Professor Aggelos Kiayias, a Greek computer scientist, currently professor at the University of Edinburgh, published a blog post titled “Stablefees and the Decentralized Reserve System”.
Kiayias notes in a blog posted by IOHK, the company that supports the development of Cardano, which facilitates transactions through crypto platforms “stumbles on the dual utility of the underlying asset of the platform.”
Users can hold and trade them as part of their investment portfolios, Kiayias adds, noting that they provide the “fuel” needed to process transactions. According to the professor, this duality suggests that the system “should have a mechanism for adjusting transaction costs, so that they remain competitive and reasonable”.
He also mentions that the “limited throughput of decentralized platforms per unit of time introduces another hurdle: the system should also allow users to discover the correct price for processing transactions in a timely manner”, which may depend on their needs. individual.
He further notes:
“Why not completely abandon transaction fees? Three reasons: First, there are costs associated with processing transactions on the system side (in terms of compute and storage). It is reasonable to allow transaction processors (participating pool operators, in the case of Cardano) to offset their costs. Second, even with a theoretically infinite capacity, it is important to prevent transaction originators from saturating the network with worthless transactions. Third, transaction processors should be encouraged to provide quality of service. An increase in demand should influence their earnings accordingly. “
Kiayias also notes that adding fees to each transaction should help address the considerations mentioned above.
He adds that Bitcoin (BTC), the flagship cryptocurrency, has defined the first mechanism for pricing transactions through platforms that are compatible with distributed ledger technology (DLT). As the professor explains, this mechanism is a bit like a first-price auction: trades can place bids for a spot in a block while “naming a specific reward, and block producers select which trades they want.” ‘they prefer to include’.
Kiayias further notes that block producers are also rewarded with “the right to mint new coins, i.e. their operation is subsidized by the whole community through total supply inflation. the rooms”. He also mentions that inflation is decreasing “geometrically over time and transaction fees are becoming more and more dominant in rewards.” According to Kiayias, this mechanism, “while allowing Bitcoin to function for more than a decade, has been criticized for its ineffectiveness.” He points out that transaction costs have also increased significantly over time.
Kiayias shared a new mechanism that “builds on Cardano’s approach to general ledger rules and system assets, and complements the concept of Babel fees.” The aim is to make the costs “fair, stable and predictable over time”. Kiayias and his team describe the mechanism “in the context of Cardano”.
But they specify that it can be adapted to any other cryptocurrency with “similar characteristics”.
The main idea behind Stable fees is to have “a base price for transactions by pegging to a basket of commodities or currencies,” Kiayias explains while noting that the stable fees include a native “decentralized reserve” contract that “issues and manages a stablecoin secured to the basket “.
He also notes that a comparison in the fiat world “could be the International Monetary Fundthe SDR of (created in 1969) and valued on the basis of a basket of five currencies: the US dollar, the euro, the Chinese renminbi, the Japanese yen and the British pound sterling.
He adds that stablecoin – let’s call it “Basket Equivalent Coin” (BEC) – is the currency used to “pay for transaction fees (and all other actual pricing needs of the platform, eg SPO costs). “.
In this system, the ADA cryptocurrency will play “a dual role: Reserve the assets of the decentralized reserve and reward the currency for staking”. It will also be the “fallback currency in extreme scenarios where the reserve contract is in a liquidity crisis”.
“Before a transaction, the issuer will have to obtain BECs, either via other third parties or directly by sending ADAs to the decentralized reserve contract. On what basis will the reserve issue BECs? The reserve contract will also issue shares – we’ll call them Decentralized Capital Coins (DEC) – in exchange for ADA. “
He further explains that by leveraging the value of DECs, the decentralized reserve will often be able to adjust the value of the CLB so that it “is pegged to the underlying basket of commodities”. He adds that DECs will be able to “absorb fluctuations in the ada against the basket to ensure that the real value of BECs remains stable (cf. the AgeUSD stablecoin design that has already been deployed and used on Ergo ) ”.
He added that this trinity of currency, “natively issued by the system, will attract different cohorts. The stability and liquidity of BECs could be attractive to risk-averse and transaction-intensive holders. According to Kiayias and his team, DECs will offer the greatest rewards if ADA goes up, but will also take the “biggest hit when ADA goes down. Long-time holders may find DECs more appealing.
