Empty Set Bitcoin Protocol

7 min readJan 14, 2021

ESB is an experimental elastic bitcoin stablecoin project. Use with caution.

Introduction

Empty Set Bitcoin (ESB) is the first elastic, algorithmic reserve token that is pinned to the price of bitcoin. The token is a fully decentralized, capital efficient, and not using any collateral.

Leveraging the learnings from Basis, Ampleforth, Empty Set Squad, and several other projects in the space, our team is looking to establish the next generation stablecoin.

Once ESB achieves a 1:1 peg with bitcoin, the token will seamlessly tie into any ecosystem / network that needs to use bitcoin’s scarcity, value, and decentralization. The team aims to have ESB as the world’s most usable derivative of bitcoin.

Stablecoins

Stablecoins are cryptocurrencies that peg their market value to an external reference. Most of the stablecoins that are currently in the ecosystem are pegged to 1 U.S. dollar. The price is achieved through having the stablecoin be collateralized or through an algorithmic mechanism. These cryptocurrencies were created because people interacting with the cryptoeconomy needed a reliable way to store their value.

When stablecoin solutions started emerging in the market, there were two types that dominated the ecosystem:

Fiat-Collateralized: This type of stablecoin has a reserve of fiat (e.g. U.S. dollar) to act as collateral for the stablecoin that is issued. Other collateral can include precious metals and commodities (e.g. USDT).
Cryptocurrency-Collateralized: This type of stablecoin is backed by cryptocurrencies like ether and bitcoin. Due to the volatility in the cryptocurrency market, these stablecoins are often collateralized more than a 1:1 ratio (e.g. DAI, sUSD).

Algorithmic Stablecoins

As the market progressed, people looked for different ways to create stablecoins. Stablecoins that were collateralized with fiat and / or cryptocurrencies were often centralized or not being capital efficient. Not being capital efficient means that the stablecoin is expensive to create and use.

In recent years, a lot of developers have started experimenting with various algorithms to create stablecoins. The first notable team to kick off research in this space was Basis.

The idea was that if the stablecoin stayed above the peg price (i.e. > 1 U.S. dollar) then share tokens would be created to match the demand. Shareholders receive the share tokens (as long as all bond tokens are redeemed).

Bond tokens: represented a future claim on stablecoin
Share tokens: play an equity role in ecosystem

Bond tokens, on the contrary, are tokens that are auctioned off when the stablecoin is below the peg price (i.e. < 1 U.S. dollar).

Due to some regulatory constraints, the project didn’t launch right away.

One of the first projects that started toying around with an elastic supply of the overall token was the Ampleforth team. They introduced the AMPL token and had a simple protocol: when the price is greater than 1 U.S. dollar, holders of the token have their balances increase and when the price is less than 1 U.S. dollar, wallet balances decrease. The supply adjustments were introduced through a mechanism called “rebase”. Rebases for AMPL occurred once per day. In effect, when the value of AMPL went over 1 U.S. dollar, token holders would receive additional AMPL tokens daily at the scheduled rebase. Conversely, when the token value dropped under 1 U.S. dollar, tokens were burned from each wallet. In controlling the token supply algorithmically, market forces would always be pushing the coin toward its peg at 1 U.S. dollar.

However, AMPL encountered an incentive problem when the price below the peg. Users demonstrated a bias towards loss aversion and drove people to offload their tokens when AMPL dropped below its peg in fear of their tokens being continually burned.

Since then, other teams have come along and leveraged the two principles that were pioneered by Basis and Ampleforth to create a novel type of algorithmic stablecoin.

Empty Set Squad created a stablecoin called Empty Set Dollar. This was a token that was pegged to the U.S. dollar and aimed to be completely decentralized and capital efficient. Still early in its explorations, the methods and algorithms that are being applied to have their token stay pegged to the U.S. dollar are being tried and tested creatively by several teams. Empty Set Bitcoin is a derivative of this project, borrowing shared algorithmic structures and applying them to a new use case.

Bitcoin Implementations on Ethereum

The Bitcoin Standard, as explored by Warren E. Weber in 2015, imagines a world that sits on a monetary system where all media of exchange are or are backed by the cryptocurrency bitcoin. To work toward something like this, people have been experimenting implementing different financial protocols on the Ethereum blockchain (e.g. bringing bitcoin’s liquidity and value to the Ethereum blockchain or having bitcoin be used in borrowing and lending applications).

