One concept that seemed to be the pot of gold at the end of every rainbow was the concept of minable stablecoins. Everyone thought this concept was almost impossible and few dared to create workable models. That is until now. Aaron Tilton of SmartFi and his team have been able to crack the code and create the world-s first minable stable coin the SFUSD.
We reached out to Aaron to ask about this.
Here is what he had to say.
Aaron Tilton CEO at SmartFi
Please, can you tell us more about the SFUSD stablecoin?
Sure, key to understanding our approach to the tokenomics of SmartFi tokens is the concept of economic balance. The tokens of the SmartFi network are designed to work in harmony and are termed the Balance Coins. The Balance is a combination of a speculative token (SMTF) and a stablecoin (SFUSD). A Yin and Yang, two sides of a circle.
What is the mechanism of value behind the SFUSD? How does the SFUSD derive its value?
In its first release to the public it looks and acts like other USD stablecoins. Because it is stable it can also be issued and purchased outside of the mining process with no limit on its supply. I will address that stable USD value first, then the stable USD value from mining second.
In our CeFi platform, portal.smartfi.com, SFUSD can be purchased directly from our treasury without mining. All the cash flow from those purchases are deposited into our SmartFi USD traditional treasury bank account balance, which is published via SFTP publicly every hour at SmartFi.com. There is some latency because the US banking system is sometimes slow to update, but within a few hours most transactions show up same-day.
We also publish the issued SFUSD from our SmartFi blockchain alongside the SFUSD Treasury bank balance. This proves within an hour generally that our SFUSD coin is backed by US dollars and is equal to or greater than the SFUSD in public circulation. No third party audit needed. This is how a distributed ledger was designed to be used for validation.
Other stablecoins use baskets of assets that are not exactly correlated and do an audit once every 6 months or maybe once a month. The problem with that is two fold. A lot of financial problems can happen within 6 months or even a month before it is disclosed to the public.
Also they are mixing multiple kinds of assets like treasuries, bonds and gold for example to try and generate yield on them money they actually owe others. Those assets can go up and down and require lengthy audits to prove there is value. In the intervening time from one audit to the next there can be problems the public is not aware of.
Because our SmartFi’s profit motive is essentially tied to the SMTF coin, not our SFUSD stablecoin, our USD value verification process is very simple, easy and updated every hour on our website.
The same verification process is used for mining SFUSD. All the cash flows from interest paid in our loans is deposited into deposited to our the SFUSD Treasury Account and verified there.
Please, can you tell us more about how the SFUSD mining process works?
When SFUSD is mined, it is produced with a value exactly correlated to USD.
This is achieved when the amount of interest charged on our loans are included in a block on the ledger is collected at SmartFi’s wallet converted to USD and deposited in the same SFUSD Treasury bank account. The Treasurer’s receive the resulting SFUSD from block reward’s (mining) is equal to the cost of running the network plus 15-20% profit margin. The cost of the network (mining block rewards) is always equal to a portion of the interest and revenue received from issuing credit and other speculative contracts. The revenue from issuing credit allows all rewards to be redeemed in the fiat currency that the Treasurers denominate their hash rate cost in. This minable stablecoin is a first of its kind. This is why our SFUSD has no transaction fees.
Please, can you tell us how the SMTF/SFUSD cryptocurrency token will work?
The SmartFi speculative token or SMTF is issued through our SmartCycle continuous token sale, with an increasing price based on an event that is deflationary. The continuing token sale process is designed to maintain a balance between the market demand for loans and tokens sold, which maintains a continuing incremental price increase of the SmartFi Token. This creates credit and assets similar to a loanable funds model used in private banking.
How can anyone mine the SFUSD?
Anyone can mine but to receive the portion of the block reward your hashrate has to win an efficiency auction in what is called the Commodity Layer Protocol. Also SFUSD blockchain is merge minable which means miners can bid in very efficient hashrate if they are mining another SHA 256 network.
How does the mining process for the SFUSD itself work?
To understand the process it is helpful to understand the problems of cryptocurrency mining which led to the creation of the minable stablecoin. The reason we first started looking at this type of design started with our mining customers who borrowed USD from us as a hedge against crypto bear market volatility.
We asked a few of our mining customers, if given a choice, would you mine for USD or current cryptocurrencies. The overwhelming answer was USD. If they receive USD it is an immediate financial option to buy any speculative cryptocurrency they want, pay bills and then build a stable growth plan with the higher yield options. This makes sense; that is why they were coming to us for a cryptocurrency back loan in the first place – they needed fiat liquidity to pay bills and keep the option open to sell the cryptocurrency they had mined at higher yield later.
Our mining process starts with the end goal as the natural on-chain hedge first and then creates many more speculative options without the intermediate step of a loan and the cost of the additional debt service.
The concept of balance or a hedge is the key to understanding the process. SmartFi’s design is the first cryptocurrency to incorporate algorithmic, protocol hedging tying the block reward back to the cost of the blockchain network costs creating an on-chain hedge.
What safeguards are in place to prevent inflationary tendencies in the SFUSD ecosystem?
The balance of algorithms and protocols accomplish this. There are no burning or minting functions needed to achieve this balance because it is done in the mining reward process SFUSD begins its distribution already equal to USD.
How do you think the emergence of a minable stablcoin will change the cryptocurrency space?
Firstly, it should serve as a lesson that current blockchains are doing things backwards. That is the fundamental reason it is virtually impossible to incorporate real world finances into crypto. Our minable stablecoin and SmartFi Token are unleashing the true potential of cryptocurrencies. For example we are already funding our first small business loans to regular people who do not know they are benefiting from cryptocurrency liquidated. This is how real mass user adoption begins. When people do not have to change behavior using cryptocurrencies, the major barriers are removed.
