Turning Out Wyoming’s Stablecoin Frontier

Wyoming aims to create its own custodial stablecoin, but could an onchain, diverse asset-backed stablecoin provide greater resilience?

Over the past five years, Wyoming has earned a reputation as the “Crypto Cowboy State” thanks to numerous crypto-friendly laws passed by its legislature, covering digital assets, banking, decentralized autonomous organizations, and — most recently — the prospect of a state-governed stablecoin, possibly issued as soon as 2024.

To this end, the Wyoming Request For Information (RFI) and Request for Proposal (RFP) processes are underway to explore development of a stablecoin with the following aims:

• Issued by the public sector
• Price parity and redeemable for one US dollar
• Fully reserved, held in trust by the state of Wyoming
• Investments only in US treasuries
• Higher transparency than privately-issued stablecoins
• Revenue sharing to Wyoming public goods, such as its school board

For those at the beginning of their crypto learning curve: stablecoins are cryptocurrencies whose price is pegged to the value of a fiat (i.e., government-issued) currency or other assets. The introduction of stablecoins opened the possibility for cryptocurrencies as a safe haven from more volatile assets. Different types of stablecoins have emerged including those backed by fiat currency, crypto, real-world assets, and even algorithmic mechanisms.

Note: Throughout this essay we will reference items that are “onchain,” which indicates something happening on or interacting with a public blockchain ledger. Blockchains enable greater transparency, reduced risks of error and fraud, and lower transaction costs.

Wyoming, we have a problem

The current financial services paradigm, with centralized middlemen administering opaque financial institutions, is broken. The Madoff Ponzi Scheme, UBS Libor Scandal, Wells Fargo Account Opening Scandal, Credit Suisse Money Laundering Scandal, frauds at FTX and Celsius and over 200 US bank failures in the last decade serve as stark reminders. They all share commonalities at the intersection of fraud or negligence, lack of transparency and accountability, and significant financial losses — partially owing their sad trophies to a system design that is fragile and inherently unstable.

A new hope

The solution? Incorruptible transparency, diversification, and the elimination of concentrated power centers leading to true public goods ownership. But how can this be realized?

Increasingly, entrepreneurs and institutions are looking toward public blockchains. Although the underlying technology is already 15 years old, it remains in its infancy, with reports suggesting less than 1% of Earth’s inhabitants use it on a monthly basis — or about the equivalent of the Internet in 1993.

Thus far a number of enthusiastic projects have misplaced the use of blockchains by clumsily tacking it on to existing analog processes. While there are frequent press releases bragging about the blockchain tech, in the back office it is business as usual: centralized, opaque, slow, and expensive. Thankfully, this is changing.

What is required?

The next-generation stable digital money should solve for a number of shortcomings in the current system.

Diversified asset backing

Stablecoins pegged to one dollar and backed 1:1 by a diversified basket of assets offer a more safe and decentralized solution by spreading out risk. Asset backing might include fiat stablecoins, T-bills, crypto, commodities, real estate, and other inversely correlated tokenized assets.

Transparent, verifiable reserves

Stablecoins should have their asset-backing reserves fully onchain, permissionlessly verifiable by anyone seeking to understand the types, amounts, and risks of the underlying collateral. For assets that are held offchain, there should be independent audits reporting provenance, quantity and quality of the collateral.

Anti-bank run mechanisms

Stablecoins should enable permissionless minting and redemption for their underlying collateral onchain, in addition to possessing a “rainy day fund” to protect against black swan events, bank runs, and depeg events. To disincentivize first-come-first-serve withdrawals during a depeg, the stablecoin should automatically freeze and implement a fair distribution exit process at the completion of the event.

Revenue sharing

Stablecoins — in particular the newer, decentralized offerings — offer shared revenue onchain, with users and other stakeholders co-creating a new financial system based on sharing prosperity. This stands in contrast to traditional banks and even first-mover stablecoins, which have historically kept revenue for themselves.

Decentralized community governance

Stablecoins with onchain governance aid in the identification of potential negligence or fraud faster than traditional finance, which galvanizes public accountability. Opaque, confidential pacts that favor a select few have limited opportunity in the 21st century.

User data protection

Stablecoin users should be able to choose privacy for their transactions. This is possible thanks to “zero-knowledge proofs,” which allow a user to prove something without revealing the specifics. An analogous real-world example would be proving you’re old enough to buy something without revealing your exact age. Moving money between stablecoins and your bank account can be seamless, even with this enhanced privacy, thanks to regulatory compliant networks. Electronic Dollar (eUSD) on the MobileCoin network is a fully functioning example of this technology in action today.

Programmability

Stablecoins should be programmed to do things automatically (e.g., all of the above items), without error or exposure to corruptible middlemen. This automation will be especially important during the fog of war such as a financial crisis. Programming can and should be updated only by community governance.

Stablecoins that meet these criteria have the built-in ability to remain stable, secure, and self-healing — even (and especially) when institutions and governments fail.

Why does it matter?

The current financial system, built on centralization and outdated technology, has sacrificed speed, flexibility, and user control at the altar of convenience. While the learning curve of blockchain may initially seem daunting, the upside could be immense.

Embracing decentralization and transparency unlocks a future of financial inclusion, where everyone has ownership over their money. Imagine a world where the “good guys” can easily opt out of a system that too frequently rewards the “bad guys;” or where people can access globally connected payments without having a driver’s license; or entrepreneurs can easily get a startup loan from their community without providing collateral.

More plainly, these are the benefits that await:

1. A system in which users truly own their currency, not just given access to it at the whims of opaque institutions.
2. A system fortified by cutting-edge cryptographic security, where fraud and theft are drastically reduced.
3. A system that empowers citizens to share in the prosperity they create, bypassing rent-seeking middlemen who siphon value at every turn.

