An independent volatility benchmark for Stablecoins
Many in the cryptocurrency community worry that Facebook’s cryptocurrency will usher in centralized corporate control on a global scale.
We believe that what the world needs is a benchmark that is independent from institutional control (either corporate or government).
The best Stablecoin is the most stable (aka least volatile). Low volatility not corporate clout should be the measure of excellence.
The GOSCI Idea
GOSCI (Global Open Source Currency Index) is designed to be the exact opposite of Bitcoin and other cryptocurrencies in three ways:
1. GOSCI is Non Volatile by design. It is a model created from a basket of Fiat currencies, comprising more than 90% of global GDP.
2. GOSCI is a model/index, not a stablecoin. You can use GOSCI to benchmark any Stablecoin – including Stablecoins from corporate giants such as Facebook.
3. GOSCI does not compete with Fiat. GOSCI is not a threat to Governments that issue Fiat Currencies, because GOSCI cannot be used directly as a store of value or a currency/medium of exchange. Even if some governments decided they did not like GOSCI, it cannot easily be shut down because GOSCI is free and open source and does not require any regulatory approval.
From a regulatory point of view, GOSCI is not a Utility Token or a Payment Token or a Securities Token or an Asset Token. GOSCI is simply a spreadsheet formula filled with data that is in the public domain – which anybody can use (it is open source).
The model is a free/open source project, created by Daily Fintech.
How GOSCI could help the Stablecoin ecosystem
You could use GOSCI to benchmark any Stablecoin. We are not in the business of benchmarking Stablecoins. We decided to to create the least volatile basket and invite anybody to benchmark any Stablecoin against that index.
There are three different approaches to creating a Stablecoin and each requires a volatility benchmark:
- cryptocurrency derivative . You use algorithms to match supply & demand of an existing volatile cryptocurrency such as ETH to create a cryptocurrency derivative that is stable.
- audit heavy/tech light. These ventures match each Stablecoin purchased with a corresponding deposit in a Fiat bank account. The Fiat bank accounts are audited so that investors can be confident that the Stablecoin is a real asset.
- algorithmic central bank. You automatically buy your Stablecoin when it is below the planned peg/benchmark and automatically sell your Stablecoin when it is above the planned peg/benchmark.
Open Source
We publish the model and the formulas. The data for the model is in the public domain (GDP data by country from the IMF). GOSCI is free, open source and permissionless.
The Bitcoin volatility problem is not going away
Bitcoin is a great store of value but flawed as a medium of exchange due to volatility. Layer two services such as Lightning Network may solve the scalability problem, enabling low value payments, but they do not solve the volatility problem. For more on the limitations of using Bitcoin as an interim store of value for payments to enable it as a Medium of Exchange please read this November 2015 post on Daily Fintech.
GOSCI is non-volatile by design.
USD Is Not The Gold Standard Of Non Volatility
USD is less volatile than BTC, but many sophisticated investors try to hedge against USD volatility risk with assets such as Gold, Bitcoin and Currency Baskets.
GOSCI is built from 36 national currencies that in aggregate account for more than 90% of Global GDP (vs about 25% for USD).
GOSCI is non-volatile by design.
Anybody can use GDP numbers to rebalance the Index
GDP data is widely available. Even if some GDP numbers lack credibility it is the best data available to track economic activity; GDP matters because economic activity drives currencies over the long term
With 36 national currencies that in aggregate account for more than 90% of Global GDP we are confident that GOSCI is non-volatile. Chasing 100% of Global GDP would add a lot of complexity with little extra benefit. There are 164 national currencies, so the 10% long tail includes 128 currencies.
When GDP changes, the index can be very easily rebalanced. For example if China GDP grows faster than US GDP, this will impact the currency weightings.
Why Now
At some point in the future, USD will be replaced as the global reserve currency. No global reserve currency lasts forever. In other transitions, the currency shifted to the rising economic power (e.g from Britain to America). The problem today is that the rising economic power is China and the Yuan is not credible as a global reserve currency and many countries will resist China in that role for geopolitical reasons.
The transition to the next global reserve currency coming at a time when cryptocurrencies are gaining traction is a unique moment in history.
The question is what will replace the USD?
GOSCI is designed to avoid the control of large corporations over cryptocurrencies. Many BigBank and BigTech companies, such as JP Morgan and Facebook, have announced plans for their own proprietary cryptocurrency. GOSCI is designed to empower a world that is decentralised and permissionless and not controlled by large corporations.
Any single Fiat currency will be resisted for geopolitical reasons, so the three non-corporate alternatives are a) IMF SDR b) Gold or Oil c) Bitcoin.
Why GOSCI is a better volatility benchmark than the IMF SDR.
The SDR is an international reserve asset, created by the IMF (international Monetary Fund) in 1969 to supplement its member countries’ official reserves. So far SDR 204.2 billion (equivalent to about US$291 billion) have been allocated to members, including SDR 182.6 billion allocated in 2009 in the wake of the global financial crisis. The value of the SDR is based on a basket of five currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the British pound sterling. The SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system, the SDR was redefined as a basket of currencies.
- It is easier to change the GOSCI model index. We believe that 5 currencies accounting for 65% of Global GDP is not enough, but imagine the politics of getting 36 countries making up 90% of Global GDP (ie the GOSCI model) approved by the IMF.
- GOSCI is a more neutral and open solution. GOSCI is neutral from a geopolitical point of view and no institution or country can control GOSCI.
Why GOSCI is a better volatility benchmark than Gold or Oil.
Gold is flawed as a volatility benchmark for two reasons:
- Gold is traded by speculators. Therefore it is volatile.
- Gold has an unpredictable inflation policy. If new sources of Gold are found (or improved mining) there will be inflation, but that rate is unpredictable.
Oil has the same flaws as a volatility benchmark as gold.
The Model
You can see the model in this Google Sheet. We use data from the IMF for GDP per country.
References