The Cornerstone of Bitcoin DeFi

Money-on-Chain provides the first Bitcoin-backed stable coin and more.

If you run a business, you need a stable unit of account in which you can state your prices and keep your books. With its hefty up and down movements, Bitcoin cannot provide the stability merchants need, that is why many are not using it yet. While for a trader or investor Bitcoin’s volatility is beneficial, merchants want a stable currency.

Therefore many companies are currently working on so-called stablecoins with significantly less volatility. Most of them peg their coin to fiat money. Projects like Tether, the TrueUSD or USDC claim to deposit one US dollar in a bank account for each stablecoin they generate. Tether originally promised to exchange your Tether for US dollars at any time. At present, there are about 26 billion Tether in circulation, which should be covered by 26 billion US dollars.

However, there are many doubts whether this is really true. Are the US Dollars really fully available, or does Tether operate a fractional reserve system? This would be possible, because not all customers would want to redeem their Tethers at the same time. After some trouble with US regulators and much criticism within the Bitcoin community, Tether moved away from the promise of full coverage.

But regardless of whether Tether may be considered trustworthy, such a pegging of a cryptocurrency to fiat money is a contradiction in terms. The original idea of Bitcoin is to work without the need to trust anyone, not a company like Tether and not a bank in which fiat money is kept in custody. It is certainly not a solution for the imminent collapse of the monetary system. Other stablecoins, such as the Digix Gold Token or the Dinar Dirham are allegedly backed by gold. That makes more sense, but it is still uncertain whether the issuing companies have enough gold in their vaults. Again, you have to trust a company, which is contrary to the original principle of trustlessness.

Catalina Castro (Tech con Catalina) explains the concept of Money-on-Chain

The Bitcoin DeFi project Money-on-Chain takes a different approach. Here, Bitcoins are deposited as collateral for their stable coin, the Dollar-on-Chain. It is pegged to the value of the US Dollar, but it is not backed by dollars, but by Bitcoins. You do not have to trust the issuing company, because the Bitcoin blockchain is publicly visible. The dollar is merely a calculation unit that is used because people are familiar with it. There are no dollars anywhere to be found in Money-on-Chain.

Bitcoin owners can put their Bitcoins into Money-on-Chain and receive interest on them. These are paid by speculators who borrow the Bitcoins in order to bet on a rising or falling Bitcoin price. If they use not only their own coins but also the borrowed ones (called a leverage), their chances of winning are much higher, even after having paid the interest for the Bitcoins’ owners. The speculators can make high profits if they have the right instinct, but can also lose a lot. Similar to a futures contract, the speculators take the risk and thus keep the DoC price stable. The less risk-taking owners of the DoC stable coin can be sure that it will not lose value, but in return they do not benefit from any price increases of the underlying Bitcoin.

Money-on-Chain is a clever concept because it retains the advantages of Bitcoin while producing stable currency units that people are familiar with. I can imagine that a stablecoin such as the Dollar-on-Chain will take over the function as a means of payment in everyday life. Bitcoin, on the other hand, could act as an underlying reserve currency, a kind of “digital gold”.

In the future there will also be Euro-on-Chain, Yuan-on-Chain and other stablecoins backed by Bitcoin, which work with the currently known currencies without being dependent on central banks. After the introduction of the Euro, people used to convert all amounts into their familiar d-mark, franc, or peseta in their heads. In the same way, the dollar, euro or yuan will certainly continue to live on in people’s minds for some time, even if these currencies no longer exist.

DAI by Maker DAO is backed nearly 50% by Fiat Money, DoC 100 % by Bitcoin

There are similar projects in the Ethereum world, the most well known is the DAI by Maker-Dao. This stablecoin was originally backed by Ether as collateral, but when Ether crashed in March 2020, the DAI system had to go into an emergency shutdown. It returned with a new concept: instead of being backed only by Ether, it is now based on a basket of various cryptocurrencies. However, if you have a closer look, nearly 50% of them are stablecoins backed by US dollars in bank accounts. That means: a significant amount of DAI is no longer backed by truly decentralized cryptocoins, but by fiat money.

While DAI has abandoned its original concept, the Dollar-on-Chain is still 100% backed by Bitcoin. The Money-on-Chain system survived the crash in March without any bigger problems, let alone a radical pivot like DAI. “I am glad that we chose Bitcoin as our collateral”, says Money-on-Chain’s co-founder and COO Manuel Ferrari. “What happened in March has clearly shown that our protocol is very resilient in critical situations.”

Money-on-Chain was launched in December 2019 after nearly a year of development, testing and auditing. It consists of three tokens, which cater to very different target groups. The already mentioned Dollar-on-Chain is for people who cherish stability more than profit. It is not pegged 1:1 to the US dollar, but will always have a value very close to one dollar.

The second target group are Bitcoin owners, who deposit their coins as collateral. As a reward they receive the BitPro token, which was designed to give a stable passive income to Bitcoin hodlers. BitPro holders have several streams of revenue: they receive a percentage of platform-collected fees, an interest rate, and a small leverage on the price of Bitcoin. When Bitcoin rises in value, the BitPro rises a bit more. In 2020, this added up to a yield of 20%. That means: if you had invested one Bitcoin into BitPro in January 2020, you would own 1,139 Bitcoin one year later.

BitPro has gained 20% compared to Bitcoin in 2020

The BitPro is not entirely risk-free: when the Bitcoin goes down, it goes down even more. In March 2020, when all assets including cryptocurrencies crashed because of the Coronavirus panic, the BitPro fell lower than the Bitcoin, so its owners lost money. But this loss was more than compensated by the constant rise of Bitcoin in the last months of 2020. As one can expect Bitcoin to rise in the long run, this is a risk worth taking, given the potential high yield. We have therefore decided to invest a significant part of our Bitcoin Hodler Portfolio into BitPro.

The third target group of Money-on-Chain are traders who are willing to assume a high risk for a high profit. They can invest in a token called BTCX, with an additional number to specify the leverage. A BTC2X has a leverage of two: it rises twice as much as the Bitcoin, but can also fall twice as low. Other tokens with different leverages may be introduced later. You could imagine a BTC-2X which allows you to go short on Bitcoin: if the Bitcoin falls, your token would rise in value twice as much. In the near future, Money-on-Chain will issue a fourth token, which is a governance token of the whole system.

“Money-on-Chain was built to be the cornerstone of DeFi on Bitcoin“, explains Max Cajurzaa, its Co-founder and CEO. “It enables other projects to develop lending, credit and advanced trading for Bitcoin holders.“

by Aaron Koenig