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Introducing The ESG Protocol: Empty Set Gold

Empty Set Gold
8 min readDec 31, 2020

emptyset.gold — Empty Set Gold (ESG) is an elastic, algorithmic reserve token pegged to the price of gold.

tl;dr

  • Seigniorage coins are promising, but pegging to USD isn’t an optimal solution. Aside from the technical risk of blacklisting (ESD/USDC funds may become blacklisted in the Uniswap Pool), the fundamental value of 1 USD is still subject to regulatory whims and value dilution via inflation (one of the key issues which inspired Bitcoin’s creation). Especially now, in the era of ramped up QE caused by coronavirus, we should aim for crypto stable assets which act as a hedge against volatility and dollar inflation simultaneously.
  • Gold seems to be a better alternative. During black swan events, gold sets the standard for safe-haven assets. In the March 2020 Black Thursday crash, Bitcoin fell 50% from $7,969 to $3,956. During the same period amidst a stock market crash, gold dipped 12%.
  • Gold’s primary weakness as a currency is its inability to expand supply in times of demand — rebasing solves this issue, and allows gold to potentially become the backbone of an ecosystem with wildly fluctuating supply and demand dynamics;
  • Empty Set Gold is a fork of Empty Set Dollar, paired with Synth Gold (sXAU), offering a regulation-resistant, “historically stable” elastic asset with the gold standard.

Algorithmic Stablecoins & The Current Climate

The elastic supply and voluntary burn mechanics of Empty Set Dollar (ESD) solved to a large extent the composability issue of existing rebased stablecoins, while providing a truly zero-collateral form of value — entirely backed by market dynamics in action, and incentive based protocol participation.

While current solutions certainly improve on perceived issues with existing stablecoins, the defining feature among them could have unforeseen and undesirable consequences: reliance on fiat currency, in this case, the US Dollar.

The Problem: The Unstable USD-Pegged Stable

The majority of stables used in DeFi currently work to find a peg to the US Dollar, usually either by backing the coin 1:1 to fiat USD (in the best of cases), or an alternative algorithmic solution. While being the most used currency worldwide, substantial concerns have arisen over whether USD is suitable as the “stable” solution. These issues are, primarily, two-fold:

Short-Term Issue: Impending Governmental Regulation of Fiat-Pegged Stables

There is impending regulation which risks curtailing the current stable climate. The STABLE Act, proposed in November 2020 and currently pending, would result in every stablecoin issuer requiring to:

  1. comply with state regulations, money transmitter laws, and obtain federal legal status as a chartered bank;
  2. comply with banking regulations, which have historically acted as costly and complex barriers to entry;
  3. be legally approved by both the Federal Reserve and FDIC six months before having the legal right to issue stablecoins; finally,
  4. either obtain insurance from the FDIC or deposit fiat USD 1:1 for each minted stable directly with the Federal Reserve.

While the legalization is pending, the stance of politicians on stables seems clear: governments, particularly the US, do not want derivatives of their currency created without their own oversight.

For the end-user, the consequences of this are yet unclear. In a best-case scenario, this would introduce KYC requirements to DeFi users seeking to use USD-pegged stables, giving centralized control to US authorities to blacklist funds at their discretion (as has been done previously).

In a worst-case scenario, this would lead to all existing centralized USD-pegged stables being frozen until KYC compliance has been fulfilled, meaning billions worth of USD being inaccessible to DeFi users, including those funds locked in Uniswap Pools, as in the case of the ESD/USDC pair, trades in and out of liquidity require passage through the USDC blacklist during token transfer. While this may seem far-fetched at this moment in time, the US has recently shown an aggressive stance on crypto regulation, with other countries sure to follow by example.

Long-Term Issue: USD-Pegged Stable Purchasing Power

Since 1914, the purchasing power of USD has fallen over 96% (Source: Consumer Price Index for All Urban Consumers, U.S. Bureau of Labor Statistics).

For crypto users looking for a store of wealth without investing in “traditional” volatile cryptocurrencies (such as BTC or ETH), this poses a unique challenge. Holding USD-pegged stablecoins for extended periods can lead to substantial loss of purchasing power, especially if current trends continue.

Source: M1 Money Stock, Board of Governors of the Federal Reserve System (US)

While likely this isn’t a concern for most cryptocurrency traders looking at the short to mid-term, as cryptocurrency continues to establish itself as a prominent store of wealth, a demand for a long-term “truly stable” stablecoin emerges.

The Solution: The Gold Standard

There exists a need for an asset that is connected to traditional finance and the real world in DeFi. The widespread use of fiat currencies brings unnecessary risks and undermines the original ethos of cryptocurrencies. An obvious asset stands above the rest when considering a solution.

Gold.

The proposed solution, offers numerous advantages:

  • Proven as a currency, used since 600 BC;
  • Used as a hedge against fiat risks such as inflation and currency swings;
  • Used as a hedge against traditional market turmoil, banking collapses or M&A risk (as safe-haven asset);

…and many more which do not need to be outlined in this article. Two particular advantages of gold are relevant when considering its application in the DeFi ecosystem:

Gold Short-Term Solution: STABLE Act Resistant

Being aimed at USD-backed stables, the STABLE Act should not bring US-based regulation to asset-pegged stables. As gold is an asset, it is not in the scope of the STABLE Act.

