Intercoin is designed from the ground up to power community currencies and actual payments. At its core, it starts with a scalable architecture to handle many simultaneous payments within communities and across communities. But there are also issues of economics and finance that need to be solved for Intercoin community coins to be a viable medium of exchange.
One major concern vendors have when accepting a payment is the ability to pay others, including their employees and supply chains. If the currency they accept is volatile, many vendors will rush to cash it out to the one they use to pay their suppliers, rather than face the uncertainty of being able to afford those payments.
Each community inside Intercoin’s ecosystem is exchangeable to and from Intercoin tokens. The exchange rates inside the ecosystem are not spot prices in a market exchange. Instead, they are deterministic prices that follow a simple formula:
(amount of intercoin on reserve) / (amount of community currency in circulation)
This allows communities to exercise a measure of control over their own exchange rate. If they increase or decrease the amount of Intercoin they have on reserve by 2%, their exchange rate goes up or down by 2% right away. They can also change the denominator by gently inflating their local money supply (e.g. to spend on UBI by democratic polling), or reducing it (by charging fees / taxes on certain purchases).
There is no middleman to move money across communities and take a cut, so the community policies are all that determine the cross-community exchange rates. People can even predict the exchange rate on an upcoming cross-community payment between communities A and B by simply following the community policies about their money supply. The more employees and suppliers start accepting payments completely within the Intercoin ecosystem, the more certainty the vendors can have about relative currency movements.
Pegging to an outside currency
In the real world, most community currencies are pegged to the federal currency. Berkshares are pegged to the dollar as 0.9 of a dollar. Bristol Pounds are exchangeable 1-1 with regular pounds sterling.
Community currencies in the Intercoin ecosystem are all exchangeable for Intercoin. They can take advantage of the determinism in the exchange rates to peg themselves to any currency they wish. Let’s say a community wants to peg its currency to the USD. As Intercoin trades against the USD on exchanges, its spot price may go up or down by 10%. The community simply needs to lower or raise its Intercoin reserves by 10% to counteract these moves, and can remain pegged to the USD in near-real-time.
The best real-world analogy for this is the Martini Boat, named so because you can hold a martini on the deck of the boat without spilling it: the deck stays absolutely flat regardless of the waves underneath.
The Martini boat has a limit: it can only handle 5.5 foot waves. Similarly, the stabilization system in Intercoin has a limit. There has to be a counterparty to what is essentially a continuous forward contract, which will accept the community’s excess Intercoin reserves when Intercoin is rising relative to USD (the easy part) and supply them back to the community when Intercoin is dropping relative to USD. We are building “bots” that no one controls, but a that a community can use to peg to any outside currency. These bots will at the very least be able to stabilize the value of every local coin being bought as long as Intercoin trades above the price it was bought.
In the early phases, if Intercoin is rising in price, these bots may build up lots of excess Intercoin they can use later to subsidize a local coin’s peg to X even if Intercoin drops relative to X, but only to a certain %. This mechanism is pretty robust but it (like any other) can’t sustain black swan events where e.g. Intercoin’s price is being depressed by a pump-and-dump scheme or massive shorting. In this case, the bot is able to “teleport people to dry land” by liquidating the entire community’s local currency (which is pegged to X) and hand out real X which it obtained on the corresponding exchange via a limit order. See Intercoin Economics: Exchanges.
Thus, even during black swan events, holders of “virtual X” currency can still expect the virtual X to be redeemed 1-1 with X, albeit with a slight loss in convenience (but not value). This can only fail if the exchange where the bot holds the limit order also starts failing to honor the limit orders at the same time, which should be extremely unlikely since the exchange would normally be bankruptcy-remote to Intercoin.
Since Intercoin is a platform for programmable money, companies and developers can come up with their own innovative financial derivatives on Intercoin, which communities may come to prefer instead of our own bots.
To date, there have been two main approaches to stablecoins:
Tethers involve locking up the original currency in a vault, and having everyone trust some auditing companies which promise the amount is what everyone believes it is. Intercoin’s pegging mechanism isn’t dependent on locking up the original currency in an audited vault somewhere. Instead, Intercoin’s counterparty bots take care maintaining the peg completely inside the community, requiring less trust.
Coin Supply based approaches, such as Basis Coin which recently raised $133 Million from many VCs rely on theories about market prices being a function of coin supply alone. The theory goes that, if more coins are issued, the price will drop and if coins are burned or confiscated, the price will rise. The fork of Bitcoin into Bitcoin Cash didn’t follow these monetarist theories – unlike a stock split, the price of both Bitcoin and Bitcoin Cash shot up after the fork. Intercoin’s approach doesn’t rely on theories about market prices, because inside its ecosystem, exchange rates are not determined by market prices.