TLDR:
Each CRC user sets up a Blancer-LBP that starts with 99/1 with some reserve asset and that will slowly over time (as more CRC get minted and get into circulation) will shift to a 50/50 pool.Intro
With Circles 2.0 we expect that CRC will become more money like and thus also be tradable. Group Circles will play a significant role here and we expect that most CRC will eventually be used as collateral for group CRC which are than used as money.However - to transition to this period we believe that we should start maximally decentralized and allow individual CRC to be traded. We would expect that the CRC issuer themself provides liquidity. One can think of Circles as a protocol for people to take sovereignty about their money and essentially become a central bank. Of course, complexity and freedom of monetary policy is greatly reduced which makes things easy enough to use. Money issuance and money destruction is set by 2 simple parameters: 1 CRC issuance per day and a constant destruction at a rate of 7% per year (demurrage).
However - beside issuance a reserve strategy is a second important parameter central banks usually control. While outstanding money are liabilities those on the other site should have assets backing them.
In Circles this is not explicitly required. However - in practice issuing CRC in itself is not useful. If no one wants to accept those CRC they are useless. Trust-connection already give CRC some utility - you can now exchange those specific xCRC against other yCRC that a person might hold that “trusts” xCRC. However - that of course only brings value to xCRC is yCRC actually have value.
The earlier proposed method to give yCRC value is to offer goods and services priced in yCRC.
However - the most direct way to give yCRC value is to allow them to be exchanged against anything of value. Central banks used to offer exchange against gold at a fixed rate. For yCRC the issuer could take any valuable asset they like (sDAI, ETH, WBTC, GNO, …) and simply put it into an AMM against yCRC.
Lets assume 100,000 yCRC exist and out of those 10,000 would be put into a AMM against $100. This would mean effectively only 90,000 are in circulation - each valued at $0.01 = $900 in total. If there are too little things to do, people will choose to sell those CRC against the AMM. The AMM might be in a state where it holds now 20,000 CRC against now just $50 (20,000 * 50 == 10,000 * 100/ x*y=k). In this stage only 80,000 CRC are “outstanding” with a total value of just 80,000 * $0.0025 = $200. If on the other hand demand for CRC increases more CRC can be released from the AMM bringing it e.g. into a state of 7000 CRC against $142.85 at a price of ~$0.02 and a total market cap of 9,300 * $0.02 = $1860.
We are proposing to recommend CRC user to give their own CRC some liquidity. This serves as a strong signal that the person is “serious” about CRC. Groups can form that make this personal liquidity a requirement. If all the collateral of the group is itself collateralized the group money itself is then colleterlized as well and this will make it easier to reach option of that money.
Practically we need to find an easy way for user to set up such a pool without having to understand details. One challenge is that when a user has just signed up, they will only have very little of their own CRC (48 at the start). The proposed 10,000 CRC will only exist after >1 year (24*365 = 8760/year).
To practically set this up we are proposing to use a Balancer-LBP (liquidity bootstrapping pool) that will “activate” over the period of e.g. 1 year.
We can take the following example: Start $100 and 99/1 weights. In this setup e.g. 100CRC against $100 would also lead to a starting price of ~1CRC/ $0.01 - as the weight would shift - if no trades would happen - the price for CRC would continuously increase all the way to 100 CRC = $100 (1CRC = $1). On the other hand - if CRC that get minted over time flow into this AMM.
Concrete proposed parameters:
$100 , CRC 100 starting point, weights 99/1
1 year period to move to 50/50
After 1 year 8,760 CRC will be minted. (ignoring demurrage for simplicity)
To “maintain” the price of $0.01 the AMM would need to constantly acquire CRC to e.g. end up in state of $50 ↔ 5000 CRC at 50/50 weights. In scenarios where less than 5000 out of the 8,760 are sold the price will raise (over a year).
Side note no path-dependency
LBP are path-dependent so unlike simple AMM where just the total amount sold determined the price. Roughly speaking, for a higher CRC price it is best if as little as possible are sold and most stay in circulation. However - if they are sold to the AMM (and we discuss here the "worst case" - all are sold) it is better if they are sold as early as possible when the price is still low. * *In the "worst"-"worst" case no CRC are sold into the AMM until it reaches its max price of 1CRC = $1. In that hypothetical scenario the state of the AMM could be: 8,760<->$1.14 == 1 CRC = $0.0001301369863Further notes
While each user can have their own personal AMM that gives their own token a well-defined price those prices are strongly interconnected because of "trust-connections". If xCRC are cheaper then yCRC but there is a trust path between x and y - someone can buy cheap xCRC - exchange them via the trust path into yCRC and sell those. This arbitrage will ensure that CRC of people that are close to each other in the trust network will roughly have the same value. The system should minimize the value leaked by such arbitrage. We can achieve that by e.g. using CoW-AMMs but in favor of simplicity we propose to rather set up those Balancer-LBP with a relatively high fee (3%). This will still make sure the personal AMMs have a stabilizing effect on CRC prices while most small price demand movements will not immediately generate arbitrage opportunities.Summary
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We propose to set social norm to back your own CRC with a reserve asset of your choice. Candidates on Gnosis chain today are: sDAI, stETH/ETH, WBTC, GNO, bS&P500 (tokenized S&P500 ETF)
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We propose to start with a price of $0.01/CRC
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Using a Balancer-LPB this price will continously increase over a period of 1 year unless some of the minted CRC are sold into this AMM
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if a user issues constantly CRC (mints at least once/ 2 week) ~60% of all those CRC need to be sold to keep the price at $0.01
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selling more will lead to a price drop, selling less will lead to price increase
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selling can also be done by users that simply have trust connections to the user
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all CRC within a densely connected trust network are expected to have roughly the same price