The modern DeFi system cannot fully function without the existence of stablecoins in it. The Free TON community, aware of the importance of this financial instrument, is holding the FreeTon StableCoins Architecture & Design contest.
Submissions for it were accepted from December 14, 2020 to January 21, 2021. To date, the winners have already been determined. A detailed analysis of the essence of the concept of “stablecoin” and a summary of the works that took the first four places can be read here in Russian.
The victory went to the original, innovative work of Mitja Goroshevsky and Andrey Lyashin “NOT a TON Binary System“. It fully corresponds to the spirit of Free TON with non-standard ideas and original proposals for their implementation.
There are several main points in the concept.
Over the past century, the functions that are embedded in the concept of “money” have changed significantly. If initially money was at the same time a means of exchange, a standard of value and a store of value, now its role has changed. For example, the dollar, which has significantly lost its price since 1913 (26 times) due to inflation, and bitcoin, which, on the contrary, increased. Conventional currency depreciation pushes people to spend it in order to enjoy the pleasure of exchanging it for something more valuable. And the rise in the price of cryptocurrency encourages accumulation, because no one wants to repeat Laszlo Hanyecz’s experience of buying pizza for bitcoins, which would cost $ 400,000,000 today.
There is no way an asset can be both a store of value and a medium of exchange at the same time.
Any cryptocurrency needs stablecoins, because for calculations it is more familiar and convenient to use those whose exchange rates are pegged to internationally recognized currencies (dollar, euro, yuan) and are relatively constant, taking into account predictable inflation. After all, the high volatility of the cryptocurrency excludes the possibility of using it when paying for utilities, payments in the store without losses in exchange rate fluctuations.
NOT — Binary Twin Of TON
The design of a stablecoin is a description of a system of two interconnected native Free TON tokens, where TON Crystal is the native cryptocurrency of the Free TON blockchain, and NOT is a reverse native currency with other economic properties, the exchange rate of which is equal to the US dollar rate.
TON would be used as a store of value, or as an «asset», and NOT — as a stable currency, or «money».
In order for a stablecoin to successfully perform its assigned function of money, users must be confident in the stability of NOT and the correctness of the exchange rate to TON Crystal. Then the holders of crystals will be able to exchange them for NOT and use them in their lives as a standard currency.
NOT The Validators
What idea of forming a stablecoin price was proposed by the authors, which should convince the community to actively use TON and NOT and not be afraid of exchange rate manipulations? They delegated the task of setting the TON Crystal price to the validators. Why them and how will the correctness of the price be guaranteed?
Validators are the guarantors of the correct formation of Free TON transaction blocks. They are interested in the stable operation of the blockchain by investing their tokens in stakes and receiving a commission for their work.
By analogy with TON the Validators, the concept of NOT the Validators is introduced. The task of NOT the Validators is to establish agreement on the price of the TON Crystal/USD pair. And in order for NOT the Validators to be interested in specifying the correct price, a mechanism is provided.
The holder of a large number of tokens can become a NOT the Validator, part of which he will pledge to NOT the Elector smart contract (by analogy with the smart contract of the choice of validators — Elector). After that, the participant can participate in the elections, and the owners of the largest stakes will become NOT the Validators.
It is important to note that the transmitted TON Crystals continue to be used in TON validation staking. Therefore, and quite naturally, Free TON validators will become NOT the Validators.
NOT the Validators collect information about the current value of TON Crystal in foreign markets and transmit data to NOT the Elector smart contract, receiving a reward for this. At the same time, stake slashing, as well as a ranking system, are provided for incorrect data provision.
When buying NOTs, there is no need for overcollaterization.
Mitja Goroshevsky and Andrey Lyashin proposed to allocate 1 billion crystals as a reserve fund and use these funds only in the event of a “catastrophe”, while not affecting the TON rate in other cases, in order to fulfill the obligations under the NOT stablecoins in the event of a sharp drop in the TON Crystal rate. The TON/NOT system can be further influenced by adjusting the staking reward. In case of its increase, it will be profitable to invest TON in staking, increasing the NOT collateral. Otherwise, more people will buy stablecoins to calculate and minimize possible risks when storing funds associated with fluctuations in the TON Crystal exchange rate.
TON/NOT and NOT/TON exchange procedure
For the exchange procedure, it is planned to create an Auction smart contract:
- direct — exchange NOT for TON Crystal
- reverse — exchange of TON Crystal for stablecoins decentralized variants — dAuction (analogous to DePool).
When a user wants to purchase stablecoins, he calls up a direct Auction smart contract and transfers TON Crystal there, receiving in return NOT at the rate set by the validators. Moreover, TON Crystals are then sent to staking. NOT the validators receive half of the staking reward in proportion to their stakes, which serves as an additional motivation, and the other half goes to the reserve fund.
TON/USD Pricing Mechanism
NOT the Elector smart contract provides for the following price formation mechanism: each round of NOT the Validators secretly disclose their TON/USD rate quotes from others. At the end of the round, the median value of the provided values is taken as the current rate.
It is assumed that there is a mechanism for checking the correctness of prices. At some random moment in time, the quotes indicated by the validators are revealed. The courses are considered correct if they fall within the range of 1/4 to 3/4 of all values (in the second and third quartiles).
Those validators who indicated an overvalued or undervalued rate receive the status of “suspects” and by cutting their stakes, “honest” validators receive a reward. The “suspiciousness” ranking is cumulative, and if the ranking exceeds a certain limit, the validator will be permanently excluded. If the validator further acts “honestly”, his “suspiciousness” ranking is reduced.
NOT The Auction
The auction is both a way of purchasing and a means of adjusting the received TON Crystal exchange rate. It is designed to prevent collusion of validators whose work is described above.
The auction starts at the price determined by NOT the Validators in the previous session. The auction works according to the Vickrey mechanism: blind bids, the highest of them wins, but the calculation is carried out at the second highest bid. There is a minimum limit on the size of the lot. All those wishing to buy NOT for crystals indicate a price higher or equal to the initial one. Any number of NOTs will be sold to the winner, but not less than the minimum lot.
Further, anyone can purchase any number of stablecoins at a price slightly higher than the price of the auction winner. This works until the next auction. Crystals can be purchased at the same rate for NOT using the reverse auction.
If the initial price is too high and no one has submitted an application to buy the first lot, the bidding is considered invalid until the next stage of the rate formation by the validators. If the price generated by the validators is lower than the market price, this will provoke a mass purchase of TON Crystal, which will reduce the amount of total collateral and, ultimately, will negatively affect the validators who receive staking income from these funds. This encourages NOT the Validators to form the correct course.
D’Auction — One For All
To ensure equal opportunities, participants who do not have the amount required to purchase the minimum lot at the auction can use the smart contract of the decentralized auction — D’Action, where, as in the case of DePool, funds from different participants will be pooled.
The authors have developed the concept of the NOT stablecoin, which is organically integrated into the Free TON infrastructure. Further detailed elaboration and creation of implementation schemes are planned, after which the idea will be implemented in smart contracts. The appearance of the NOT stablecoin will enable the Free TON system to move to the next stage of development and attract the attention of a larger audience.
You can get acquainted with all the details and details of the contest work here.