AstridDAO Interview: BAI, The Dark Horse Of Polkadot Stablecoins
AstridDAO is a decentralized money market and multi-collateralized stablecoin protocol built in the Polkadot Ecosystem and Astar Network.
The issued stablecoin, $BAI, is hard-pegged to USD and over-collateralized by multiple crypto assets, including USDC, USDT, wBTC, wETH, DOT, DAI and etc.
BAI has been the highest issued native decentralized stablecoin in the Polkadot ecosystem from early May to early August this year.
Through Instant Liquidation and Instant Redemption, and support for stablecoins as collateral, AstridDAO achieves higher capital efficiency and price stability over its stablecoin competitors (e.g., DAI-MakerDAO, aUSD-Acala).
Furthermore, AstridDAO was selected to the Microsoft for Startup program and is one of the first incubatees in the Astar incubation program.
This up-and-coming DeFi protocol has received $3 million in seed funding from industry-leading investors such as Next Web Capital, DFG, Global Founders Capital, Digital Strategies, AU21, Castle Seal Holdings, and others.
In this PolkaWorld interview, we caught up with the AstridDAO team to talk about the innovative designs and advantages of AstridDAO, how BAI pegs to the US dollar, use cases for BAI, and much more.
How AstridDAO Works
The following diagram shows how the AstridDAO system works, using ASTR as collateral as an example.
Firstly, when a borrower needs decentralized stablecoins, they can deposit ASTR, DOT, ETH, BTC, USDC, or other collaterals and then lend out $BAI for however long they want without paying interest, just a one-time 0.5% borrowing fee.
If a debt position approaches insolvency, i.e., the borrower’s collateral ratio falls below the MCR (minimum collateral ratio), the liquidity in the stability pool will be used to liquidate these unhealthy collateral positions.
Liquidity providers in the stability pool can deposit BAI into the pool and aquire the collaterals in these debt positions when liquidations happen, while also earning liquidity mining rewards in ATID tokens. In addition, they can choose to sell the collaterals quickly after acquiring them to arbitrage, and make profits between the liquidation price and the market price of the collaterals.
Another role in this system are liquidation initiators, who can use our frontend or query on-chain data themselves to see which vaults’ collateral ratios are close to the MCR, report the vaults by calling our smart contract, and receive the liquidation initiator reward.
Another role are redeemers, who can use their BAI to pay off the debts of the user with the lowest-collateralized vault across the system and acquire this user’s collateral. Redemptions usually occur when the price of the BAI is below $1, i.e., when there is an arbitrage opportunity for redeemers.
Liquidation Mechanism: Instant Liquidation
AstridDAO is an over-collateralized stablecoin, and it uses instant liquidation mechanism that is very different from the auction-based liquidation mechanism of traditional over-collateralized stablecoins.
The auction-baed liquidation is adopted in traditional over-collateralized stablecoins such as DAI (MakerDAO) and aUSD (Acala). First,users deposit collaterals and lend the corresponding stablecoin generated.
When the collateral’s price falls, reaches the minimum collateralization ratio (MCR), and is about to become insolvent, the protocol liquidates the collateral through an on-chain auction. Then, it uses the auction gains to repay the user’s loaned stablecoin debt.
While there are different liquidation ratios for different collaterals, traditional over-collateralized stablecoins like DAI (MakerDAO) and aUSD (Acala) are losing in capital efficiency compared to BAI issued by AstridDAO, due to their higher liquidation ratios.
This is because they use an auction-based liquidation. When the price of collateral assets fall, MakerDAO will package the collateral assets and sell them in auctions at a discounted rate (e.g., 10% — 50%), and if the liquidator is willing to take some risks, they can bid for the collateral at the discounted price.
Suppose that the liquidators are eager to take the risks, in this case, they can bid for the collateral at the discounted price and then hold the collaterals or sell them immediately on the secondary market to arbitrage.
Each time the market price falls to the liquidation threshold, the auctions will start.
The biggest issues for auction-based liquidations are: auction-based liquidations takes relatively longer time, and the liquidation outcome is uncertain when there is a lack of liquidity in the market. Transferring collaterals from the vault to the bidding contract of the liquidator, opening the auction and completing multiple bidding rounds based on specific strategies, are very time-consuming. For example, we can see that MakerDAO’s usally takes 1–2 hours to liquidate the collateral during past price falls.
