MakerDao was unarguably revolutionary in that it enabled true decentralised digital cash, a token with stable purchasing power. In a way, it was using a market mechanism to control the supply of money, replacing that monetary policy tool for Central Banks.
Our research group, Cambridge Cryptographic, has been looking into how the other monetary policy tool of Central Banks, namely a risk-free interest rate, can be achieved on-chain.
We have achieved a solution which we outline in our whitepaper here:
A market determined risk-free interest rate on a stablecoin
In a nutshell, we are proposing that:
- Validators need to have deposits of stablecoin in order to earn block/staking rewards, and as such, will pay a “risk-free rate” to delegators (delegation means 100% guarentee of retrieiving the principal).
- To ensure the token security model is not broken, we use a 2 token system, where validators maximise their revenue by holding equal proportions of unstable (native) tokens, and stablecoins
We believe this is a significant breakthrough as it allows:
- Purely DeFi portfolios to optimise returns for ANY level of risk
- Traditional financial/risk models to be applied to DeFi (the risk-free rate is the most important parameter)
- Fractional reserve banking to be built ontop of decentralised money (the risk-free rate has potential to be counter-cyclical)
Implementation-wise, this may require implementation at the consensus protocol level, although if a smart contract can control how its “fees” are distributed, it can also work that way.
At this stage we are looking for feedback rather than aiming to build it. Eager to hear what people here think.