aim to go even further in the coming months, putting the ownership of our mining tokens into the hands of 1000s of additional miners.
William: There are ideological debates raging in the stablecoin sphere revolving around buyback systems and volunteerism. What’s your take on these debates?
Eiland: You’ve got to have the right incentive structure or else your stablecoin will be dead on arrival. The Nubits death spiral shows what can happen if miners and financial players do not have clear and compelling incentives to act in ways that support stability.
In fact, all of the so-called “seignorage shares” models for non-asset backed stablecoins—like Nubits and Basis—have an uphill battle when it comes to long-term confidence in the market that their incentives will hold.
This is due to the fact that these models rely on complex financial incentives to remove coins from the money supply. Kowala has been able to circumvent this issue entirely with a mint and burn approach—we don’t count on humans to volunteer or bet on the future market cap in order to lower the money supply. Our algorithms automatically charge a transaction fee, similar to a tiny sales tax and send the money to a burn wallet. Simple, yet effective.
William: Stablecoins as a concept have really started to come into their own over the past two years. Why now, do you think? Is it just progress coinciding with the growth of the fledgling cryptoverse? And, going off of that, how do you see the stablecoin ecosystem changing over the next five or so years?
Eiland: When we began working on this problem two years ago, many in the crypto industry thought it was a waste of time—they had an almost religious belief in the potential of bitcoin to somehow catch on as a daily currency. Due to the volatility of these coins, it was obvious to industry leaders that this would never happen. We asked ourselves: “Why don’t our friends and families use this incredible technology? Why don’t we accept bitcoin as payment for services today?” The answer was, “volatility”. So, it was inevitable that the creation of a stablecoin would become the most important topic as others woke up to this now-obvious reality.
William: As for the larger Kowala protocol, could you explain to our readers a little bit on the relationship between kUSD and the mUSD mining token?
Eiland: kUSD is the stablecoin; it’s designed to track the value of one dollar. mUSD is a separate token that should be thought of as “ownership in the network.” mUSD gives owners the right to mine kUSD and perform the work of the network. Since kUSD is not asset-backed, the blockchain simply creates new stablecoins whenever there’s more demand in the marketplace—this is automated.
That newly created value flows to the miners in the form of block rewards. This means that the mUSD mining token has a revenue-generating component, which is somewhat novel. We count on the miners to pursue their own self-interests when they receive block rewards,and to eventually sell the kUSD stablecoins on an exchange. Miners can also ultimately sell their rights to mine, if they want. So, in addition to having a revenue stream, mUSD mining tokens also have an asset value, like other cryptocurrencies, that can be exploited by owners of the token according to their self-interested pursuit of maximal returns.
Importantly, the owners of the mining tokens, the miners, are the conduit through which newly minted kUSD stablecoins enter the marketplace. Because this is not immediate, other traders in the marketplace may decide to front-run these mechanisms in pursuit of trading profits. This is great, of course, because these market actors compete with one another, increasing the stability of our kUSD stablecoin, and providing the liquidity that the market needs to maximize the utility of kUSD as a means-of-payment. We think of our model as a masterful and beautiful symphony of incentives.
Minty … Tenderminty
In utilizing a fork of the Ethereum codebase, Kowala was free to take their consensus mechanism in whatever way they saw fit.
They’ve stuck with PoS as the end goal, but instead of waiting for the fruition of Ethereum’s PoS system via Casper, Kowala’s Konsensus protocol pivoted more toward a Tendermint-style approach.
Per the project’s homepage:
“Konsensus is derived from Tendermint, a mostly asynchronous consensus protocol which is itself based on Byzantine Fault Tolerance (BFT). We chose to base our work on Tendermint because it has achieved block transaction performance that is far superior to other widely used blockchain consensus protocols and because it has a well-understood security profile.”
What’s your take? Do you use stablecoins in your own trading? Let us know about your personal experiences with the tech in the comments below.
Images via Kowala, YouTube