Addressing Wyoming’s criteria to create ‘wyoUSD’

Hundreds of companies and even some governments are working toward the tokenization of everything — that is, figuring out how to put real-world assets like commodities, stocks, bonds, lending, and real estate onchain. Citigroup is forecasting trillions of dollars of newly tokenized assets by 2030. As of today, however, the most popular assets used to build a diversified basket for stablecoin backing tend to be other fiat stablecoins, tokenized treasuries, and various other cryptocurrencies. As more assets become tokenized, we can look forward to even greater diversification and increasing resilience for asset-backed stablecoins.

For the sake of this essay, let us imagine Wyoming USD (wyoUSD), a decentralized stablecoin with the following characteristics:

1:1 diverse asset-backed

Exclusively backing stablecoins with US Treasuries concentrates investment in a single asset class which exposes the system to heightened vulnerability, particularly in the context of the United States’ rapidly increasing national debt exceeding $33 trillion. Alternatively, diversifying stablecoin backing with other assets would simultaneously distribute counterparty risk and cultivate intrinsic resilience. Because — crucially — each backing asset in a basket contributes its own additional safety mechanisms. In fact, assets like DAI are increasingly further diversifying their own backing with real-world assets.

wyoUSD could initially be fully backed by a basket of 33% DAI, 33% USDP, 33% eUSD.

• DAI is the oldest and most widely used stablecoin that is entirely issued, managed and redeemed onchain and backed by a mix of real-world assets, crypto, and fiat stablecoins. Learn more about DAI safety at Bluechip.org.
• USDP (Pax Dollar) is issued by NYDFS-regulated platform Paxos, and therefore subject to stringent guidelines and monitoring requirements. USDP’s reserves comprise short-dated US Treasuries, highly liquid assets backed by US Treasuries, and cash in fully segregated and bankruptcy-remote accounts. Learn more about USDP safety at Bluechip.org.
• eUSD (Electronic Dollar) a safety-first stablecoin that brings together diversified, highly liquid backing of USDC (Circle) and USDT (Tether) with ample anti-bank run overcollateralization. eUSD was the first stablecoin created on the Reserve Protocol. Learn more about eUSD’s stress test during the run on Silicon Valley Bank.

A basket of yield-bearing DAI, USDP, and eUSD (derived from DeFi protocols such as Compound, Aave, and Convex) could generate a net yield of up to 6% for wyoUSD stakeholders.

Safe and transparent

By utilizing the Reserve Protocol, wyoUSD could maintain asset-backed reserves fully onchain that are permissionlessly verifiable by anyone wishing to understand the types, amounts, and risks of its collateral. wyoUSD would have overcollateralization, zero-fee, permissionless minting and redemption, as well as mechanisms like fair and proportional distribution that disincentivize first-come-first-serve in the event of a black swan event. Because this transparency is on a public blockchain for anyone to verify, it should not require additional reporting or auditors.

Revenue sharing to holders and public goods

wyoUSD’s revenue sharing can be programmed via community stakeholder governance. As an example, the aforementioned 6% yield could be distributed as follows: 40% to wyoUSD holders, 40% to the state government, and 20% to overcollateralization. If Wyoming were to allocate just 10% of its $36 billion state GDP to using and accounting for a $3.6 billion wyoUSD supply earning 6% yield, we could expect this would generate about $216 million per annum, where $86.4M would be distributed to the holders, $86.4M to the state, and $43.2M to overcollateralization.

Issuance and governance by the public sector

By leveraging the security and transparency of decentralized protocols such as Reserve, issuance and governance are facilitated by the public in smart contracts, minus the middlemen. wyoUSD should be governed by the citizenry and companies making the most active contributions to the economy. Governance responsibilities can be earned or delegated through a number of various methodologies.

Wyoming as a first mover

While hundreds of governments around the world are exploring central bank digital currencies via Industrial Age management paradigms, Wyoming has the opportunity to solidify its reputation as the “Crypto Cowboy State” by pioneering state-affiliated decentralized stablecoins. It is possible that wyoUSD could even become popular outside of Wyoming, whose stakeholders would have a headstart in reinventing a more fair and transparent financial system.

Cost effectiveness

Decentralized technologies like the Reserve Protocol eliminate the costs and errors of middlemen and reduce the risk of fraud. wyoUSD can be architected to have near-zero costs for collateral asset management maintenance, as well as transparent verifiable reserves, revenue sharing with stakeholders, and governance — all of which are administered onchain.

Closing thoughts

Since 2018, Wyoming has positioned itself as a leader in the crypto space, embracing innovation and paving the way for a more inclusive and efficient financial future. While the recent move towards accelerating stablecoin adoption is undoubtedly groundbreaking, an even greater opportunity exists: to leapfrog the flaws of the current financial system entirely and rapidly achieve groundbreaking levels of transparency and prosperity. It is an opportunity not just for Wyoming to make a tangible impact locally, but also to inspire the global financial landscape.

A stablecoin like wyoUSD could serve as a “light switch” that instantly brings much-needed transparency and accountability to the financial system. Imagine a world where financial access is equitable, prosperity is shared, and accounting is both verifiable and immutable.

This is the innovative future that Wyoming is uniquely suited to pioneer.

This is what wyoUSD could do.

For those seeking a deeper understanding of risk and mitigation within the Reserve Protocol, a comprehensive guide is available for your reference. To explore the possibilities of wyoUSD, decentralized stablecoins, or the Reserve Protocol in greater detail, feel free to join the community Discord or connect directly on X.