Hi @tim, Thank you for your feedback. This is just in response to your first question. I’ll address the others in a follow up, since my reply to this one is quite long.
Issue is how the deposit rewards rate is determined. We believe that our proposal is the simplest way to provide a market determined deposit rewards rate.
To understand why this is important, it is helpful recall the original meaning of, and motivation for, decentralisation in the economic context: This term was made famous by Hayek in his 1947 paper The Use of Knowledge in Society. Hayek’s definition of decentralisation is close to what would often today be called “self-organising” (this phrase would not be invented until 1949). It describes order (e.g. values of parameters) emerging from local (peer-to-peer) interactions between agents—this is a defining property of the market mechanism.
The definition of decentralised decision making specifically excludes collective decision making , which includes decisions taken by popular vote (which may or may not be weighted, such as in the case of a stockholder vote). Collective decision making also includes the case where the parameter is centrally determined by an entity which reflects popular sentiment to a significant degree.
The distinction between decentralised and centralised decision making is critical and often misunderstood. See for example, James Buchanan’s paper Individual Choice in Voting and the Market (1954).
One important difference is that parameters decided by a collective decision making process are subject to time inconsistency —also called dynamic inconsistency — this is the subject of Kydland and Prescott’s seminal 1977 paper Rules Rather Than Discretion: The Inconsistency of Optimal Plans. (Work for which they were awarded the 2004 Nobel prize!)
The reason why this matters to us is that, for certain types of parameters such as interest rates, time inconsistency means that agents prefer ever lower values, leading to economic instability. This is the reason why the Dai Savings Rate was voted down to zero, where it has stayed for the past two years. It is also the reason why central bank interest rates trend downwards. (See for example Ray Dalio’s Principles for Navigating Big Debt Crises.) A rate which is market determined can avoid the effect of time inconsistency.
In our proposal, validators decide the deposit rewards rate they will pay for each unit of cStable deposit (for each vote from a cStable deposit holder). In other words, the decision is made on an individual “peer-to-peer” basis. No validator or depositor is compelled to transact or accept any particular price. This is the market mechanism–again, see e.g. Buchanan (1954).
Note that the problem we are solving is not only a problem in crypto, but an outstanding problem in macro economics in general. It has been known for centuries that economic stability normally requires a positive credit risk free rate of return to be available (fixing a lower bound for commercial lending rates), but no one has ever figured out a market mechanism which can provide this. Public (non-permissioned) blockchain technology combined with PoD solves this problem. We are also working with Ezechiel Copic from Celo’s CBDC team on formulating our proposal for a (non-permissioned) CBDC which takes advantage of this discovery.