Note: This should be considered a rough draft, made available to promote the idea and get feedback. The final system will likely be different. Criticism, questions, and suggestions welcome.
The world's most popular stablecoin Tether (USDT) earned $6.2 billion in 2023, surpassing BlackRock's $5.5 billion, with just 100 employees compared to BlackRock's 20,000
Unfortunately, Tether does not offer privacy, censorship resistance, or self-custody. Tether can:
Identify all account holders
See all amounts held
See every transaction detail (sender, receiver, amount, transaction dates/times, IP address)
Lock coins from further trading
Unilaterally seize coins. (Tether, 2024-08-23)
Tether says that they have "aided governments worldwide with criminal investigations, helping freeze a total of $835 million in assets it said were mostly tied to theft."(Foldy, 2023)
For example, when $610 million was stolen from PolyNetwork, Tether simply froze $33 million of its tokens that were included in the heist. (Robertson, 2021). Tether subsequently returned the stolen tokens to the original owners.
While its surveillance capability and centralized control does give Tether the ability to address unethical criminal activity, it also makes Tether vulnerable to government pressure to py on users, enable capital controls, and seize funds from dissidents.
Despite Tether's cooperation with law enforcement, US government officials accuse Tether of profiting from a wide variety of crimes, including sanctions evasion, money laundering, terrorist funding, and theft.
For example, several Congress members have called for the US DOJ to prosecute Tether executives, in order to "choke off funding to the terrorists currently targeting Israel". (Foldy, 2023)
Tether Limited is owned by the British Virgin Islands–based company iFinex Inc. Tether's employees and executives are known and are subject to imprisonment, fines, and death if they fail to cooperate with authorities.
And Tether's executives have responded to such threats. In a letter to Congress, Tether CEO Paolo Ardoino announced that Tether had disabled tokens in all wallets associated with the Office of Foreign Assets Control (OFAC) sanction list. (Ardoino, 2023).
Is it possible to build an asset backed stablecoin that does not have Tether's weaknesses?
Here are some of the features that an ideal privacy stablecoin would have:
Anyone can participate in the stablecoin network.
No centralized gatekeepers (banks, FinCen, Paypal, etc)
All participants are anonymous
Once issued, stablecoin issuers cannot unilaterally seize the coins
Stablecoin issuers cannot spy upon network transactions. Sender, receiver, amount, timestamp, IP address would all be invisible.
The location of the vaults are hidden from authorities
Vaults can be audited without revealing their owners or the vault locations.
The network encourages many backers of the stablecoin, not just one large backer, thereby providing redundancy.
If any given vault is seized, it does not effect the value of the stablecoin very much.
How would such an ideal stablecoin work?
For the sake of simplicity, I'll lay out how it will work with gold. Let's call it StableGold. However, it could work with any asset, such as dollars. Also, let's assume for the sake of argument that gold is trading at $2000 oz.
There are three roles in the system:
Vault Operator (VO) - stores gold for Vault Clients and issues StableGold stablecoins backed 1:1 by the gold in their vault
Vault Client (VC) - person who stores their gold with the vault operator
Auditor - audits vaults to make sure that Vault Operators have the assets they claim to have (gold, dollars, etc)
Entry of gold into and out of the StableGold network is similar the dead drop mechanism employed by the Russian Anonymous Marketplace (RAMP). (Vorobyov, 2020)
RAMP was one of the largest and longest operating darknet drug markets, from 2012 to 2017. (Shubin, 2018)
Let's assume that Lucy wants to store her 1 oz gold coin with StableGold.
Lucy first hides her 1 oz of gold in some location--a park, a forest, an abandoned building.
She then makes a request to the StableGold network for someone in her general vicinity to store her coin. Let's say Bob the Vault Operator takes her offer and agrees to store the gold. He takes her ticket, and locks $2 K worth of Monero in a darkfi smart contract (aka the 'security deposit'). This security deposit is forfeit to Lucy if Bob later fails to deliver her coin up demand.
Lucy gives Bob the location of the coin, which he retrieves. After verifying that the gold coin is real, Bob issues her 1 oz of StableGold, backed by the Lucy's 1 oz gold coin in his vault.
Whenever Lucy trades the StableGold he has issued, Bob earns a 1% fee from the transaction.
If Lucy later wants her physical coin back, she buys back her coin with the StableGold she was given earlier (or StableGold she's bought from someone else).
Bob takes her coin from his stock and hides it somewhere nearby. He then gives the GPS location to Lucy. She retrieves the coin and notifies the network that she's retrieved her coin. The StableGold is retired from the market, and Bob's security deposit is released.
