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Reducing Volatility for a Linear and Stable Growth in a Cryptocurrency

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EXAMENSARBETE INOM DATATEKNIK, GRUNDNIVÅ, 15 HP STOCKHOLM, SVERIGE 2021 Reducing volatility for a linear and stable growth in a cryptocurrency Encourage spending, while providing a stable store of value over time in a decentralized network GUSTAF SJÖLINDER CARL-BERNHARD HALLBERG KTH SKOLAN FÖR KEMI, BIOTEKNOLOGI OCH HÄLSA Reducing volatility for a linear and stable growth in a cryptocurrency Encourage spending, while providing a stable store of value over time in a decentralized network Reducering av volatilitet för en linjär och stabil tillväxt i en kryptovaluta Uppmana användning, samt tillhandahålla ett värdebevarande över tid i ett decentraliserat nätverk Gustaf Sjölinder Carl-Bernhard Hallberg Degree Project in Computer Engineering First cycle,15 ECTS Stockholm, Sverige 2021 Supervisor at KTH: Luca Marzano Examiner: Ibrahim Orhan TRITA-CBH-GRU-2021:047 KTH The School of Technology and Health 141 52 Huddinge, Sverige Sammanfattning Internet gav människor möjlighet att utbyta information digitalt och har förändrat hur vi kommunicerar. Blockkedjeteknik och kryptovalutor har gett människan ett nytt sätt att utbyta värde på internet. Med ny teknologi kommer möjligheter, men kan även medföra problem. Ett problem som uppstått med kryptovalutor är deras volatilitet, vilket betyder att valutan upplever stora prissvängningar. Detta har gjort dessa valutor till objekt för spekulation och investering, och därmed gått ifrån sin funktion som valuta. För att en valuta ska anses som ett bra betalmedel, bör den inte ha hög volatilitet. Detta är inte bara begränsat till kryptovalutor, då till exempel Venezuelas nationella valuta Bolivar är en fiatvaluta med historiskt hög volatilitet som förlorat sin köpkraft på grund av hyperinflation under de senaste åren. Med detta i åtanke föreslår vi en ny kryptovaluta; Dynamic Network Token, vars uppgift är att reducera volatiliteten i en kryptovaluta genom att reglera utbudet dynamiskt med hjälp av burning och minting. Denna implementeringsuppgift är att minska hög volatilitet till fördel för en mer stabil och linjär tillväxt och samtidigt uppmana användare att använda Dynamic Network Token mellan varandra i nätverket. Nyckelord Kryptovalutor, Volatilitet, Burning, Minting, Dynamiskt, Värde, Investering, Stabil, Tillväxt Abstract The Internet provided humans a new way to exchange information digitally and has changed how we communicate. Blockchain and cryptocurrencies have given humans a new way to exchange value over the internet. With new technology, new possibilities arise, but not always without issues. One problem that has risen with cryptocurrencies is their high volatility, meaning that the currency has big price swings. It has made these currencies objects for speculation and investment almost exclusively, and therefore they have lost their functionality as a currency. For a currency to be viewed as a good means of payment, it cannot be associated with high volatility. This is not only restricted to cryptocurrencies, as for example the Venezuelan Bolivar is a fiat currency with historically high volatility and has been losing its purchasing power due to hyperinflation in the recent years. In regard to this we propose a new cryptocurrency; the Dynamic Network Token, which aims to reduce the volatility in a cryptocurrency by regulating the supply dynamically with burning and minting. The implementation of this functionality will strive to remove the high volatility in the token for the benefits of a more stable and linear growth, and at the same time encourage users to transact with the Dynamic Network Token between each other. Keywords Cryptocurrencies, Volatility, Burning, Minting, Dynamic, Value, Investing, Stable, Growth Acknowledgment To whom it may concern, the authors are grateful for the aid received during the work done in this thesis project. - Vires in numeris. Glossary Bitcoin - The first cryptocurrency. It uses proof of work for validating transactions on its blockchain and has a hard cap. Blockchain - A distributed digital ledger, storing blocks of transactions made with the native currency related to the specific blockchain. It is maintained and validated by nodes in a decentralized peer-to-peer network. Burning - A method that removes tokens from the total supply. Cryptocurrency - A digital currency recording transaction in a decentralized network using cryptography. Ether - The native token of the Ethereum protocol. Ethereum - A cryptocurrency ecosystem powered by the EVM (Ethereum Virtual Machine) allowing for the deployment of smart contracts and decentralized apps. Ethereum test-net - Ethereum development network used for developing and testing cryptocurrencies and other decentralized applications. Two examples are the Goerli and Ropsten