Arthur Hayes proposes the Bitcoin-backed NakaDollar, which would rely on exchanges to maintain the dollar peg

BitMEX co-founder Arthur Hayes has proposed the NakaDollar (NUSD), a stablecoin backed by bitcoin (BTC) and bitcoin derivatives, which would theoretically be deeply liquid, attractive to traders and provide stability if accepted and used by investors and crypto exchanges.

The token, which is entirely theoretical as of Thursday, will not rely on any centralized entity, such as a bank, and will instead be backed by member crypto exchanges that list inverse bitcoin perpetual swaps — a derivative product that is traded and settled with an underlying asset.

“We, the crypto faithful, have the tools and organizations needed to support the $1 trillion or more of NakaUSD outstanding,” Hayes wrote Thursday. “If this solution were embraced by traders and exchanges, it would lead to a large growth in Bitcoin derivatives open interest, which in turn would create deep liquidity.

“This would help both speculators and hedgers. It would be a positive flywheel that would not only benefit the member exchanges, but also DeFi users and anyone else who needs a USD token that can be moved 24/7 with a low fee, Hayes added.

Holding a perpetual swap shorting, or betting against, the price of bitcoin along with $1 worth of bitcoin means that the dollar value of the NUSD ultimately remains the same – as losses and gains effectively cancel each other out.

Hayes proposed creating a decentralized autonomous organization (DAO) with its own governance token, NAKA, to help provide liquidity and allow holders to vote on operational issues. Funding generated from holding the perpetual barter can be transferred back to the DAO.

Both NAKA governance tokens and NUSD would be ERC-20 tokens living on the Ethereum blockchain, Hayes added.

Hayes’ proposal comes in response to the growing demand for stablecoins that are not tied to traditional currencies such as the US dollar or the euro.

With the rise of decentralized financial platforms (DeFi), there is a need for stable coins that are not subject to the same regulatory scrutiny as traditional currencies.

Stablecoins are a hugely important feature of crypto markets that facilitate billions of dollars in trading, lending and almost every crypto-based service offered to users today.

Tether (USDT) and USD Coin (USDC) dominate the centralized stablecoin market picture, each stating that their dollar-pegged tokens are backed by a corresponding reserve in the form of spot currencies, commercial paper or bonds.

There are then decentralized algorithmic currencies such as frax (FRAX), djed (DJED) and the upcoming crvUSD, which will rely on baskets of locked tokens to maintain the link to the US dollar.

However, concerns remain after the demise of Terra’s UST tokens last May. A change in market dynamics at the time caused Terra’s LUNA prices to fall at a breakneck pace, dropping 99.7% in less than a week as UST lost its link and dropped to a few cents.

It was because of how algorithmic stablecoins like UST operated. A UST can be redeemed or minted for exactly $1 worth by LUNA at any time. In theory, UST helped retain value while creating demand for both tokens.

Traders can continuously buy and sell LUNA and UST to maintain the link and profit by doing so, encouraging them to maintain UST’s link. But while that experiment was ultimately a failure – that hasn’t stopped crypto hopefuls from trying out new iterations of a crypto-based stablecoin.