BitMEX Founder Arthur Hayes Proposes New Bitcoin-Backed Stablecoin – Here’s How It Works

BitMEX co-founder and crypto veteran Arthur Hayes is proposing an idea for a new Bitcoin (BTC)-backed stablecoin.

In a new blog post, Hayes tells his 67,000 followers that the collapse of crypto-friendly bank Silvergate suggests that there’s a need for a token that is worth $1 but doesn’t rely on the traditional banking system.

“The goal is not to create a decentralized fiat currency. MakerDAO is great, assuming it actually is decentralized, but for 1 USD of value it requires locking up >1 USD worth of crypto. It removes more liquidity than it adds, which is a net negative for the system. What we need is a mechanism that allows you to lock up 1 USD worth of crypto to obtain 1 USD worth of a stablecoin.”

Hayes proposes the “Satoshi Nakamoto Dollar, NakaDollar, NUSD,” and lays out how it could work.

“1 NUSD = $1 of Bitcoin + Short 1 Bitcoin / USD Inverse Perpetual Swap.

A Bitcoin inverse perpetual swap (e.g., Ticker: XBTUSD on BitMEX) which is worth $1 of Bitcoin paid out in Bitcoin has the following payoff function:

$1 [divided by] Bitcoin Price in USD
If Bitcoin is worth $1, then the Bitcoin value of the perpetual swap is 1 BTC, $1 / $1.
If Bitcoin is worth $0.5, then the Bitcoin value of the perpetual swap is 2 BTC, $1 / $0.5.
If Bitcoin is worth $2, then the Bitcoin value of the perpetual swap is 0.5 BTC, $1 / $2.”

In short, Hayes proposes an idea where a stablecoin is pegged to both the value of Bitcoin and the value of short Bitcoin in the perpetual markets. In theory, the two values should cancel each other out during price swings to maintain the $1 peg.

To further elaborate on his idea, Hayes shows an example of how the stablecoin will stick to its peg in a scenario where BTC’s value fell from $1 to $0.1. According to the crypto capitalist, the profits made by the stablecoin from shorting BTC in the perpetual markets will negate the losses that come with the decline in BTC’s value.

Meanwhile, a rise in BTC’s value will also invalidate the stablecoin’s losses from its short position, effectively keeping its peg.

BTC is trading for $24,258 at time of writing, up 8% on the day.

 

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