As a result, in order to prevent extreme situations, for example, if there are no bid from liquidators or if the collateral price falls during the auction period, the liquidation threshold is usually set higher, which means lower capital effciency for the users.
For example, MakerDAO’s liquidation threashold is around 150% for ETH, and Acala’s liquidation threashold is around 200% for DOT, meaning that a $100 collateral can only generate $66 and $50 in aUSD or DAI.
Due to their inefficient liquidation process, they set such high liquidation thresholds to ensure that the protocol would not suffer losses or bad debts.
AstridDAO uses instant liquidation without slengthy auctions and can liquidate collaterasl efficiently within a single block (12 seconds). Because AstridDAO comes with Stability Pools, which are liquidity poosl built into the protocol specifically for the liquidation of collaterals.
Whenever the collaterals’ price falls, AstridDAO automatically liquidate the collaterals in the stability pools via smart contracts, and people who deposit BAI into the stability pool will aquire the collaterals. They can choose to hold or set up a bot to sell them immediately in the market to arbitrage and earn liquidation gains.
The instant liquidation mechanism basically transfers the risks to the liquidators; correspondingly, liquidators can earn the high returns via liquidation gains and ATID rewards.
What are the benefits for users to deposit BAI into the stability pool?
First, the liquidity providers in stability pools can receive AstridDAO’s protocol token ATID as rewards for liquidity mining. Second, when liquidations happen, liquidity providers in stability poosl can earn the differencse between the market price of the collaterals and the liquidation price of the collaterals when the MCR is reached.
What is the benefit of the AstridDAO instant liquidation mechanism?
First, it means that all liquidations can be done in one block. A block is 12 seconds on Astar, and the probability of a further significant drop in the asset within 12 seconds, for example, a 50% or 60% drop in an asset like ETH, is minimal.
This allows us to keep the liquidation threshold much lower and achieve higher capital efficiency while maintain the stability of the system. For example, the liquidation threshold (Minimum Collateral Ratio, MCR) on AstridDAO is 110% for ETH and is 115% for DOT, which means that a $100 collateral could generate $91 and $87 in BAI.
The liquidity in the stability pool can cover 70% to 80% of the BAI lent. So even if there is a significant price fall event, there is sufficient liquidity in the pool to liquidate the collateral.
Hard-pegging mechanism
How does BAI achieve a hard anchor to ensure high price stability?
Another significant feature of BAI is the price floor and a price ceiling of BAI$.
However, many stablecoins only have a price floor and don’t anchor to a price ceiling. For example, when Compound first started Yield Farming the year before last, the price of DAI shot up from 1 USD to almost 1.4 USD because there was no mechanism to guarantee the price ceiling of DAI.
How is the lower price limit of BAI anchored?
It is through the “instant redemption” mechanism.
In our system, we always consider 1 BAI stablecoin equal to 1 USD. Therefore, all people, whether they have a position in the protocol or not, can access the BAI in the open market and use it to make an instant redemption in the AstridDAO protocol.
How does Instant Redemption work?
It means you can use your BAI to redeem other people’s collateral assets.
Note that you can’t redeem anyone’s collateral if you want to, but the system maintains a ledger of the lowest collateral positions, which will be redeemed first.
So, for example, if I am a user and I have 1000 BAI, I can choose to call this function from the protocol. It will take out the collateral from the lowest collateral position and give it to me, equivalent to paying someone else’s debt directly.
Then I get the collateral equivalent to his current debt, and the rest of the collateral is still owned by the user.
Note that there is no loss to the redeemed user in this process, as only the collateral equivalent to his debt is redeemed at the moment of redemption.
The advantage of this mechanism is that if the price of the BAI falls below 0.995 USD, people can go to the open market and buy the BAI and then use the BAI to redeem someone else’s collateral in our protocol. In addition, we always consider a BAI equal to 1 US dollar in our contract.
However, when buying it on the market at a price below 1 US dollar, there is an arbitrage space where you can buy the collateral and sell it immediately to make the difference in the middle.
So once the price of the BAI is below 0.995 USD, everyone can manipulate the arbitrage through the instant redemption mechanism to earn a risk-free sure profit, so they will buy the price of the BAI up again.