The challenge with the protocols bringing bitcoin to the Ethereum blockchain (or to any for that matter) is it is either through a centralized authority or it is not capital efficient. To bring bitcoin to the Ethereum blockchain, protocols issue a token that represents bitcoin’s price on the network. Some protocols (e.g. Ren Protocol) have the bitcoin from the Bitcoin blockchain locked into their platform before they issue the tokenized bitcoin (renBTC) on the Ethereum blockchain. Other protocols (e.g. Synthetix) allow users to lock up cryptocurrencies at a high collateralization ratio so that they can create synthetic bitcoin on the Ethereum blockchain (sBTC).

If bitcoin is to become the world’s reserve currency, it needs to remain decentralized and capital efficient, regardless of what network it is on.

Isn’t Bitcoin too volatile for a stablecoin?

Stablecoins that are currently pinned to the price of real-world fiat-denoted stable assets like the U.S. dollar are the most popular form of stablecoin currently for good reason. The fact is, these assets are about as close to being perfectly stable that we can achieve right now, with the added benefit of being commonly recognized as being consistently and universally valuable. However, even these assets are not immune to volatility and market forces. The U.S. dollar at the time of writing this has dropped by over 12% in value over the last 10 months. Likewise, coins pegged to that mark are exposed to the same price movements. With increasing globalization and ever-mounting political tensions, there is a distinct need for new immovable stores of value, impervious to the powers that be.

Bitcoin may be seen as an unpopular choice to peg to given its historical price volatility, and rightly so. However the ultimate vision for bitcoin is to become a decentralized global currency, transcending national borders and replacing the U.S. dollar as a unit of account through which to denote value and asset prices. In this crypto-friendly future, Bitcoin suddenly becomes the most stable of assets, digital gold with real-world transactional utility embodying all the utility and characteristics of money. The value of bitcoin will be unmoved by monetary policy, fiscal policy or sovereign economic performance in this integrated globally decentralized monetary system. It’s to this vision of what Bitcoin will become in the long-run that Empty Set Bitcoin is built.

What we’ve done so far

We are working on an experimental fair-stablecoin that is pegged to 1 bitcoin. Coins were not sold in advanced to early seed investors, insiders, or VCs (check the contract on Etherscan!). This also means that the treasury of the project does not have any starting capital which means that supply grows organically.

Now

Price feed oracle based on 1 liquidity pool pair (ESB / WBTC).
Protocol uses Time Weighted Average Price TWAP for the price.
Epoch duration for minting new supply is 2 hours.
Protocol caps the newly minted ESB when the protocol is in expansion to 5% of the total supply during each epoch.
The debt issued is capped at 25% supply (maximum coupons generated for each contraction).
The coupons are set to expire after 30 days (or 360 epochs).

What’s next?

The protocol is bootstrapping until 01/24/2021 @ 1:00am UTC
Setting up the channels required to facilitate discussions about how the protocol should evolve (e.g. Snapshot, Discourse)
Introducing more pools with assets like renBTC and sBTC to establish a stable set of price oracles for the price peg of ESB
Exploring how we can bring Empty Set Bitcoin to other chains and protocols (e.g. Polkadot, Rune)

Get Involved and Rewarded

Buy Empty Set Bitcoin: ESB on Uniswap

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

Hold ESB as a bitcoin-pegged stablecoin, optionally burning ESB when protocol debt accrues to receive coupons (or buying ESB under peg to wait for it to return to the peg)
Bond ESB in the DAO, receiving a high reward per expansion in exchange for a commitment to participate in governance
Provide liquidity to the ESB/WBTC Uniswap pool, receiving a share of (22.5%) of the 5% reward per expansion + Uniswap reward fees.
Advance the ESB epoch for a 0.001 ESB reward: 12 times a day, each at 2-hour intervals, a contract interaction is required to advance the ESB epoch. This is done by activating the advance() function on the Empty Set Bitcoin Stake contract.

ESB Related Links

A Parting Note

ESB is a highly experimental attempt at an elastic bitcoin stablecoin. High caution is advised.

Thank you to everyone who takes part in using ESB. Happy New Year to all.