Today enterprise blockchain developer Settlemint announced a deal with the Islamic Development Bank Institute (IsDBI) to use smart contracts to develop a ‘Smart Stabilization System’ (SSS). It applies to any market-based assets but particularly financial asset and digital currencies.
At a high level, the goal is to reduce the potential for major short term market swings. Sometimes short term volatility can get out of hand and cause crashes. Depending on the asset – think money market funds – occasionally governments have to step in, resulting in a cost to the taxpayer. As a development bank, the IDB is exploring an alternative path.
It says the stabilization algorithm will aim to manage “the gap between supply and demand to reduce the volatility of the price.”
We’ve asked for details, but we’d guess the smart contract will automatically buy when there’s a lack of buyers, and sell when there’s a shortage of sellers. If it doesn’t own the asset, it might need to borrow it first. Theoretically that would mean it will buy low and sell high, although it may not work out that way. This may be why the SSS claims to be self-financing.
There is a risk that traders game the system if people know the details of how it works. Doubtless, that is all being considered and the reason for the patent that is pending.
“The world is moving fast on the digitalization of financial transactions,” said Dr. Sami Al-Suwailem, the Institute’s Acting Director General. “This requires a robust stabilization system in place to minimize the instability associated with fast movements of funds, as has been proven by the recent banking crisis.”
Meanwhile, Belgian headquartered Settlemint is a major enterprise blockchain developer with more than 60 projects under its belt. Late last year, it raised $16 million in funding. It has a partnership with Fujitsu for track and trace solutions, with the Japanese company participating in the funding round.
Settlemint provides low code middleware to enable corporates to deploy blockchain applications on various public or permissioned blockchains quickly.