Why is it 0.995 and not 1? AstridDAO has a 0.5% commission, so if someone wants to arbitrage, they need to pay a 0.5% commission. So as soon as it drops below 0.995 USD, people can arbitrage to buy it up.
How does the price cap work?
It’s because we support stablecoins as collateral, so if the price of BAI goes above 1.02 USD, there is an incentive for people to deposit USDC on our protocol side, then lend out BAI and then sell it on the open market.
Another thing is that it can be arbitraged, thus pushing the price of BAI back down. Why is it USD 1.02? Because we back the stablecoin USDC as collateral, giving a set MCR of 102% for USDC.
So how is this anchoring mechanism working?
If we look at the BAI price chart on the open market now, we can see that since the launch of USDC collateral in May, the price of BAI has never risen above 1.02 and has basically never fallen below the 0.995 price floor. There was a brief dip to 0.99 in the early days, but it was quickly re-anchored.
Perhaps because the Astar network was not particularly well attended at the time, with fewer liquidation initiators, the community and the team have since used a bot to initiate liquidations, and it can automatically call that function regardless of the number of participants and price stability has been quite good before.
High Protocol Revenue — Stable AMM
The third point is the higher protocol revenue. In the next version of the contract, we will implement an embedded stablecoin AMM in the stability pool.
As I mentioned earlier, we only accept BAI in the stability pool now, but in the next version of the contract, we will upgrade and consider allowing the stability pool to support other stablecoins such as DAI, USDC, BUSD, etc.
These stablecoins can be used as collateral to store in the stability pool and get the difference when the market goes down. These coins can be used as collateral in the pool to earn the difference when the market goes down.
The logic behind this is that the stability pool is a large pool of protocol-controlled liquidity, but when the market is not falling, this liquidity is actually sitting idle.
This is because if the market does not go down and goes up, there will be no liquidation, and what users can earn at this time is only the revenue from protocol token mining, which is not so sustainable.
So we added this embedded stablecoin AMM design so that the stability pool’s liquidity provider can also earn the stablecoin transaction fees when there is no liquidation.
In simple terms, our future stability pool will support a variety of stablecoin assets, which will form an automated market maker (AMM) decentralized exchange.
We will also use the Stable AMM mechanism, similar to the design of Curve, which is a three-coin pool containing USDC, USDT, and DAI. We will also have a base pool, a significant liquidity pool containing various stablecoins, which you can use as a DEX to exchange for a token.
For example, I can trade USDT for BAI, BAI for USDC, etc. In this way, these people who deposit stablecoins into the stability pool and want to earn collateral when the price drops can also make daily fee income when the price does not decrease. This is the equivalent of going to the DEX as an LP to provide liquidity and earn fees.
This is an up-and-coming market. Who is the biggest DEX on the whole of Ethereum right now? Actually for a long time, it wasn’t Uniswap but was Curve because there was a considerable demand for exchanging coins between different ecosystems. For example, when swapping CAKE for UNI, the best path is usually not to go straight to a CAKE/UNI pair, but to go through CAKE/BUSD — BUSD/USDC-USDC/UNI three times, to achieve the lowest slippage. The stablecoin pool acts as the bottom router in the DeFi world.
Another benefit is that the embedded AMM ensures sufficient liquidity for BAI. For stablecoins, the most important thing is actually liquidity. How necessary is liquidity? We can see stablecoins like Flex and UST have launched the so-called Curve War to get the most liquidity on Curve.
We are taking a different approach, there is no big stablecoin liquidity pool on the Polkadot yet, so we hope to make the best stablecoin liquidity pool on Polkadot through a set of mechanisms.
In addition, we will open this interface to other DEXs so people can exchange between BAI, USDC, and BUSD in Stable AMM.
The most significant benefit of this is that it solves the fundamental liquidity problem for BAI, which is the most critical issue for stablecoins. At the same time, it generates higher protocol revenue, as all transaction fees in this AMM ultimately go to the liquidity provider of the stability pool.
No Interest
There is no interest in lending the stablecoin BAI with AstridDAO, only a one-time borrowing fee. For long-term users of BAI, the cost is much lower than over-collateralized stablecoin protocols such as MakerDAO and Acala.
