Amidst a season plagued with banking controversy, Arthur Hayes proposed a stablecoin structure that promises to revolutionize the industry.
Not only a tech genius but also a prolific passion-filled writer, the former CEO of BitMEX discusses NakaDAO, a fictional stablecoin which not only would solve problems of governance and peg stability, but would make the reliance on traditional banking systems obsolete.
NakaUSD is revolutionary. Let’s discuss why.
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The Satoshi Nakamoto Dollar: A Revolutionary Design
NakaUSD uniquely utilises a synthetic peg system which has never been seen before in the industry.
By utilizing centralized derivative exchanges with listed liquid inverse perpetual swaps (ticker XBTUSD), a synthetic USD equivalent is created by depositing 1 BTC on a derivatives exchange and shorting an XBTUSD swap:
Without ever touching USD held in a fiat banking system, you create a stablecoin with Bitcoin as its primary collateral, whilst also creating a natural hedge against its volatility.
Regardless of Bitcoins price, the 1:1 peg is mathematically stable, making liquidation almost impossible for the borrower,
The key custodians here would be centralized derivative exchanges, which would ensure deep liquidity. Surrounding this system, a DAO would be used, powered by a governance token, NAKA, used for both creating the initial stock of NUSD and for providing decentralized control of operational matters, such as qualifying who the partner exchanges would be and how net interest margins would be distributed.
Specifically vetted authorised participants (APs) would play the crucial role of creating and redeeming NUSD tokens directly from the DAO. This would be paramount, as it would create both a controllable and intrinsically transparent collateral management system.
Hayes also proposes a sinking fund and a balance sheet mechanism, which would work in tandem to bolster the stablecoin’s peg stability and overall financial health.
The balance sheet would list assets and liabilities (bitcoin and short positions held vs total NUSD issued) and, in tandem with an Ethereum blockchain explorer such as etherscan, would verify that ‘NakaDAO is not playing funny with the money’, as Arthur Hayes puts it.
To address 3 main risks associated with such a system (member exchange losing bitcoin, negative funding and socialised loss), a sinking fund and sales of NAKA governance tokens can be crucially utilised, pumping liquidity into the system to address any capital shortfalls.
Combining a synthetic peg system which breaks away from traditional banks, whilst also combining centralization and decentralization principles, providing both deep liquidity and transparency alongside a well rounded risk mitigation system, the Satoshi Nakamoto coin would empower rapid evolution industry-wide.
“We, the crypto faithful, have the tools and the organisations needed to support $1 trillion or more worth of NakaUSD outstanding“
Let’s zoom in to 3 issues the biggest stablecoins have faced over time, and see why NakaUSD would extinguish these concerns in the space.
USDT Transparency Frustrations
Tether’s inability to be clear about its reserve composition has been a vast source of concern and frustration.
From an alleged 1:1 USDT to USD reserve peg, to a slip admission in that only 74% was backed by cash with the remaining being comprised of loans and investments, , Tether’s organizational structure has been a source of dismay and solvency concerns for too long.
NakaUSD’s transparent governance system as well as its synthetic peg would make such concerns obsolete.
USDC and Centralized Regulatory Pressure
USDC’s centralized structure and reliance on government and traditional banks means that it is constantly under pressure and risk of regulatory FUD.
As evidenced by Circle’s subpoena from the SEC and consistent rumors of trouble, centrally reserved stablecoins such as USDC and BUSD are always vulnerable to regulatory disruptions.
NakaUSD mitigates such risks by keeping the whole system crypto-native and by utilising a network for collateral management, reducing the potential for single points of failure.
DAI’s Liquidation Risks
During the Black Thursday market crash on March 12, 2020, the MakerDAO system experienced severe stress.
The rapid decline in the value of ETH, DAI’s primary collateral, led to numerous liquidations. However, the Maker protocol’s auction system could not handle the high liquidation volumes, leading to under-collateralized DAI and threatening its USD peg.
NUSD’s risk mitigation strategies protect the stablecoin from market volatility. Through efficiently hedging the peg against price fluctuations, NakaUSD will maintain its USD peg under extreme market events, avoiding such issues and uncertainties.
This kind of resilience is of course paramount for a stablecoin, and when it is present it truly allows for a crypto native standardization tool, removing the need of fiat in the industry.
Final Thoughts
Paramount to such an idea’s successful execution would be industry-wide cooperation. Historically an impossibly difficult feat, but if executed correctly, would make NUSD the central pillar of crypto, would remove the risk of crypto FUD and would generate immense stability in the industry.
At a time where the ridiculous unprofessionalism in both the traditional markets and the web3 industry is more visible than ever, where everywhere you look there is a completely valid excuse NOT to trust, systems like Arthur Hayes Nakamoto coin are desperately needed.
So to take the realm of conversation from wishful speculation to material transformation, such ideas need to stop being philosophised about and instead materialised.
So if someone has to do it, why not you?
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[Editor’s Note: This article does not represent financial advice. Please do your research before investing.]
Featured Image Credit: Chain Debrief
This article was written by Harry Vellios and edited by Yusoff Kim
