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Author Topic: How to use Bitcoin to Collateralize interest-bearing Crypto-USD  (Read 615 times)
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May 24, 2013, 03:01:55 PM

In the spirit of attempting to solve turing FIAT into something as easy to exchange in as BTC I would like to propose an idea in 2 phases.   The first phase will explain how this could be done in a 'centralized' manner, the second phase will show how the same concept could be implemented via a blockchain in an entirely decentralized manner.

Phase 1)   I decided I am going to open an exchange that will accept BTC deposits and pay interest on those BTC deposits.  The interest paid on BTC deposits comes from exchange transaction fees.  Think Mt.Gox with interest.  Then I am going to allow users of my exchange to borrow digitial USD provided they lock in 2x that value in BTC deposits (based on a moving average of exchange rate).   I will then pay the holders of digital USD accounts interest from the collateral until all collateral is exhausted at which point the USD loan is considered 'paid in full' and the digital USD holders have effectively received BTC at half price (over time).   Only digital USD is accepted on my exchange. 

Now there is a steady stream of people taking out loans and paying them off and each time they do so the collateral is adjusted based upon the current exchange rate.  Therefore, when the price of BTC goes up the interest paid on digital USD goes up and when the price of BTC goes down the interest paid goes down.   BTC posted as collateral is still earning interest paid from exchange transaction fees and also serves to grow the collateral over time.  All USD loans are 'fixed-term', 'fixed-fee' meaning that you are spending your collateral to pay down the loan + interest over time and that 'spent collateral' is not recoverable.  If you wait the full term of the loan you will have 0 collateral and 0 debt.

In order to buy digital-USD you have to get it from one of my customers who wants to sell digital-USD and as a result a market develops for digital-USD.  When there are more depositors than withdrawers then digital-USD commands a premium and motivates more people to take out BTC mortgages so they can get digital-USD at face value and then sell it at above face-value for real USD.   This then increased the supply of digital-USD and pushes the price back toward parity.

Later more people want to withdraw real USD from digital USD than want to deposit.  This causes the digital-USD to have a below-face-value price on the market.  This represents an opportunity for people to pay off their mortgages by purchasing digital-USD with real USD and thus pushing the price back toward face value.

The end result is that I have created a centralized exchange that allows people to 'leverage up' on their BTC positions, pays interest on their BTC deposits, and as a side effect created a new digital-USD that pays interest and is 'pegged' to real USD within a couple of percent +/- depending upon momentary changes in supply and demand.

Phase 2) Implement this with a block chain with the following rules:
  - 90% of trx fees are redistributed to holders of 'BTC', 10% to the miner.
  - All trx carry a minimum trx fee of X%
  - All TRX outputs are annotated with a UNIT (USD, BTC, etc)
  - The block chain would add a transaction that takes BTC as an input and issue three outputs (-USD and +USD and Collateralized BTC).
  - Interest 'due' can be calculated by coin-age and the fees / collateral posted in all blocks since that time.
  - The exchange would be implemented by creating A simple transaction that allows the output to be SPENT provided the same transaction also sends USD or BTC at the specified exchange rate to the specified address and sends any 'change' to a new output with the same restriction.   Such an output could also be 'SPENT' by the owner and thus canceling the order.
   - Escrow, NashX, etc can allow people to exchange crypto-USD for real USD at near(+/- a couple %) of face value.  Escrow could also be built into the block chain / client.

End result is a distributed, trustless, interest-bearing fiat-gold-silver BANK and Exchange.


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