As a result, blacklisting and KYC requirements imposed by proposed US regulations would not be applicable to gold-pegged stablecoins.

Gold Long-Term Solution: Inflation & Black Swan Resistant

While USD has fallen in purchasing power, gold has remained relatively consistent for the last 100 years. 1oz of gold purchased at ~$20 in 1914 would be worth close to $2000 today (Source: Gold Prices 100 Year History Non-Inflation Adjusted, MacroTrends), with a 400% increase in purchasing power over inflation-adjusted USD.

Additionally, during black swan events, gold sets the standard for safe-haven assets. In the March 2020 Black Thursday crash, Bitcoin fell 50% from $7,969 to $3,956. During the same period amidst a stock market crash, gold dipped 12%. With recent, aggressive monetary policy changes, fiat currencies suffering black swan events are also beginning to look like a possibility. By any means, gold would appear to be the best choice available for those seeking the most stable option.

Defi Solution to the Traditional Gold Problem: Advancing The Golden Standard

While gold maintains a relatively stable purchasing power, in traditional finance, the primary issue with gold is supply: the supply cannot be expanded to fit the need for advanced financial products. Advanced use in financial services would lead to shifts in gold market price or availability, making it complex and undesirable to use in traditional models.

Rebase mechanics, which are unique to crypto, offer a solution to this, allowing the perceived supply of gold to expand and contract with demand. More specifically, the unique DeFi mechanic of elastic algorithms, such as currently used by seigniorage coins, would allow the price of gold to be used with advanced financial products without impacting the pricing or availability of gold itself. One of such uses would be using gold as a stable peg.

As an interesting coincidence, while gold may solve an issue found in DeFi, DeFi may solve an issue found in gold.

Bringing Things Together: Empty Set Gold (ESG)

Empty Set Gold (ESG) is an experimental, zero-collateral algorithmic stablecoin pegged to Synth Gold (sXAU), the Synthetic stock asset backed by Synthetix’s external price feeds on-chain.

Forked from Empty Set Dollar (ESD), ESG follows the three key features of Stability, Composability, and Decentralization, while evolving the protocol to avoid the pitfalls of the USD peg. ESG utilizes game theory and elasticity to increase incentives during periods of decreased market demand, while expanding supply to fulfil periods of increased demand. As ESG is created, the collateralization of sXAU decreases, ideally leading to sustainable, under-collateralized lending.

ESG Comparison vs Other DeFi Stablecoins

Fundamentally, ESG elasticity works by following two conditions:

  • If 1 ESG is worth less than 1 sXAU, participants are incentivized to either burn surplus tokens and decrease supply to receive a future claim on supply expansions, or, to purchase ESG below market rate to speculate on a return to peg;
  • If 1 ESG is worth more than 1 sXAU, ESG is minted to reward coupon holders and DAO/LP participants, and ESG holders are incentivized to sell these rewards at a profit.

Participants have high chances of reward in the early, expanding stages of the protocol while market cap rises. As the protocol evolves and reaches a consistent market cap, the target of 1 ESG = 1 sXAU also becomes consistent as a stable peg.

ESG Protocol Timing Parameters

  • Epoch Length: 6 Hours
  • Advance() Incentive: 0.1 ESG
  • DAO Lockup: 20 Epochs
  • LP Lockup: 8 Epochs
  • Bootstrap Phase: 54 Epochs, at 10% expansion in supply per epoch, with and additional 22.5% of this reward going to liquidity providers according to their share of the liquidity pool.

Get Involved & Be Rewarded

Buy Empty Set Gold: ESG on Uniswap

For those uncertain of how to get involved with ESG, there are four primary ways:

  1. Hold ESG as a gold-pegged stable coin, optionally burning ESG when protocol debt accrues to receive coupons (or buying ESG under peg to wait for it return to the peg);
  2. Bond ESG in the DAO, receiving a high reward per expansion in exchange for a commitment to participate in governance;
  3. Provide liquidity in the ESG/sXAU Uniswap pool, receiving a share (22.5%) of the 10% reward per expansion + UniSwap reward fees;
  4. Advance the ESG epoch for a 0.1 ESG reward: 4 times a day, each at 6-hour intervals (00:00, 06:00, 12:00, and 18:00 UTC), a contract interaction is required to advance the ESG epoch. This is done by activating the advance() function on the Empty Set Gold Stake contract.

ESG Related Links

A Parting Note

ESG is a highly experimental attempt at an elastic gold stablecoin. High caution is advised.

Finally, thanks to everyone who takes part using ESG, and a Happy New Year to all!

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Empty Set Gold

Written by Empty Set Gold

5 Followers

Empty Set Gold (ESG) is an algorithmic reserve token pegged to the price of gold.

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