How does the SFUSD compensation system work without transaction fees? What scenarios are possible with the SFUSD fee-free model?
Imagine a scenario where any merchant has a choice between using a payment system like SmartFi that does not charge the customer or the merchant a transaction fee to complete a payment or using a credit card payment network with its fees or a cryptocurrency with its fees. Which one would you choose? A characteristic of real money is that it should be costless to use; we have accomplished that.
With the SFUSD having no limit on its supply, how will this affect liquidity within the greater cryptocurrency space?
Combined with the zero transaction fees, it should break down transaction friction between cryptocurrencies and fiat money. Over time it should cause more fiat liquidity to come into the crypto space.
Please, can you tell us more about the SmartFi economy?
SmartFi’s ecosystem uses some of the same type of tools as central banks to promote economic stability and growth. However, that is where the similarity stops. SmartFi incorporates decentralized decision making into its governance and is fundamentally different from central banks.
SmartFi has a free banking type structure. SmartFi is completely market based and not attached to a government. SmartFi does not receive profits from the interest payments. It makes profits from making the SMTF token more valuable. Therefore, we are most concerned about making the SMTF token more valuable. The SMTF token holders have the right to enact the SmartFi cryptocurrency monetary policy.
SmartFi token value benefits from a loanable funds credit creation structure.
The SMTF token price fundamentals are directly linked to the demand for loans in the SmartCycle. As the demand for loans increases, more tokens are issued in scheduled fixed supply and increasing the forward price curve. This creates credit and assets like a loanable funds model used in private banking.
Please, can you tell us more about the SmartFi Commodity Layer Protocol?
SmartFi is unique in that it connects the network cost data to an algorithm called the Commodity Layer Protocol (CLP). This protocol, along with its reward algorithm, provides the SmartFi Network with a balance and stability of its minable native protocol coins. The following is a description of the Treasurer’s (miner) role, hash rate inputs and reward mechanism. The block reward is an auction allocation model. The highest ranked Treasures’ hash rate reported receives first allocation of the block reward. The block rewards are generated from the Block Revenue which is the interest paid on loans.
The CLP combines data from three sources to create the algorithmic lending platform:
Treasurers’ (self-reported) hash rate commodity cost,
Total liquidity value (from lenders), and
Total loan value (from borrowers).
Using the Treasurers’ hash rate cost information, the CLP correlates the cost to run the network with the block rewards gained from the loan interests. This effectively hedges the Treasurers’ rewards to the base currency (SFUSD) of the hash rate costs. You can find all the details of the algorithm and protocols in the SmartFi White Paper .
Please, can you tell us more about delayed Proof of Work (dPoW)?
SmartFi’s dPoW consensus mechanism provides the same level of security as the Litecoin network and uses Litecoin network as a storage space for ‘backups’ of SmartFi transactions. By this method, in the event of an attempted attack on SmartFi’s blockchain history, even a single surviving copy of the SmartFi main chain will allow the entire ecosystem to overwrite and overrule any of the attacker’s attempted changes.
A key difference of SmartFi’s dPoW consensus mechanism from regular PoW networks is that the dPoW consensus mechanism does not recognize the Longest Chain Rule for any transactions that are older than the most recent ‘backup’ of the SmartFi blockchain. For conflicts that may arise, which refer to transactions that are older than the most recent ‘backup’, our consensus mechanism looks to the backups in the chosen dPoW blockchain Litecoin to find the accurate record.
Therefore, to destroy the SmartFi blockchain with dPoW security, an attacker would have to destroy all existing copies of the SmartFi blockchain and the accompanying PoW security network into which the dPoW backups are inserted, i.e. Litecoin. This endows the SmartFi ecosystem with higher than Litecoin-level security while avoiding excessive financial and resource costs.
The current SmartFi infrastructure, as of Saturday, February 13, 2021, consists of 67 p2p nodes – 64 of them are Notary Nodes and operate the dPoW-protected SmartFi blockchain on high fidelity servers in a distributed manner across the globe.
What are the energy implications of delayed Proof-of-Work (dPoW)
The energy efficiency of the SmartFi SFUSD blockchain is rooted in the merged mining capabilities of its hashrate design. The same miners that are mining Bitcoin or any other SHA256 network can simultaneously mine the SmartFi SFUSD network there by using the same electricity for two blockchains. Our network gets more efficient if merged with mining capabilities used by the miners.
Please, can you tell us more about SmartFi’s lending capabilities?
By posting cryptocurrencies as collateral, users are eligible to receive USD (SFUSD) loans. SmartLoan uses a feature that helps design a loan best suited for what is most important to you. What is most important may be minimizing interest charges, maximizing available cash, or no payments until the end of the loan. You choose what is most important and SmartLoan presents you with different options that customize to your needs.
How can anyone get started with the SmartFi ecosystem?
Signing up can be done at smartfi.com. Signing up is fairly simple, it takes a few minutes for an individual to sign up for a company it will require about 30 minutes. We do require that your identity be confirmed for security and regulation purposes. Security is our highest priority.
Please, can you tell us more about SmartDEX and your partnership with the guys at Komodo?
We started discussions with the Komodo team about 3 years ago. After significant due diligence and planning we started development work in July of 2020. SmartFi and Komodo have very similar ideals when it comes to the potential of cryptocurrencies, freedom, and private property. They have been great to work with. Our experience in energy and finance and their technical prowess have complimented each other very well.