Enhancing Celo's Mission of Prosperity for All

Ecosystem
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Thank you to all those who have reached out about our Proof-of-Deposit proposal to create a perpetual, market determined deposit rewards rate for cStable depositors.

We are posting this to give people a better appreciation of how we see our proposal enhancing Celo’s mission beyond bootstrapping near-term adoption! Be sure to give us comments

The Problem

If we look at the wider economic context, we find that prosperity for the people is the essence of what government fiscal policies (how to spend money), and central bank monetary policy (how to control the supply of money) are supposed to be about.

However, for many developing nations, the people have found that those in authority have at times diverged from this path, damaging credibility with respect to national finances.

Even when responsible policies are restored, these developing nations find themselves in a vicious cycle:

  • government is unable to borrow at reasonable interest rates because the economy is weak, and the government has historically lacked credibility

  • economy is weak and unable to grow because government is unable to borrow at reasonable interest rates and have little means to build their credibility

This forces many of these developing nations to dollarize. But this is a brittle state of affairs as once a domestic crisis hits, the government finds itself unable to stimulate the economy as its central bank has near zero control of monetary policy.

Decentralized Sovereign Currency

Often, when talking with people in the crypto space, there is a view that decentralization is for fighting back against corporate control or government overreach. But are these the only applications?

Whilst we recognise the above are indeed important applications, our research has uncovered another application:

Decentralization can be a tool for central banks to transparently and verifiably set limits to their discretion over monetary policy

This has the potential to help developing nations break out of their vicious cycle, as international investors will be more willing to extend affordable credit when they have significantly more confidence that the value will not be inflated away. In this way, decentralized blockchain offers a solution to a well-known problem in macro economics which has remained unsolved for decades–see for example Calvo (1978).

The way we envision this being spearheaded by Celo in the future is by allowing central banks to create their own decentralized sovereign currency where:

  • The decentralized sovereign currency will be a cStable that is pegged to an index of the central bank’s choosing (e.g. some basket of goods)

  • Smart contracts will limit the amount of decentralized sovereign currency that can be created (say, per year)

  • The market is in control of expanding and contracting the decentralized sovereign currency using current cStable technology

  • The market is in control of dynamically adjusting the base interest rate on this decentralized sovereign currency using Proof-of-Deposit

In closing

This is our vision for enhancing Celo’s mission, with the first step being piloting Proof-of-Deposit to show that a market can dynamically adjust the deposit rewards rate for a currency without it trending to zero.

This is a bold vision, but we believe achieving prosperity for all is worth it.

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With regard to the basic idea of the project proposal I think it is very admirable. If I understand what I’ve read so far the incentive that will pay for this is the growth of the currency usage.

A concern that I have is that it doesn’t have an incentive to actually use the currency in the world outside crypto.

What I’m getting at here is that in the conventional banking system the interest paid to a depositor is basically rent on the money so that the bank can use the funds to invest and lend out to others and make a return.

Will there be an incentive to use the larger pool of CUSD in the real world?

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The future that we are painting here is central banks using Celo as a platform to deploy their own sovereign currencies.

There won’t be a need for “incentives” to use it in that case as the government will mandate it as legal tender (and require taxes to be paid in it).

We are saying this can be a real possibility because a decentralised sovereign currency will allow governments of those developing nations to borrow in international bond markets at affordable interest rates (which they currently are not able to due to the vicious cycle I described).

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As I understand Proof-of-Deposit, the rewards would be generated in the same manner and along side staking rewards and just like staking, that makes Proof-of-Deposit another form of inflation.

Proof-of-Deposit seems to ‘pay’ for that the inflation by assuming the price of Celo will rise because more and more Investors will buy more and more Celo to maintain the arbitrage.

The ‘money’ that buys that Celo has to come from somewhere. If it’s a form of central currency it has to make a circle within it’s own ecosystem.

When buying Celo with cUSD you find that the buying power of cUSD has fallen a little more with each loop in relation to Celo.

My concern is that inflation won’t create free money in a closed loop.

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Another question that has popped into my head yes if the USD coin is paying interest that will affect its value in the market currently people will pay a premium to have the CUSD coin.

That’s not necessarily a bad thing, it would drive adoption, but it would pose a challenge for keeping the peg.

It’s possible that the market would price it at $1.03 or somesuch thing…

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The rewards for Proof-of-Deposit do indeed come from inflation (as well as transaction fees). However, we are not proposing that there be any additional inflation. We are proposing that rewards which, at present, are given only for staking CELO are instead divided between CELO stakers and cStable deposit holders who take part in Proof-of-Deposit.

We anticipate that a nation which adopts our proposal would permit the Celo-based stable to be used along side traditional forms of their national currency, at least for an extended transaction period. During this time, people may choose to exchange “traditional” forms of money (e.g. physical cash) for the Celo-based form of the currency. This is domestic demand. There may also be international demand, where the Celo-based national currency is purchased with foreign currency.

The cStable corresponding the the national currency will be used to buy CELO from the reserve when the cStable is above its peg. This is the arbitrage mechanism which pushes the cStable back towards its peg.