He further noted that since the decentralized reserve prices of these coins in ADA, BECs and DECs are able to facilitate participation in both the staking and governance process, Kiayias adds while noting that returns can be issued “at different rates, reflecting the different nature of each coin.” He also mentions that in the end, the rewards will always be “denominated and payable in ada, which will remain the most versatile of the three coins”.
He continues to note:
“The centerpiece of this mechanism is a chain oracle which determines the price of the basket in ada. FSs can implement this oracle in a decentralized manner. The reserve may offer additional rewards to all Oracle contributors from fees collected during BEC / DEC broadcasts. This will ensure two things: thousands of geographically diverse contributors and ledger rules calculating a synthesized exchange rate in a canonical fashion (via a weighted median over all price bids at a time, for example). “
He adds that if Oracle contributors can manipulate their contributions, they can be “held accountable by tracking their reputation and performance on the chain.”
He also mentions:
“How would we price the transactions and reward the block producers? Using Cardano’s current approach, each transaction will be deterministically mapped to a specific BEC denominated value, using a formula determined by general ledger rules. The formula will take into account both the size of the transaction and its computation requirements, and may also incorporate execution metrics (such as average system load).
He specifies that the resulting value will be “the basic fee ensuring that the transaction will be processed by the system”. Considering the base fee, end users will be able to “apply a multiplier if they wish (which will be a value of at least 1, for example, 1.5x, 3x, etc.) to increase the fee and speed up the process. treatment, ”noted the professor. while adding that it “will become relevant in times of high demand”.
According to For Kiayias, this approach has a key advantage over the first-price auction model: “the pricing mechanism is continuously stabilized at a reasonable default”. He adds that users can perform price discovery in one direction “only to expedite processing, if necessary.” In addition, transaction issuers can store BECs “to secure their future transaction issuance capacity without being affected by ada price volatility”.
He further notes that the Stablefees mechanism can be seen as “a natural extension of Babel’s fees – ad hoc conversion of BECs into ada by the decentralized reserve”. He also mentions that the two mechanisms “complement (and are compatible) with each other”.
He points out that Babel fees can be deployed “with Stablefees with one change: use BECs to cover Babel fee obligations, instead of ADA”. This also means that the fees will “always be payable in ada (via a Babel fee liability convertible into ada on site)”. Thus, the whole mechanism “is backwards compatible: it will not affect occasional users who simply have an ADA and do not wish to obtain a BEC”, explains Kiayias.
He further notes:
“Although the above narrative identifies a single, global BEC, the same mechanism can be used to issue regional BECs tied to different baskets of commodities, which could potentially be weighted differently. Such “regional” BECs will be able to increase the inclusiveness of the system, while allowing SPOs to have more refined policies in terms of transaction inclusion. “
He explains that the mechanism described above requires a decentralized reserve contract and the issuance of BECs and DECs “by contract to buyers”. A “light” version “avoids the reserve contract and directly adjusts the fee formula by linking it to the basket of products agreed via the price oracle”, adds Kiayias.
He also mentions that the resulting system “names the transaction fees nominally in BEC and immediately converts them to ADA”. The amount to be paid fluctuates, “depending on the value of the BEC”, notes the professor while adding that the mechanism is otherwise identical, “also facilitating one-way price discovery via the multiplier”.
He specifies :
“The only downside is that a potential transaction issuer does not have access to a native token that enables transaction processing in a predictable manner; issuers of transactions must pay ada fees. Nevertheless, the costs will constantly adjust and remain stable via the anchoring mechanism in relation to the basket. As a result, a transaction issuer will be able to organize its portfolio of off-chain assets to effectively meet its transaction needs. “
Kiayias confirms that his team is studying the details of the Stablefees Mechanism. Once this research is complete, Stablefees can be integrated with Cardano to provide fair and predictable transaction prices, the professor added while noting that the price oracle and the global BEC (and regional variants, if applicable) ” will undoubtedly find uses beyond the paid transaction. fresh.
This should help extend the capabilities of decentralized applications (dApps) in the Cardano ecosystem, Kiayias wrote.