Jan 23
Deflationary stablecoins
The forgotten dream of cryptocurrencies
Bitcoin was created in 2008 as a response to the problem of indiscriminate printing of money by central banks, which creates inflation that destroys the purchasing power and savings of workers.
The huge volatility of Bitcoin however makes its use as a currency or unit of account impractical and many even question its usefulness as a store of value.
These doubts that Bitcoin generates for its use as money or currency, led to the appearance of the first proposals for the creation of decentralized stablecoins in 2012. The most veteran in crypto will remember projects like Mastercoin, Nu, Bitshares and the very promising Basis, put down by the SEC. Tether itself was born in 2014 as a layer 2 proposal for Bitcoin.
The idea of inflation-indexed currencies also dates from that time, and can be found in Ametrano and Sams’s 2014 publications, although it was never put into practice.
The Geminon project was created precisely with the aim of bringing closer that initial dream of creating a form of decentralized, secure electronic money that would act as a true store of value in the long term, but without the extreme volatility that Bitcoin presents. This dream is now a reality thanks to the launch of our first two deflationary stablecoins: the USDI, which offsets the inflation of the US dollar, and the EURI, which offsets the euro’s inflation.
Deflationary Currency vs Inflation Index
At Geminon we consider that we have been the first project to create a true deflationary stablecoin and not a simple tokenized inflation index. The differences between the two are subtle but important:
- A tokenized index tries to exactly replicate the value of the index it follows, while the deflationary currency only takes it as a base to calculate its peg price.
- The deflationary currency uses predictions of current inflation values as a reference to be on the curve, while the tokenized index trails the inflation curve with a lag of two periods.
- The tokenized index can go down if there is deflation, losing value against fiat money, while the deflationary currency can only grow or hold its value stable, but never go down.
How do they work
Although the idea of inflation-indexed stablecoins is over a decade old, its practical application has not been possible until the development of smart contract technology and oracle networks such as Chainlink, which allow data to be imported from the outside world into the blockchain in a verifiable and reliable way.
Geminon’s deflationary coins need to know the value of the inflation index they use as a reference, which is updated once a month. Two mechanisms are available to achieve this:
- Using a smart contract from the Chainlink oracle network, which reads the inflation data directly from the API of the government body that publishes it. The data is validated by the Chainlink network consensus protocol. This is the most decentralized and secure way of obtaining the data, although it is also the most complex and expensive.
- Manually supplying the inflation values to the smart contract by the team. This way is simple and cheap but centralized. For security, the smart contracts check the received values and if they are outside the accepted limits, they reject the update.
In addition to these two ways, in the future [SPOILER ALERT], Geminon v2 will incorporate a fully decentralized and autonomous mechanism for obtaining inflation data through the governance module of the protocol.
Inflation index forecasting
In order to implement a prediction system in a smart contract, it must be extremely efficient since it is very expensive to store information and perform complex calculations on the blockchain.
The forecasting system implemented by Geminon uses the well-known Holt-Winters model, which is a type of exponential smoothing that incorporates a linear trend component:
This model is optimal for this task, both because of its efficiency in prediction, and because it requires the minimum possible amount of stored information and calculations. The figure shows an example of the real fit of the model and the quality of the predictions on the inflation rate for the Eurozone:
Backup value
Geminon’s deflationary stablecoins have a built-in system that ensures that they continue to fulfill their function autonomously even if no one updates the reference inflation index values. If more than 60 days elapse without new data being provided to the contract, it is capable of slowly changing its monthly variation rate until it reaches a default value of 0.2% per month, equivalent to an annualized 2.68%.
How to get them?
Geminon Deflationary Coins can be obtained in two ways:
- Giving GEX tokens in exchange to create new supply using the stablecoin minter (SC Minter) in our app.
- Trading other Geminon stablecoins via our app’s StableSwap.
You can visit our app at app.geminon.fi
Further reading
To learn more about Geminon’s deflationary stablecoins, check out the project documentation:
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