Here we start by understanding why some stablecoin projects require interest when lending out stablecoins. Interest is an ongoing fee that is received into the protocol’s treasury and intended to be distributed to users to compensate them if the deal makes a loss.
And AstridDAO takes a different approach. Our treasury also generates revenue, but the revenue comes from a one-off borrowing fee, i.e., a 0.5% fee for each loan lent. If you only lend for two months, it is undoubtedly not as cost-effective as MakerDAO or aUSD. But if you are borrowing for a year, it is much more cost-effective to use AstridDAO. It’s really a difference in business model, and we encourage people who hold stablecoins for the long term.
veTokenomics
AstridDAO uses the veTokenomics (Voting Escrow Tokenomics) mechanism, meaning that the protocol’s governance and profit-sharing rights are not directly enjoyed by the ATID holder. Still, you need to lock your ATID into the protocol to generate the veATID before the user can enjoy profit sharing or voting rights.
This gives the right to share the revenue of the protocol to the AstridDAO’s native token ATID and guarantees the interests of the long-term holders of the ATID token.
There is a formula for calculating the number of veATIDs obtained and the length of time they are locked. For example, if an ATID is locked for one year, you get one veATID, two veATIDs for two years, and eight veATIDs for four years. This incentivizes people to keep their ATIDs locked for a more prolonged period, distributing more rewards to long-term participants, thus contributing to the project’s long-term development. Furthermore, the fact that a veATID automatically earns a share of the protocol’s revenue gives the ATID more utility than if it were a protocol such as Uniswap, where most of the fees are allocated to the liquidity provider. In addition, users receive an ATID as a reward for the first two years of lock-in.
DAO Goverance
The parameters of the AstridDAO protocol are adjustable via the DAO governance module to better adapt to market conditions.
For example, suppose a collateral position has a MCR and if there is a systemic risk in that collateral. In that case, the DAO can, through a governance proposal, increase the collateral’s MCR to ensure the safety of the protocol.
Conversely, suppose an asset, such as a DOT, reaches a high level of liquidity and depth after five years. In that case, the DAO can, through a governance proposal, reduce the MCR for that collateral.
Again, this guarantees the utilization of the user’s funds.
AMA Session
What happens in extreme circumstances when collateral continues to fall?
We mentioned earlier that AstridDAO uses an instant liquidation mechanism, but how does this mechanism perform in extreme situations where the market falls sharply? Let’s take the example of the Luna-induced 5.19 event. AstridDAO and BAI were battle-tested in the 5.19 crash, and BAI did not come unanchored during the crash.
In 5.19, starting with the Luna crash, the WASTR price dropped from 0.3 USD to as low as 0.04 USD in one go. At that time, the AstridDAO protocol only supported one asset, WASTR, and around $50 million of WASTR was stored in it, most of which was liquidated.
As the market falls, step by step, liquidation occurs automatically in the liquidity pool, automatically selling these WASTRs and then paying off this BAI debt. But until the final WASTR drop to 0.04, there is no agreed loss, just a large amount of user assets being liquidated, which is inevitable. Each liquidation took only 12 seconds per block, and the process lasted three or four days. As soon as WASTR dropped during this period, more users would be exposed to the liquidation of their positions. This is as inevitable as a lending protocol. The user either has to add more collateral to his debt position or pay off his debt, or he will simply be liquidated.
It is worth noting that the loss of being liquidated on AstridDAO is relatively tiny. Why? Because we have a much lower liquidation threshold. For example, on MakerDAO, the liquidation threshold is 130%, so if you liquidate, you are selling an asset worth 130 for a lower price, say 100, which is a discount of around 70%. With AstridDAO, our liquidation threshold is 115%, which is only about a 10% discount on the liquidation price.
We have set different liquidation levels for other assets. For example, the MCR of USDC is 102, so the discount rate when it is liquidated is meager, and users will only lose 1% even if it is liquidated. Therefore, it will not experience such a significant price fluctuation in most cases.
How can BAI avoid the ‘death spiral’?
After the highly rapid collapse of UST some time ago, the market started to pay renewed attention to the anchoring mechanism of stablecoins.
Is there any similarity between the mechanism of BAI and UST? How can we avoid getting caught in a “death spiral” of declining stablecoins and protocol tokens?
