4.4 RSD Autonomous stability and relation to the US Dollar

RSD has not been designed with a hard monetary peg in mind. This means that the ReSource protocol does not guarantee, or intend to guarantee, a fixed exchange rate between RSD and USD. Rather, RSD has been designed to achieve Autonomous Stability - meaning a stable, predictable value, which may fluctuate over time, without demonstrating radical price movements and without incentivising speculative hoarding, long or short maneuvers.

Just as established sovereign fiat currencies demonstrate long-term price predictability without having to be pegged to each other, so does RSD derive its own stability without having to directly reference the USD or rely on an imposed exchange rate. Just as the US Dollar and the Euro are both “stable”, but tend to fluctuate around each other, evolving with the economies they serve, so does RSD retain stability, but may fluctuate in price around the US Dollar.

The mechanism by which RSD achieves this value stability is comparable to the mechanisms employed by sovereign currencies. RSD’s endogenous nature ensures that its supply expands and contracts as a result of market demand, rather than having to rely on arbitrary monetary constraints or reserved assets.

This should by no means be confused with “algorithmic” stablecoins, which use a free floating asset to “absorb” the market movements of a pegged stable one. In contrast to “algorithmic” stablecoins such as Luna\Terra, neither RSD nor SOURCE are minted or destroyed in order to preserve a pegging target, and aren’t directly interchangeable at a set price in order to create an arbitrage mechanism. For more information on the material differences between ReSource Stable Credits and Algorithmic stablecoins, refer to this article.

Instead, RSD relies on a debt-based currency system which ensures that the circulating RSD supply always matches the demand exercised on it by outstanding loans. Since RSD are minted when credit is extended and destroyed when loans are paid back, each RSD in existence is required by someone, somewhere to repay their debt - rendering them inherently valuable without requiring an external pegging target. The SOURCE reserves, stakes and RSD savings plans described in the chapters above secure the credit risk involved in this process, rather than an arbitrary price target.

Monetary history has shown that free-floating currencies preserve stability for longer periods, while encouraging rational, efficient markets better than pegged currencies. With this, RSD is the first form of Autonomous, privately issued money on the blockchain - considering that unstable assets can’t be considered money in an absolute sense, while pegged stablecoins aren’t truly “Autonomous”, but rather rely, by proxy, on the policies of central banks to achieve stability.