test networks. ERC20 - A token deployed on the Ethereum blockchain as a smart contract. EVM - Ethereum Virtual Machine. Fiat Currency - A physical currency such as the U.S dollar and Swedish krona controlled by the government. Hard Cap - A cryptocurrency with a finite supply. Market Cap - The total value of a fiat currency invested in an asset, often nominated in dollars. In cryptocurrencies the market cap is calculated by multiplying price with circulating supply. Miner - A computer that solves a computational problem to verify Bitcoin transactions. Minting - A method that adds tokens to the total supply. OpenZeppelin - A library provider for developing cryptocurrencies. Residual - A measurement of how far a data point is from a regression line. Smart Contract - A self-executing transaction protocol with terms of agreement between a buyer and a seller being written in code that is deployed on a blockchain. Stable Coin - A cryptocurrency, which is pegged to a fiat currency, i.e., has a 1:1 ratio. Tether - A stable coin with a 1:1 ratio to the U.S dollar. Token - A type of cryptocurrency representing an asset residing on a blockchain. It is fungible and tradable, meaning that one token is always equal to another making it suitable for transactions. Table of contents 1 INTRODUCTION ................................................................................................... 1 1.1 PROBLEM .................................................................................................................................... 1 1.1.2 SUPPLY AND DEMAND ............................................................................................................... 2 1.1.3 VOLATILITY IN CRYPTOCURRENCIES ........................................................................................... 3 1.1.4 HYPERINFLATION ...................................................................................................................... 4 1.2 GOALS ........................................................................................................................................ 5 1.2.1 THE DYNAMIC NETWORK TOKEN ............................................................................................... 5 1.2.2 CAUSES FOR VOLATILITY IN CRYPTOCURRENCIES ....................................................................... 6 1.2.3 CONTROL OF VOLATILITY IN CRYPTOCURRENCIES ....................................................................... 6 1.2.4 REGULATE GROWTH IN CRYPTOCURRENCIES .............................................................................. 7 1.2.5 SELECTION OF PARAMETERS ..................................................................................................... 7 1.3 DELIMITATIONS ............................................................................................................................ 8 1.4 CONTRIBUTION OF AUTHORS ........................................................................................................ 9 2 THEORY AND BACKGROUND ......................................................................... 11 2.1 INFLATIONARY CURRENCIES ....................................................................................................... 12 2.2 DEFLATIONARY CURRENCIES ...................................................................................................... 12 2.3 BITCOIN .................................................................................................................................... 13 2.4 ETHEREUM ................................................................................................................................ 14 2.4.1 SMART CONTRACTS ................................................................................................................ 14 2.4.2 ERC-20 TOKEN ...................................................................................................................... 15 2.4.3 BURNING AND MINTING IN AN ERC20 ....................................................................................... 16 2.4.4 DEPENDENCY OF ETHEREUM ................................................................................................... 17 2.5 TETHER .................................................................................................................................... 17 2.6 BLACK-SCHOLES PRICING MODEL ............................................................................................... 18 2.7 REAL WORLD USE CASES ............................................................................................................ 18 2.7.1 IMPLICATIONS OF DYNAMIC NETWORK TOKEN .......................................................................... 19 2.8 RELATED WORK ........................................................................................................................
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