“We suck at marketing,” Eiland Glover, CEO and founder of Kowala, admitted in good humor. “Our PR probably doesn’t want to hear me say that, but it’s true.”
Glover’s brutally honest statement is by no means a reflection on the company’s work ethic or even its progress — quite the opposite. The milestones the project has surpassed this summer have been an unintentionally well-kept secret, which makes its most recent announcement pretty surprising: Kowala, an under-the-radar stablecoin based in Nashville, Tennessee, is being integrated into Ledger’s hardware wallets.
An integration by the world’s largest hardware wallet manufacturer is a significant stamp of approval, especially considering it’s the first stablecoin to merit the company’s attention.
“I think it’s indicative of what we’re all about,” said Glover, who also pointed out it was the Ledger team that originally approached Kowala about integration. “We’re not the best social media mavens; we’re not the best hypesters. The Ledger deal is indicative of when very serious companies [and] organizations take a deep dive into our code and look at what we’re doing (the structure, the monetary policy, the algorithmic stability mechanisms) [and] say, ‘This is the real deal.’”
The integration announcement also came shortly before another milestone moment for Kowala: the launch of its mainnet alpha version, Andromeda.
Rethinking Decentralized Stability
Tether likely comes to mind for most people when thinking of stablecoins. The multibillion-dollar market cap coin has become synonymous with its asset class, although TrueUSD, a rising competitor, has recently inserted itself into the conversation.
Both Tether and TrueUSD retain their stability with underlying collateral in fiat. For both currencies, each coin is reportedly backed 1:1 by a corresponding dollar, though questions continue to surround Tether’s coin issuance as it has never received an official audit.
Outside of the fiat-collateralized model, MakerDAO’s stablecoin, Dai, pegs its value to the USD with collateral in cryptocurrency. Through what the project calls Collateralized Debt Positions, anyone can issue Dai with an Ethereum-powered smart contract — so long as they have an excess of cryptocurrency, usually bitcoin or ether, to back the issuance and hedge against volatility.
Self-advertised as a “non-asset-backed stablecoin,” Kowala breaks the collateralized mold that shapes the market’s most prominent fiat-pegged coins. In fact, the only thing backing Kowala is its mining protocol, smart contracts and some serious mathematical gymnastics.
The coin’s economic model is a play on the seigniorage shares stability mechanism proposed by economist Robert Sams in 2014. Taking its cue from the economic principle of the same name, the seigniorage shares model leverages smart contracts to keep a coin’s value stable without needing to tie it to an underlying currency. Overseeing mintage, the smart contract would issue and buy back coins in response to price movements; if price goes above $1, for instance, the smart contract would mint more coins to compensate; if it goes below this threshold, then it would buy back coins until the price stabilizes.
As a non-asset-backed stablecoin, Kowala achieves the same end but through different means. Instead of smart contracts, the network’s miners are in part held responsible for the coin’s stability and distribution. When prices exceed $1, miners net larger mining rewards until the coin’s price reaches an equilibrium. If the price dips too low, then all transaction fees are sent to a dead-end address and burned, taking coins out of circulation permanently until the price stabilizes.
Kowala utilizes a two-tiered token system to structure its stability mechanism. The first of these, kUSD, is the stablecoin itself, serving as the network’s native currency and its mining reward. The second token, mUSD, is a staking token used to gain mining rights on the network. Miners must stake at least 30,000 mUSD in a mining client to earn kUSD.
This week’s Andromeda release sees the distribution of mUSD to Kowala’s early investors. Fully regulated as a securities sale under the U.S. Securities and Exchange Commission (SEC) guidelines, mUSD was only available for private purchase by accredited investors. In our interview, Glover said that Kowala “originally intended to hold a public token sale,” but as the regulatory conversation became complicated, the team decided to err on the side of caution.
“We decided to play it safe rather than get slapped with a subpoena halfway into our token sale,” John Reitano, Kowala’s CTO, said.
Once the project gains traction and has sufficiently decentralized, Glover said, there are plans to take its mUSD sales public for unaccredited investors. Until that time, however, the team is looking to free up avenues for additional private investments, and it’s working on a crowdfunding model with an undisclosed partner to this end (Glover indicated that Kowala can not reveal specifics due to securities guidelines).
After Launch: Expectations
With Andromeda underway, Kowala is standing on its own two feet. But by distributing the network’s mining tokens, this alpha version is only just baby steps. It won’t be until these miners begin minting and distributing kUSD — and these coins start trading on exchanges — that the project will truly test its balance and see if it has legs.
Glover indicated in our interview that Kowala is in talks with “a number of top exchanges” as the project enters a phase of seminal growth. These exchanges will provide the live price-watching that the mainnet’s upcoming Boӧtes release, slated for September of 2018, hopes to introduce, along with a kUSD wallet app.
As the project grows, the team plans to extend its stablecoin to additional currencies. Kowala’s roadmap has the Chinese yuan and Russian ruble in its sights. Glover teased that the project also hopes to establish a presence in Japan; they are tied up in NDA business talks with a multitude of top corporations.
Until then, Andromeda marks the introduction of a hitherto unforeseen stablecoin model. Lacking central control and governed by mathematical principles, kUSD adheres to Bitcoin’s decentralized ethos by completely divorcing itself from underlying assets and centralized entities. If its mainnet functions fully operationally, as its testnet did in its controlled, theoretical confines, Kowala could effectively set the standard for what a fully decentralized, autonomously maintained stablecoin looks like.
“With the distribution of our mCoins, we come even closer to fulfilling the promise of the original Bitcoin whitepaper and creating the infrastructure that this industry needs to go mainstream. Andromeda brings an unprecedented level of decentralization to the stablecoin class, allowing users of the kUSD to forgo the centralization problems that have plagued the space for years. Such a system will allow node operators around the globe to have ownership of a money supply mechanism that keeps the stablecoin within its target range around one dollar, without that money supply being locked in a vault controlled by a small handful of c-suite executives,” Glover said.