Firstly, BAI and UST have completely different stabilization mechanisms, with UST being an algorithmic stablecoin and BAI, like DAI, being an over-collateralized stablecoin.
The over-collateralized stablecoin mechanism is safer because it is underpinned by the value of the collateral. There have been few significant de-anchors of large-scale over-collateralized stablecoins.
The over-collateralized aUSD was unanchored a few days ago, not because of a problem with its over-collateralization mechanism, but because of a problem with the configuration of the new iBTC pool, which led to a large number of hackers using iBTC as collateral to generate aUSD.
In contrast, the clearing mechanism of the stablecoin itself was not a problem.
Secondly, the core cause of the UST crash was the entry of its native token, LUNA, a non-stable asset. It can generate the stablecoin UST by burning the native token LUNA.
The price of LUNA and the price of UST are firmly linked, i.e., if LUNA goes up, so does UST, and conversely, if the price of UST goes down, the cost of LUNA will also go down, causing UST to go further off-anchor and thus fall into a “death spiral” of falling dual coin prices. “
In contrast, there is no link between BAI and AstridDAO’s native token ATID. Market capitalization, wBTC, and wETH are also very high-quality assets.
Comparison of AstridDAO with other stablecoins
To visualize the features of AstridDAO, we can compare them with some of the existing CDP projects, liquidity, and MakerDAO.
Liquify does not support multiple collaterals, and the protocol cannot be upgraded. The protocol parameters cannot be modified via DAO, so no adjustments can be made in the face of dramatic market changes. Although it is also interest-free, it cannot achieve high protocol revenue as we can with Stable AMM. It is also more stable in terms of price and capital utilization, as the exact mechanism of Stability Pool + Instant Liquidation is used.
MakerDAO can support multiple collaterals, and the protocol can be upgraded. Still, there is no way to do it without fees, no way to do it with higher protocol revenue, and no good price stability because it has no way to control the price cap. It also does not have high capital utilization because it uses an auction-based, time-consuming clearing mechanism.
Future plans: De-CeFi Lending DAO
In the long-term plan for AstridDAO, we want to do a De-CeFi Lending DAO around BAI, introducing real-world asset income opportunities on the chain and opening up entirely new use cases for BAI.
As we can see in the current bear market, DeFi mining returns are getting lower and less sustainable. Because most of the high returns from DeFi Farming were based on the high price of the protocol token, in a bear market, the token price is unsustainable, so many DeFi operations have meager returns.
But in the real world, we see a lot of lending scenarios that are very high yielding, for example, in platforms like GoldFinch, where many real-world assets have an APY of over 10%.
De-CeFi Lending DAO, where people deposit BAI, convert it to USDC through Stable AMM, convert it to USD, go through the DAO form of decision making and lend to offline entities in pursuit of a higher return than DeFi.
We will have various pools, such as a pool for new fintech companies in Asia and companies in emerging markets in Africa, etc. Because the whole decision-making process is entirely transparent, the DAOs on the chain will collectively decide which offline entity to lend to, thus avoiding the situation where some traditional finance packages bad assets in layers and eventually mines them.
We believe that bringing real-world revenue opportunities onto the chain could be a future trend. Therefore we will explore this after the AstridDAO V2 version upgrade is completed.
Roadmap
Finally, we look at the roadmap of AstridDAO’s future development plans.
In the second quarter of this year, we went live with single collateral and later with multi-collateral. We will work with the SiO2 Lending protocol in the third quarter of this year. In Q4, we will support the generation of BAI as collateral for some high-quality parallel chain native assets from the Polkadot ecosystem, such as Centrifuge and Litentry, to help extend their application scenarios. However, we will set the MCR higher to ensure the protocol’s security.
In the first to the second quarter of next year, we will focus on the development of DAO governance. Then, the third quarter will see the embedded Stable AMM stablecoin liquidity pool launch. After this, there will be a move towards De-CeFi Lending DAO.
About AstridDAO
AstridDAO is a decentralized money market protocol and multi-collateral stablecoin built on Astar and the Polkadot ecosystem, allowing you to borrow $BAI, a stablecoin hard-pegged to USD against risk assets at 0% interest and minimum collateral ratio. This mechanism enables you to leverage the value in your risk assets, including $ASTR, $BTC, $ETH, and $DOT, without selling them.
