The case for a Kin backed stable coin
Personal ruminations of a Kin enthusiast
Kin’s KRE Developers summit led to many proposals on how to incentivize developers to create a vibrant Kin economy. While most proposals focused on optimizing transactions and balancing incentives, some tried to mitigate the KRE reward/ inflation dilemma.
The KRE reward/ inflation dilemma
The dilemma is summarized below:
- Apps joining the ecosystem are rewarded with Kin from the KRE
- Apps (like miners) need to sell Kin to cover operating costs
- In a bear market, apps race each other to sell, to preserve the value of their KRE rewards.
- This becomes a self fulfilling prophecy for a price drop.
However, in a bull market, apps HODL as much as possible, again self fulfilling a price rise prophecy.
This pattern is not unique to Kin, but is common to all crypto currencies including Bitcoin and Ethereum. Proof of work algorithms are fortunate to have a floor price, which is determined by the mining difficulty. Miners only sell to the point where they can still make a profit from running their mining rigs. Bitcoin and Ethereum also have mature economies, since they act as the base currency for most exchanges.
Likewise, proof of stake algorithms have upper and lower price boundaries that are determined by the cost of transactions and number of transactions.
Kin is unique in that it is neither strictly a proof of work nor a proof of stake currency. So this leads to the dilemma:
Without a set floor price, how can the KRE reward developers and still maintain a virtuous, self fulfilling price positive cycle?
To encourage bullish conditions, Kin entering the ecosystem needs to be restricted, but developers still need to be rewarded for their work.
How do you:
- Restrict the amount of Kin flowing into the economy
- While still rewarding developers for their work?
Restricting Kin issued
Various suggestions have come forward, varying from using buy ratios or hard caps to limit the amount of Kin flowing into the ecosystem from the KRE. Kik proposed a daily payout cap of 250 million Kin or $USD 5,000 in Kin.
However, the proposals are still concomitant on the app economy generating more pull than the total Kin pushed into the ecosystem by the KRE. Is there another way?
A stable coin issuing proposal
Consider the ecosystem below. What would happen if the KRE rewarded developers in DAI (or other stable coin)?
Three things become apparent:
- Developers would be able to cover ‘real world costs’ without needing to sell kin or worry about price volatility
- Developers wanting exposure to kin could exchange their DAI for KIN in the open market
- All kin flowing into the app economy would come from the open market instead of the KRE.
In short, the net demand for kin would become strongly positive.
Given that this is what would happen in such a scenario, how could the KRE issue a stable coin?
While creating a smart contract to back a Kin stable coin (kUSD) on Solana is possible, a simpler solution exists.
Issuing a stable coin
Stable coins are simply overcollateralized debt positions that guarantee their value from an underlying asset. While some positions are issued by smart contracts, others are managed by trusted parties that hold collateral. i.e. They accept one currency as collateral and issue another one as debt.
For example, Bitcoin Suisse offers collateralized loans in USD, DAI or ETH for currencies such as DOT, XTZ, ADA and DASH. Salt lending accepts collateral in the form of LTC, DOGE, ETH, XRP and others in exchange for TUSD or DAI. Other similar companies include Torque, Nexo, etc.
Simply put, the KRE could partner with a company willing to add KIN to its list of accepted collateral.
The KRE would then add KIN to its collateralized position, get DAI, and distribute that to developers instead. The position would act as a time locked buffer to slow inflation and encourage deflation in the ecosystem.
With a daily rewards cap of $5,000 USD, the collateral would need to cover about $1.8 MM USD to run the KRE for a full year.
Wouldn’t the Kin need to come back to circulation, eventually?
This arrangement gives the Kin Foundation greater control over inflation, where it can choose the time and speed of releasing the locked kin into circulation.
Easing the entry of kin will allow the market to set new (higher) schelling points for its price over time.
Looking to the future
Over time, and if necessary, Kin could transition to its own smart contract backed stable coin or partner with a DeFi project. The advantage would be being able to control its own interest rates and levels of collateral required to maintain parity to the dollar.
By that time, however, Kin would have proven to the market that its vibrant economy can be used to back a stable asset.
