How the System Maintains Liquidity
The Element Zero liquidity system is based on the following techniques:
Element Zero uses API’s (Application Program Interface) to measure the volatility of the Liquidity Reserve against the dollar from a set of leading exchanges, following the median buy and sell rates, or to conduct actual buy/sell orders on a daily basis, or as needed, with fractions of BTC (Bitcoin) and or ETH (Ethereum). Essentially, the system will use the average rate from the micro BTC/ETH trades to compare BTC and or ETH to all other top coins, thereby establishing the fair market Liquidity Reserve’s value against the US dollar. The system will then measure the volatility of the Liquidity Reserve against inflation by following the Personal Consumption Expenditures (PCE) index and the Consumer Price Index (CPI) index. These checks and balances provide a multi-market assessment of the holdings.
With no cap on inventory, Element Zero stablecoins—can be purchased at any time, directly from the system at the current fixed face value of $100 before any adjustments for inflation. This reduces fear and eliminates panic from buyers in secondary markets in a case of high demand and low supply.
Users who want to sell or redeem their stablecoins will be able to do so within the system at current (fixed) face value, minus the transaction fees (discussed in #4 below) reducing fear and panic from sellers in secondary markets in the case of high supply and low demand.
The Element Zero platform allows the stablecoin partners to impose any transaction fee they choose. Revenues from transaction fees will be split, with 75% going to the stablecoin partner, and 25% to be streamed into the Liquidity Reserve to increase the liquidity of all the stablecoins’ holders. In the case of the Element Zero EZO coin, 100% of the transaction fee will be deposited into the Liquidity Reserve.
In order to preserve a sense of fairness for all users, the system will process all redemption requests pro-rata, once every 24 hours, and not on a first come, first serve basis—to combat “quick clickers” and people who try to beat the system.
Slow and halt mechanisms are in place for periods when highly traded crypto coins such as BTC and ETH start to appreciate. This could indicate a lesser demand for stablecoins, which may lead to a significant increase in requests to exchange stablecoins for other cryptocurrencies.
With these checks and balances in place, the Element Zero system is designed to be strong enough to manage any level of redemption requests, even if all the holders want to redeem their stablecoins at the same time. Over the years, the system will gain income from transaction fees and interest rates from token asset that generate appreciation from real estate indexes, which can bring the ratio of the reserve to 1:1 against any stablecoin. Furthermore, once mainstream users—those who are not speculative investors or risk takers—start using stablecoins for both short and long—term holding the redemption ratio will reduce in the system. These market forces work to balance the system in an organic manner. But until this time, the Element Zero system is designed so as to trigger automatic Circuit Breakers in extreme situations, should they arise.
Element Zero’s Liquidity Protocol employs a circuit breaker mechanism designed specifically to prevent, or at least minimize, the effect of a “run on the bank” scenario. The Element Zero Circuit Breakers impose a daily limit of 2% on processing redemption requests, which in turn reduces the pressure on the system. This daily limit creates a scenario encouraging users to use secondary markets for trading and purchasing goods and services. In uncertain periods, when there are unusual or extreme cases of high volumes of redemption requests due to a single event or a small group of whale investors with enough funds in the game to impact liquidity if they should sell or buy, the protocol will protect the reserve from such abuse by employing Circuit Breakers to slow down redemption requests. In severe cases, the protocol will force a halt for a short time, similar to when stock exchanges halt trading. In regular scenarios, an increased demand for redemption by a majority of the users usually happens when the cryptocurrency market is booming. This leads users to favor cryptocurrency over stablecoins and the protocol will create more liquidity by borrowing funds from the Holding Reserve.
Based on the liquidity, the smart contract will increase or decrease the transaction fee to users who redeem stablecoins from the system instead of secondary markets. This is to encourage users—especially those with significant funds—to redeem coins from secondary markets, reducing pressure on the Liquidity Reserve and allowing the system to better service the average users (users whose participation is greatly encouraged).
- Level 1: The system processes redemption requests once every 24 hours, pro-rata, with a daily limit of 2% from the Liquidity Reserve.
- Level 2: The system will decrease the 2% redemption rate, based on the following formula: Current value of Liquidity Reserve divided by its value in the last 24 hours, multiplied by the 2% redemption limit. At the same time the system will be adjusting the transaction fee that is related to the redemption of stablecoins from the liquidity reserve based on the following formula.
- Level 3: If the Liquidity Reserve has extra funds available, they will be lend to the Holding Reserve. When the Liquidity Reserve has less than the minimum Liquidity Coverage Ratio (LCR), it will borrow funds from the Holding Reserve, using bond tokens (read more about bond tokens below).
In addition to encouraging users to trade their stablecoins on secondary markets, the Element Zero protocol will maintain the Liquidity Reserve by creating a fluid relationship with the Holding Reserve. This allows for funds to move to the Liquidity Reserve when needed.
The fluidity between the two reserves is based on these rules:
-
Liquidity Coverage Ratio (LCR)
- 30-day stress-period redemption
-
Minimum Balance in the Liquidity Reserve
- LCR divided by 30% (represents 70% potential crypto crash) = 3.33 LCR
Element Zero’s Liquidity Protocol maintains bond tokens to act as an intermediary between the Liquidity Reserve and the Holding Reserve. Since the asset tokens held in the Holding Reserve have a high ROI target return, it becomes more advantageous to borrow against them at a much lesser cost, compared to selling those asset tokens and losing higher profits (lenders may be prepared to lend funds at a 6-10% interest rate over investing directly with higher risk). Bond tokens guarantee to individual and institutional accredited investors a fixed return coupon, backed by a first position, held over both the Liquidity Reserve and the Holding Reserve.
Bond tokens are created automatically by the machine learning system every time the funds in the Liquidity Reserve are not enough to keep up with the LCR.
Bond tokens are made available to accredited investors and institutional investors. To further encourage support of Bonds, Bond tokens will also be available for purchase under an auction, where the lowest coupon bidder will get the first right of refusal.
If bond tokens mature and the machine learning mechanism calculates insufficient funds in the Liquidity Reserve to address the LCR and pay off the bonds, the AI system will force the Holding Reserve to auction off asset tokens. This creates further liquidity for the Liquidity Reserve. This solution will remove the traditional requirement for investors to deal with court orders or force foreclosure in order to liquidate assets when bonds are not paid on time. We believe that the risk of a “haircut scenario”, where there is a drop in the financial assets supporting the loan, is the closest it can be to being eliminated on the Element Zero platform. This is because the bond tokens are backed by both the Holding Reserve that holds the commercial real estate assets tokens, and the Liquidity Reserve that stores the income streams in the system.
Problem
Any investor can purchase more than 51% of tokens to acquire the network. With 51% or more the investor can control the network.
Solution
To prevent this type of attack, a smart contract will mint an equal number of tokens to be assigned to a system wallet when any investor purchases the token. . So, for every purchase the total supply will be updated like this:
Total Supply = Total Supply + (Number of Purchase Tokens X 2)
The same logic will be applied when an investor token is destroyed or burned. With this protocol in place, no investor intentionally or unintentionally will acquire more than 50% tokens out of total supply. The system wallet will be like a secure vault without any key to access it. The Element Zero smart contract exclusively can access the wallet and perform two functions; create or destroy tokens. Any tokens that leave the wallet are automatically destroyed.
