Overview of M^0
A digitally native rethinking of the monetary stack
When Apple first popularized touch screens as primary input devices, the main way of interacting with apps was through so-called ‘skeumorphisms’ in the user interface. These ‘skeumorphisms’ took representations of real-world tools, such as notepaper, and turned them into approximations in the touch screen space. The first versions of Apple Notes had a faux-paper background, handwriting fonts and even little torn off paper edges below the navigation bar.
Stablecoins arguably started with similar ideas. Representing tokenized, natively digital value is something relatively new, dating back less than a decade and mainstream adoption is even newer. Most stablecoins today are, in some ways, a skeumorphism of a banknote or a bank deposit too. They promise stability relative to a reference value and aim to secure that value through either crypto-native mechanisms, such as crypto-backed loans, or through governance controlled interest rate changes.
To look at stablecoins from first principles, it is useful to understand what role they play in the hierarchy of money.
Following Sébastien Derivaux’s1 framework, cryptodollars (stablecoins that offer redemption for higher level money) sit at and below the level of bank deposits, in relation to their ability to offer redemption to ‘higher level’ forms of money. For example, USDC offers the ability to redeem for a bank deposit on demand and USDS offers the ability to redeem for USDC.
M^0 takes a novel approach to creating digitally native units of $1 value. A fiat-backed stablecoin with access to central bank money would provide the strongest assurances to users for redemption for higher level money. Although the Federal Reserve is unlikely to open accounts for stablecoin or cryptodollar issuers, the prominence of US Treasury instruments in monetary policy operations makes them functionally equivalent, if not identical, to central bank money for the US dollar. By allowing minting $1 units of value backed exclusively by US Treasury notes, M^0 circumvents layers of counterparty risk that stablecoin skeumorphisms have to contend with.
While M^0 will inevitably be compared to the existing catalog of stablecoins and tokenized treasuries, the project aims to be something more. The long-term objective of infrastructure such as M^0 might not necessarily be to end up as an end-consumer tool or product. Rather, by creating a digital native index to $1, M^0 could offer a counterparty-exposure mitigated way to access a token promising redemption value for $1. In many regards, it could itself become a reserve asset even for other fiat-backed stablecoins. M^0 seeks to establish a foundational layer of value representation—a neutral, stable asset that can serve as a building block for a variety of financial products.
M^0 achieves this by restoring some of the most valuable and enduring qualities of physical cash—neutrality, fungibility, limited counterparty risk, and bearer-like self-custody—and advancing them with the advantages of blockchain technology. M^0 brings these traits into the digital realm.
With the above, we have published an in-depth economic review of the M^0 protocol. Please find the PDF and ePub versions of the full report on our website.
Derivaux, Sébastien, Cryptodollars and the Hierarchy of Money (October 26, 2024).: https://ssrn.com/abstract=5000167