To the extent that inflation (and transaction fees) can be leveraged to boost the Marketcap of CELO, it is considerably more efficient to generate demand for CELO indirectly, by the method we have described (rewards on cStables via PoD). This is because even a relatively low return on a cStable is meaningful, so long as that return does require the deposit holder to bear credit risk. On the other hand, the same return on CELO (in return for staking) is practically a rounding error compared to the volatility of the CELO price. It follows that no one realistically decides to hold one protocol token over another because of the staking reward that is offered. Therefore the staking rewards, as they are currently being distributed, do not drive significant demand for the native token.

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Hi @markbarendt

If cUSD is above its peg, then there is an arbitrage opportunity (specifically, exchanging $D worth of CELO for D cUSD, which can then be sold for >$D ). This should bring the price of cUSD back towards $1.

However, it is possible that (in the early stages) the feedback in Proof of Deposit could become strong enough that cUSD remains above its peg for an extended period of time. This is because, while token inflation is still in place, a large portion of rewards are denominated in CELO. While this is the case, a rise in demand for CELO will tend to increase the deposit rewards rate (received by cUSD deposit holders), which will attract more deposit holders, and so on.

Although the rewards are then divided between more cUSD (which tends to reduce the deposit rewards rate, all other things being equal), it is not inconceivable that this could be more-than-compensated for by the increase in CELO price. If this were to happen, the result could be that cUSD would drift above its peg. No doubt, some cUSD holders would like it if this were to happen (they make a profit!), it is not desirable from the point of view of the utility of the protocol.

To mitigate the possibility of cUSD drifting above peg due to persistent high demand caused by PoD, the rewards rate can be configured to throttle (e.g. will not go any higher) if the cUSD is above its peg by a certain amount, for more than a given amount of time, etc (exact parameters TBC). In this scenario, the “surplus rewards” would be diverted to the CELO reserve. This interrupts the positive feedback of increasing interest rates leading to increasing demand for cUSD, and would allow the arbitrage/stability mechanism to “catch up”, returning cUSD back towards its peg.

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Thanks for the response John.

I want to say unequivocally that I believe you are right in that having Celo stable coins generate interest/rewards as a feature would be a huge pull and making that happen is a truly worthy goal.

There are still several things I’m still not comfortable with in Proof-of-Deposit, as proposed.

First is what appears to be a relatively arbitrary reduction in the rewards rate for staking CELO to pay people for doing nothing but holding a Celo stable coin.

It seems to me that Proof of Deposit doesn’t incentivize everyday use or adoption as a ‘buy groceries and run your business’ currency, instead Proof of Deposit encourages holding the stable coins.

As proposed, I would suggest that Proof of Deposit would make the Celo stable coins into more of a store of value and with 5% return not a bad inflation hedge to HODL. From a retail perspective I’d take that deal. It’s exactly why I got interested in Valora and Supercharge.

Given that people tend to spend their least productive and depreciating assets first, and keep safe growing assets, Proof of Deposit would initiate a real change in mission and use case from a users perspective. That is not a trivial divergence. More down this line in a moment. This is what I’m using Valora for right now. I’d like to use Valora for everyday money the off ramps available are clunky to use.

With regard to staking, IMO CELO needs to be comfortably profitable for those who participate there. The stability and security of the whole ecosystem are dependent upon a lot of people being willing to hold and stake their Celo. Also the staking rewards are not ‘rounding errors’ to the anyone who intends to be in this business for the long haul. If CELO’s price goes up ‘only’ 20x over the next 14 years then the staking rewards turn that 20x gain on the original investment into a 40x gain.

IMO staking rewards rate should not be considered as part of the Proof of Deposit proposal. To be blunt, IMO the current proposal’s financing scheme smacks of robbing Peter to pay Paul, to stay inside old budget decisions, rather than deciding to invest in CELO’s future.

I would instead suggest that it may be more appropriate to consider having the Celo project act more like a for profit retail bank. Task the treasury with loaning out/investing the assets backing the coins, in the real world outside crypto, to generate the tangible returns needed to cover the interest paid to the stable coin savers. The loans could be focussed in markets that fit well inside Celo’s larger vision.

In the short term I could see Proof of Deposit being financed with a truly temporary bump in the CELO inflation rate to boot strap the project.

Onward, if you are correct John, and if Proof of Deposit is instituted, and if the Celo stables start becoming added to lots of trading platforms I think there really is the opportunity to become the ‘trading partners of choice’ in various and sundry trading pairs, and I believe that would be a good thing!

I’d be interested to see summaries of any modeling that has been done to test the ideas you’ve presented and where it succeeded or failed.

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One idea that might be considered is to make it a requirement to ‘lock’ the stable coin for maybe 3 days in order to earn the interest. In essence I’m just suggesting some sort of limitation on access like a regular savings account at a bank.

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You seem to be under the impression that everyday use and “real adoption” should be directly incentivised.

This is what Valora attempted and I would argue this is a flawed approach. At the moment Celo has a chicken and egg problem. Why should merchants integrate Celo if there’s no users? Why should users use Celo if there’s no merchants?

