Introducing TAODAO, An Algorithmic Currency Protocol
In this post, I will try to explain how TaoDao works in low complexity terms. I hope it provides you with a good understanding of the problem we’re tackling and how we aim to solve it.
So, what is the problem? That we still do not have an independently valued digital currency. I think it’s pretty well understood at this point that Bitcoin is not a currency; it is money (an asset). The same goes for ETH, and any other “cryptocurrency” out there today. The perfect currency holds the same purchasing power today as in 50 years. It provides a stable and consistent foundation upon which contracts can be formed, financial planning can be done, prices can be marketed; basically, upon which an economy can run. This is impossible in absolute terms, but I don’t think anything out there even comes close to this today.
How are we addressing this problem? With dollar coins (imo incorrectly dubbed “stablecoins”). At the time of writing, there are $38 billion in USD tokens circulating. They have become the primary trading pairs in crypto markets and the most popular assets in DeFi. There’s a strange irony to the fact that the most utilized cryptocurrency is really just a digitized dollar. While functional stablecoins may achieve a stable USD value, that does not mean they’re stable in purchasing power. Their real value changes just like dollars in a bank account, and that value is heavily reliant on the policies of the Federal Reserve and US government, and on the US economy.
Recently, there’s been a wave of algorithmic stablecoins seeking to emulate a dollar peg without collateral (or less than 1:1 backing). I believe we can go a step further. Each iteration in the line of algos has demonstrated different ways of achieving stability, and many of them work! What if we could achieve stability while still maintaining a floating market-driven price? That is TaoDao.
How it works:
Each Tao token is backed by 1 DAI in the treasury. However, tokens can’t be minted or burned by anyone except the protocol. The protocol only does so in response to price. When Tao trades below 1 DAI, the protocol buys back and burns Tao; when Tao trades above 1 DAI, the protocol mints and sells new Tao. Because the treasury must hold 1 DAI and only 1 DAI for each Tao, every time it buys or sells it makes a profit. It either gets more than 1 DAI for the sale, or spent less than 1 DAI on the purchase.
The fact that the protocol holds DAI for each token allows us to say with certainty that Tao will not trade below its intrinsic value in the long term. This allows investments to be made with defined risk (1 DAI is your guaranteed long-term price floor), because the protocol can and will buy indefinitely below 1 DAI until no one is left to sell, even if it means supply is reduced to 0. In fact, an event like that would be immensely profitable to those who didn’t sell; they’d end up with a chunk of every token burned.
It is important to understand that Tao does not rebase. Rather, new supply is created via direct sales into the market and burned via direct purchases from the market. This way, Tao remains backed by real assets in the treasury.
Holding DAI to back tokens also creates a yield generation opportunity. We could keep it all locked away in a vault, but that would be a waste. The protocol never needs more than a few percent of reserves on even the largest down days, meaning we are free to utilize the rest. We will plug those assets into yield aggregators and add the proceeds onto profits from buying and selling Tao.
The initial profit distribution will be: 90% to stakers and 10% to the DAO (these allocations will be changed if necessary, as decided by the DAO). All rewards are paid in Tao backed by DAI. This system maintains a stable intrinsic value and reduces the incentive role of appreciation in favor of accumulation, like with real currency: you try to get more dollars, you don’t hope your dollars become worth more (though we do have both).
So, how do I play this? The best way is to buy as close to or below 1 DAI as you can. The distance from 1 is the risk you take on (it’s actually negative below 1!). Regardless of where you buy, you can then stake your Tao or provide it to the Sushi pool as liquidity and bond the LP token. In both cases, you earn a more Tao over time.