Digital Trade Coin: Towards a More Stable Digital Currency
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ARTICLEINPRESS Digital trade coin: towards a 1 2 3 more stable digital currency 4 rsos.royalsocietypublishing.org 5 6 Alex Lipton, Thomas Hardjono and Alex Pentland 7 MIT Connection Science, Massachusetts Institute of Technology, Cambridge, MA, USA 8 9 Research TH, 0000-0001-7396-7640 10 11 Cite this article: Lipton A, Hardjono T, We study the evolution of ideas related to creation of asset- 12 Pentland A. 2018 Digital trade coin: towards a 13 backed currencies over the last 200 years and argue that more stable digital currency. R. Soc. open sci. 14 recent developments related to distributed ledger technologies 15 5: 180155. and blockchains gives asset-backed currencies a new lease 16 http://dx.doi.org/10.1098/rsos.180155 of life. We propose a practical mechanism combining novel 17 technological breakthroughs with well-established hedging 18 techniques for building an asset-backed transactional oriented 19 cryptocurrency, which we call the digital trade coin (DTC). 20 Received: 31 January 2018 We show that in its mature state, the DTC can serve as a 21 much-needed counterpoint to fiat reserve currencies of today. Accepted: 18 June 2018 22 23 24 25 1. Introduction 26 Subject Category: This paper describes the concept of the asset-backed digital 27 Computer science trade coins (DTCs), currently under development at MIT [1]. 28 It outlines an approach to building a consortium of sponsors, 29 who contribute real assets, a narrow bank handling financial 30 Subject Areas: transactions involving fiat currencies, and an administrator, who 31 cryptography/human-computer issues the corresponding digital token in exchange for fiat 32 interaction/software payments and makes fiat payments in exchange for digital tokens. 33 In short, our proposal is to apply distributed ledger technology to 34 Keywords: give a new lease of life to the old notion of a sound asset-backed 35 blockchain technology, digital currency, currency, and to use this currency as a transactional tool for a large 36 electronic cash pool of potential users, including small and medium enterprises 37 and individuals. We intend to build a currency, which encourages 38 legitimate commerce, but makes illegal activities difficult. Our 39 contribution should be viewed as a position/vision paper, as at 40 Author for correspondence: the moment there is no working prototype for the DTC. 41 Thomas Hardjono We wish to replace physical cash with a supranational digital 42 e-mail: [email protected] token, which is insulated from adverse actions by central banks 43 and other parties, due to the fact that it is asset-backed. We believe 44 the DTC is ideally suited as a medium of exchange for groups of 45 smaller nations or supranational organizations, who wish to use it 46 a counterweight to large reserve currencies. 47 Supranational currencies have been known for two millennia. 48 For instance, Roman, and later Byzantine and Iranian gold coins 49 were used along the entire Silk Road; Spanish and Austrian 50 silver coins were prevalent medium of exchange in the Age of 51 Sail. Closer to our time, the British Pound was used as reserve 52 A contribution to the Blockchain Technology currency for the British Empire and, to a lesser degree, the rest 53 special collection. 54 55 2018 The Authors. Published by the Royal Society under the terms of the Creative Commons 56 Attribution License http://creativecommons.org/licenses/by/4.0/, which permits unrestricted 57 use, provided the original author and source are credited. 58 ARTICLEINPRESS 59 of the world; the Dollar and the Pound were used as a reserve currency basket for the world economy in 2 60 the twentieth century, to which the Euro and the Yen were added in late twentieth century; and now the rsos.royalsocietypublishing.org 61 Yuan might be used along a revived Silk Road. ................................................. 62 Today, for the first time ever, there is a possibility of designing a digital currency that combines 63 the best features of both physical cash and digital currencies, including finality of settlement, partial 64 anonymity and usability on the web. This currency is largely immune to policies of central banks that 65 control the worlds’ reserve currencies. Such a currency has enormous potential to improve the stability 66 and competitiveness of trading and natural resource producing economies. In the DTC, we propose 67 to develop a trade-oriented asset-backed digital currency, aimed at facilitating international trade and 68 making it as seamless as possible. This currency will be based on a proprietary framework combining the 69 most recent advances in blockchain and distributed ledger technology, cryptography and secure multi- 70 party calculations, together with time-tested methods for preventing double spending. In view of the fact R. Soc. open sci. 71 that our framework relies in part on our own research and in part on ideas readily available in public 72 domain, we do not anticipate specific intellectual property right issues. Unlike Bitcoin, it will be fast, 73 scalable and environmentally friendly. It will also be transaction friendly because of its low volatility 74 versus fiat currencies, not to mention cryptocurrencies. 