As pretty much all the current biggest tech companies have shown, when starting out, a platform needs to prioritize building the network effort above all else. Businesses and usecases will naturally follow afterwards because that is where the users will be.

Proof-of-Deposit will bootstrap adoption of Celo for everyday use by simply making it the place where users and merchants alike will store their money.

Where will that 20x come from? What is the probability of it happening?

Ultimately it’s about expected returns, not just the multiplier. If the 40x only has a 5% chance of happening Vs a 20x which has 50% of happening, then I say CELO stakers will always prefer the latter.

Again you need to appreciate that Celo has a chicken and egg problem. Your suggested method here is based on the assumption that people actually will want to take loans from Celo.

Why would they? Why would Celo be a better choice than the thousands of other organisations that are already in this line of business, many of which are non-profit.

The significance of Proof-of-Deposit is that it is creating internal demand for cUSD by validators from which external demand will follow. This is superior to methods which jump straight to depending on attracting external demand.

Yes that is a possibility

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Good evening Ying,

No, my statement is not an advocation for subsidizing retail adoption, it is simply my frank assessment of what behaviors I think Proof of Deposit will and won’t encourage in users of the Celo stablecoins and the effect the changes will have on the people who keep the system decentralized and running.

I will reiterate again that I think that the idea of Celo stable coins paying an interest rate is a great draw toward the Celo ecosystem.

If we want Celo to succeed we need to be honest about the effects of any proposed change, yes?

With regard to Valora I don’t believe for a moment that there is a failure because of the Supercharge incentives not being interesting. I would suggest instead that the biggest hurdle that is holding Valora, and by extension Celo, back from mass adoption in the real world is the complexity of getting fiat into and out of Valora.

Provide a simple on & off ramp system inside Valora and the 5% interest you are hoping to provide on the stable coins will be IMO plenty of draw to start getting retail people in the door. The 5% interest would also as y’all have suggested incentivize DEXs to add the coins.

Kraken believes that the on/off ramp problem is such a big problem and such a big opportunity that they are establishing a real bank in Wyoming to address it. They have a ways to go before it opens but in some news I read today it said they just got their bank routing number.

So the 20x comes as a SWAG about price growth on Celo if being run like a business for 14 years and creating an income stream that comes from it’s customers rather than fresh cash from investors. If successful for 14 years Celo should IMO reach a significantly larger multiple than 20x.

People don’t need to want to borrow money from Celo. For a start Celo could simply start buying debt off Tinlake/Centrifuge https://tinlake.centrifuge.io and that’s just the ip of the iceberg. Instead of holding just crypto in the reserve, income producing assets like the stuff on Tinlake could be added. Over time Celo could add more debt through channels developed in house. This is how traditional bankers make money.

There are already people working on pilot projects here in house that are getting very close to being able to offer loans in various parts of the world. I don’t know if they have thought of putting those loans into our reserve but I’m hopeful.

Interacting with the real world is where the big money is as well as where Celo can make the biggest differences.

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Here’s a link to the Celo video of one of the pilot projects Real World Use Cases from Around the Globe - YouTube Starting at about the 20 min mark the project called Roda. This is one example of where Celo could help in formalizing informal markets.

These projects take time and would be happy to borrow for Celo and they can becomes very symbiotic.

The people in these underserved markets could benefit greatly from the stable interest rate Proof of Deposit could bring to the community.

Celo could make money on these markets from both transactions and interest on the basket of the loans.

There is room in there for Fiadores/Gaurantors/Local Loan Originators to make money too.

Similar markets abound all over the world, even here in the USA. On/off ramps akin to m-pesa’s model may be a way to even work inside the USA. It might be interesting to go see your barber or local grocer for a loan at a reasonable rate.

Solving these on-the-ground problems is where the real profit for investors will come from.

Developing these markets takes legwork, it’s not a software change, but it creates an ‘external’ income stream.

The work needed to develop this market would naturally create an economic moat that could protect Celo’s success.

My basic core gripe with the Proof of Deposit proposal as it stands, is simply the funding mechanism. It seems almost fully dependent on investment money inflows rather than commercial success. If Celo is a success in this market, great but, there is no economic moat that might impede Tether or USDC from doing something similar if they see Celo stable coins succeed in this manner.

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Hi @markbarendt

You have misunderstood my claim:

This is a simple statement of fact. For example: what is your price prediction for CELO a year from now? What are the error bars on that prediction? Are they larger than +_5% ?

Personally, I’d say CELO might be as low as 30c (or lower, if there were a market wide crash), or as high as $30 or more. That is 2 orders of magnitude (10,000% !). That is quite large compared to 5%.

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Morning John,

I fully understood your point the first time. Evidently I may not have gotten mine across.

I’m going to use a very blunt question to highlight the difference in the philosophy of what we each seem to be expressing. This is by no means meant as an affront to you, it is purely a tool to refine the conversation a bit.

Are we trying to be Moon boys here in the Celo ecosystem and then move on, or are we trying to create a viable business that we’re going to spend the next 14 years in?

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