This transcript discusses the stability protocol of the Celo blockchain’s stablecoin, the Celo Dollar. It is part of a series aimed at regulators, researchers, and international organizations interested in stablecoin technology. The session provides an overview of stability mechanisms and focuses specifically on the Celo Stability Mechanism.
In the previous session, four types of stablecoins were introduced. These include fiat or commodity collateralized stablecoins like Tether or USD Coin, which have centralized governance. Crypto collateralized stablecoins, such as the example of USD Coin discussed, have decentralized governance since everything occurs on-chain.
The Celo Stability Mechanism is an elastic supply stable value asset. It consists of two assets: the Celo Dollar, which tracks the value of the US dollar, and Celo Gold, which is a fixed supply variable value asset. Users can exchange Celo Dollars for Celo Gold and vice versa to balance the demand and supply of Celo Dollars. This mechanism resembles how fiat-backed stablecoins work, but with the advantage of being fully decentralized and transparent.
The governance of the Celo protocol is decentralized, allowing the community to decide whether to introduce additional currencies, such as Selo Pesos or Selo Euro, onto the Celo blockchain. This flexibility in currency options is determined by governance decisions.
A key challenge for stablecoins is accurately matching the unpredictable demand for stablecoins. To programmatically achieve this, the Celo Stability Mechanism utilizes a demand function. The goal is to maintain a price of one dollar for each Celo Dollar, ensuring that supply and demand are in balance.
The Celo Stability Mechanism employs a decentralized one-to-one mechanism, allowing users to exchange Celo Dollars for the corresponding value in Celo Gold. This mechanism incentivizes users to engage in arbitrage when the price of Celo Dollars deviates from one dollar. It resembles the constant product mechanism used by decentralized market makers like Uniswap.
To support the stability mechanism, Celo maintains a crypto-based reserve held in a smart contract. Users can verify the existence of the reserve since everything happens on-chain. The reserve is bolstered by transaction fees and can also receive epoch rewards. Risk factors in analyzing stablecoins like Celo involve assessing the demand and value of reserve assets. Various stochastic processes and distributional assumptions can be used to simulate data for forecasting.
The Celo Stability Mechanism offers transparency and accessibility for users, with the ability to exchange Celo Dollars for Celo Gold and participate in the governance process. The protocol is designed to maintain stability through expansions and contractions of the Celo Dollar supply. The mechanism is fully decentralized and offers the potential for adding diverse assets to the reserve. The session concludes with a Q&A section, addressing questions about economic differences with other stablecoins, the role of Celo Gold and Celo Dollar in the protocol, and the transparency of the stability mechanism.