March 19, 2021
How does the EURxb stablecoin meet both the utility and redemption requirements in order to perform the function of a currency?
There are two important ways to answer this question. One is to talk about the reserves that the EURxb protocol has which provides a long-term guarantee for the value (and the 7% pa growth) of the EURxb stablecoin, but we’ve covered this already in another post here. The other answer is the focus of this post, and actually deals with the implied question in the original statement:
How do I know I will get 1 EUR of value for each of my EURxb’s whenever I want to use or sell them?
Let’s start by acknowledging that any currency works on the basis that it must have both utility and redemption value. That means there has to be a reason for users to hold the currency in their wallets from time to time (and earning interest is a good one for this), but simultaneously there has to be a reliable mechanism for users to exchange the currency for something else when they want to. Without both of those - a currency just does not work.
Like with other currencies different users will use the EURxb for different reasons - and this is even more true because of the uniqueness to the EURxb protocol’s reserves, and that it has an impact beyond the existing DeFi market. This means that there are at least 3 additional types of users interested in holding the EURxb, over and above the main users of stablecoins like those of us in crypto and DeFi.
Such additional users add their own buy and sell pressure to the EURxb market, and this is what creates a meaningful demand and supply model that offers the liquidity necessary to buy-back EURxb stablecoins from crypto and DeFi users when they demand it.
Institutional investors who bought MIRIS’ GreenBonds use the EURxb as their “home currency” - meaning if they spent it in the DeFi market, they want to repurchase it later for the purposes of taking profits, calculating taxable income, and using it for its primary utility - an instrument that allows them to optimise their investment position. This creates steady buying demand for EURxb stablecoins.
There are many everyday people in Europe frustrated with the low interest rates offered by their banks for Euro deposits (often less than 1%) who are looking for alternate places to keep their money - or at least a part of it to reduce the amount they hold in their bank accounts. This is quite clear in the case of Denmark where the more money you keep in the bank, the more you pay (negative interest rates on larger deposits is already a reality for many citizens - read more here). These type of EURxb stablecoin users find little value in selling EURxb stablecoins once they own them, creating a steady buying pressure as they enter the ecosystem, as they primarily want to buy and hold stablecoins for the interest it pays them - comforted in the knowledge that the protocol reserves offer a reliable guarantee that they will receive the full value in either stablecoin or even FIAT (if they comply with the registration process and have sufficient EURxb to become bondholders) when the bond matures.
Miris (who issues the bonds that the EURxb protocol use as reserves) is able to optimise their own capital management by buying EURxb stablecoins from the open market - reducing their balance sheet liability in real-time when they complete a project and have surplus cash on hand to do so. This creates less steady and predictable EURxb demand spikes, but it also gives a fourth group a very good reason to want to buy and sell the EURxb - Market Makers.
The last major group are market makers who understand the somewhat erratic spikes created by crypto and DeFi users that very quickly want to enter and exit large EURxb positions, but sees a profit opportunity in servicing those needs by smoothing out the overall demand and supply curve by buying and holding the EURxb when it is sold en-masse in order to sell it at a higher rate back to the market when demand increases, and vice versa (selling off large volumes quickly and buying it back over time). This last group actually plays a critical role in the ecosystem, and they earn a small fee every time they participate for rendering this valuable service.
To turn on the economic engine of the EURxb, market makers play an important initial role - and this is why we kicked-off with a launch program that rewarded the initial EURxb pool liquidity providers with our protocol’s gov token (XBE) to encourage a long-term incentive to participate - and profit from market making. We are constantly engaging new players to join this effort, and exploring new and more efficient ways of achieving it as a matter of priority so the protocol can cope with the growing demand for daily volume from users, with lower and lower slippages on trades.
While the initial liquidity program has concluded, we believe that this is a critical component of the growth of the EURxb protocol - so follow our socials and join our discussion groups on telegram and discord for information on more liquidity incentive programs in the near future!