Stablecoins have become a fundamental pillar in the crypto economy. They have provided an important building block for DEFI and have increased the access to USD worldwide. However, as we've seen recently fiat pegged stablecoins suffer from their own set of risks, both to holders and to the entire crypto economy. Despite the expressiveness of Ethereum, we've simply migrated the fiat system to the digital space.
If we were to reimagine a digitally native stable currency from the ground up, what would it look like? We'd have a currency that didn't suffer from a centralized monetary policy. One whose buying power didn't get inflated away. We'd build a currency that was stable to cost-of-living, not an arbitrary fiat peg.
The Liquid Energy Dollar (LED) project is the first decentralized global energy-stable currency experiment. Energy is fundamental to everything we consume. When energy prices rise, so does our cost of living. Looking back from 1960 to today, energy prices have closely tracked the general consumer price index (CPI). Even compared to gold, something that has traditionally been used as an inflation hedge, energy has a much stronger correlation to CPI.
With an energy-stable currency, we can keep our buying power stable relative to the things we care about. Energy isn’t a replacement for fiat currency; however it provides a powerful alternative.
For LED to truly be decentralized requires a fully decentralized oracle for global energy. This is historically a hard problem as the best energy index that we have today is entirely centralized and produced retroactively on a monthly basis. We can't build a new monetary system on such a fragile foundation. Instead we've created a decentralized global energy index using the Bitcoin network. Bitcoin miners consume energy using hashrate (miner costs) to secure the network and earn block rewards (miner revenue). Because the role of the miner is highly competitive, the relationship between cost and revenue is fairly constant over time. For example, when the value of Bitcoin rises, hashrate increases. When energy prices rise, the hashrate must fall to remain profitable.
By knowing this relationship, the current Bitcoin difficulty and block rewards, we can reliably derive the energy prices that miners are paying. Since the Bitcoin network is globally distributed, we can create a close approximation for a global energy index. We can simulate how this index would have performed relative to historic real-world energy prices to demonstrate the model's reliability.
In the above chart, the blue line is the real-world global energy prices while the red line is our model.
We're excited to share that as of today we've completed v1 of the LED oracle system and have successfully deployed it to Optimism. To provide a simple comparison to USD, we set the scaling parameters to initially target LED as $1. You can track its changes in real-time using this Dune Analytics dashboard.