In order to ensure that the StableGold issued by Bob is backed 1:1 by real gold in his vault, Bob is subject to random audits of random amounts.
If he's audited, Bob must provide the audited gold (or the current market value in Monero to an auditor within a given time.
If he fails the audit, he forfeits his security deposit to the owners of the StableGold. His vault will also receive a full strike which requires him to deliver all of his gold holdings to a random selection of auditors. If he fails the full strike audit, he forfeits his Monero security deposit to the StableGold holders.
Frequently asked questions:
Q: Who can join the StableGold network?
A. Anyone can join the Vault network in any role.
Q: What ensures that the StableGold holders coins are backed by real gold
A: In order to store other people's gold, a Vault Operator must lock up a security deposit (in Monero) equal in value to the private stablecoins they issue.
Q: How do vault operators make money?
A: For every StableGold transaction, the Vault Operators receive a 1% fee. (The percentage is just an example—it will be whatever amount induces the VO’s to offer the service.)
Q: What happens if the value of a VO's security deposit drops below the value of the StableGold?
A: They have 24 hours to add more Monero to their security deposit, or their entire holdings will be subject to a full strike.
Q: How will VO's be selected for audit?
A: The Vault network software will select Vaults for audits at random.
Q: How does one become an Auditor?
A: Anyone can become an Auditor. Auditors must also put up a security deposit. They can only audit vaults in proportion to their security deposit.
Q: What prevents Auditors from being corrupted and falsely claiming they didn't receive audited funds (when they did)?
A: Some vaults will be secret shopper vaults (ie vaults with a known quantity of good / fake deposits). If auditor fails to properly count the vault, they will be struck and forfeit their security deposit .
Q: What happens if a Vault fails an audit, but believes the Auditor is corrupt?
A: The Vault can call for a secondary audit. Three more Auditors are selected at random. The secondary auditors will review the evidence by both the VO and the original Auditor.
Q: Who pays for the Auditors?
A: Auditors receive a fee from the network for each audit they perform.
Q: How much will auditors be paid?
A: Whatever amount is required to induce them to offer the service.
Q: Who pays for the developers, legal team, marketing, etc?
A: In addition to the 1% fee paid by the Vault Owners, another 1% will be paid into a anonymous DAO treasury. Out of this Treasury will be paid the investors, auditors, developers, marketers, legal team, etc.
Q: Who governs the network?
A: Decisions will be made by an anonymous council of the StableGold DAO.
Q: How will members of the StableGold DAO be selected?
A: They will be selected from a pool of people who put their names up to be on the StableGold council (a 13 person council with rolling 8 year terms). Council members will be selected at random from the pool of people who meet all of the following conditions:
a. at least 51% approval from all Vault owners
b. at least 51% approval from all Vault owners (proportionate to their holdings)
c. at least 51% approval from developers
__
Q: What if Lucy receives her gold coin back, but doesn't report that she's received it to the network?
A: All transactions will have a time limit. If she fails to dispute the return of her coin before the deadline, then the network will assume it has been returned to her.
Q: Why would Lucy store her gold with StableGold? Why not store it in her safe at home?
A: Storing gold at home exposes her to risk of theft, assault, and loss. If she were to store her gold with a secure gold storage facility , she would normally be charged a fee of 0.40 - 1% / year. By storing it StableGold, she avoids the risk, cost, and headache of storing the gold herself, and the fees associated with storing it at a secure gold storage facility.
References
(Foldy, 2023)
https://archive.is/gfeaq
Original: https://www.wsj.com/finance/currencies/most-popular-cryptocurrency-keeps-showing-up-in-illicit-finance-71d32e5e
(Robertson, 2021
https://markets.businessinsider.com/news/currencies/poly-network-hack-610-million-tether-mr-white-hat-defi-2021-8
(Sander, 2024)
https://www.coindesk.com/business/2024/01/31/tether-reports-record-285b-profit-as-biggest-stablecoin-nears-100b-market-cap/
(Shubin, 2018)
https://politicalcritique.org/cee/2018/on-magnets-or-underground-how-does-the-russian-anonymous-marketplace-work/
(Tether, 2024-08-23)
https://tether.io/news/tether-proactively-assists-u-s-doj-in-criminal-investigation-and-victim-recovery/
(Warmbrodt, 2023)
https://www.politico.com/newsletters/morning-money/2023/12/19/elizabeth-warrens-new-crypto-target-00132395
(Vorobyov, 2020)
https://www.vice.com/en/article/hydra-russia-drug-cartel-dark-web/