5 75 Over the past decade, potential advantages and disadvantages of distributed ledgers or blockchains, : 180155 76 have been discussed by numerous researchers (see, e.g. [2] and references therein). While numerous 77 potential applications of blockchains have been entertained in the literature—including title deeds, post- 78 trade processing, trade finance, rehypothecation and syndicated loans, to mention but a few—the main 79 usage of blockchains has so far been in the general area of payments, more specifically cryptocurrencies. 80 World-wide interest in distributed ledgers was ignited by Bitcoin, which is a cryptocurrency protocol 81 operating without a central authority. It was described first in the seminal white paper by Nakamoto [3]. 82 Since then Bitcoin has inspired creation of more than a thousand of other cryptocurrencies, all with 83 various degree of novelty and utility (if any). One of the most promising is Ethereum, which is 84 significantly more versatile than Bitcoin, not least because is supports so-called smart contracts [4]. 85 Another interesting and popular cryptocurrency protocol is Ripple [5]. The Ripple system departs of the 86 Nakamoto consensus approach. It is not truly decentralized because it does not rely on the thousands 87 of anonymous (pseudonymous) mining nodes that form the peer-to-peer network underlying Bitcoin. 88 Instead, the Ripple system uses a small set of nodes that act more like notaries, validating transactions at 89 a higher throughput and much lower cost compared to Bitcoin. Unlike Bitcoin, most entities in the system 90 are known and not anonymous. By their very nature, all of these currencies are native tokens, residing 91 on a blockchain. Their transition from one economic agent to the next is controlled by the set of rules 92 that are inherent or ‘hardwired’ in the blockchain set-up and are needed to maintain the integrity of their 93 blockchain as a whole. However, until now, attempts to build tokens backed by real-world assets—first 94 and foremost, fiat currencies—have been unsuccessful. Yet, until this all important problem is solved, 95 in is virtually impossible to make cryptocurrencies a part of the mainstream financial infrastructure, 96 because otherwise the inherent volatility of cryptocurrencies will severely curtail their usability. 97 Although potential application of distributed ledgers mentioned earlier, such as post-trade processing 98 and trade finance, are very important, they are technical in nature and lack the revolutionary spirit. 99 However, a distributed ledger can potentially play a truly transformative role and bring a dramatic 100 departure from the past by making central bank digital currency (CBDC) and stable cryptocurrencies 101 a reality. 102 In this work, we propose a stable asset-backed cryptocurrency which we refer to as DTC. It can be 103 viewed as a natural extension of a fiat-backed cryptocurrency called the utility settlement coin (USC) [6]. 104 Setting aside operational aspects of gathering and managing collateral assets, we need to design a ledger 105 associated with value transfers. Since, by design, Nakamoto’s approach is neither scalable, nor efficient, 106 we need to use a different design. Our analysis indicates that combining blockchain with an earlier 107 approach for issuing electronic cash (e-Cash), developed by Chaum [7,8], seems to be promising. Recall 108 that Chaum introduced a blind signature procedure for converting bank deposits into anonymous cash. 109 On the one hand, Chaum’s protocol is much cheaper, faster and more efficient compared to Bitcoin. 110 It also offers an avenue towards true anonymity and unlinkability (as in paper cash), as compared to 111 the weak pseudonymity of Bitcoin. If true anonymity is not desired, there are variations on the Chaum 112 approach on offer, for instance, anonymity for the purchaser but not for seller and so forth. However, on 113 the other hand the basic Chaum model and many of its variants rely on the integrity of the issuing bank. 114 To alleviate this issue, we propose the use of blockchain technology itself to track the relevant transaction 115 parameters, reducing the opportunity for parties to be dishonest. Payments are still direct between users 116 as in Chaum’s proposal. ARTICLEINPRESS 117 In the DTC, we propose a solution to the stable cryptocurrency problem, which boils down to 3 118 assembling a pool of assets, contributed by sponsors, appointing an administrator, who will manage the rsos.royalsocietypublishing.org 119 pool and digitizing the ownership rights on this pool. In addition, we build a special-purpose narrow ................................................. 120 bank, which facilitates activities of the administrator.