Crypto-asset Volatility

One of the major impediments to holding any asset is its unpredictable volatility. The more volatile an asset's relative price is to other commonly-held assets (e.g.: USD), the more risk there is in holding it. If volatility is sufficiently high, such assets become too risky to be used in everyday commercial activities. Crypto-currencies, being a relatively new asset class, is usually significantly more volatile than their non-digital counterparts. BTC/USD pricing's volatility is lowering slowly over time, but it's still around 5 to 6%. Compare that to a more conventional asset volatility, such( as Gold/USD pricing or USD/EUR exchange rate, which is only around 0.5%.

• One way to mitigate volatility and risk is to have price-stable assets in the exchange that's pegged to a relatively less-volatile asset, say, USD. This asset acts as a stable anchor against which all other crypto-assets could be valued, and each unit of such an asset will always give a predictable return. LX has built in price-stable assets. One such asset is a series of gold-pegged stable currencies that are designed to be equivalent to stable currencies such as the USD, which is referred to as “LGOLD”. The idea of such currencies is not new. BitShares for example, has such currencies for trading in its ecosystem. However, pegged currencies within the BitShares ecosystem suffer from two distinct challenges:

• Currencies are in themselves too volatile (hence defeating the purpose of the peg) as it is collateralized by BTS, a relatively illiquid crypto-asset.

• There are too few issuances of the pegged currencies as there are no incentives to issue them. In LX's design, the collateral is based on gold, a far more mainstream and liquid crypto-asset. LX's built-in interest rates also give dynamically adjusted incentives for BTC holders to issue LGOLD, hence avoiding the pitfalls faced by the BitShares ecosystem.