XST Synthetic Assets and the launch of XSTUSD
Powering the future of DeFi on SORA, a future parachain on Polkadot and Kusama.
Xor SynThetics (XST) will be gradually launched to strengthen SORA’s Many Worlds, One Economy approach, which can help to stabilize the cryptosphere and promote financial inclusion.
The first XST launched is XSTUSD, an algorithmic stablecoin pegged to the value of DAI and backed by XOR.
The volume and innovative value of stablecoins in the crypto space is growing significantly. XSTUSD’s role and growth will have a positive impact on the development of DeFi, SORA and XOR.
In this article we will elaborate on:
- The meaning of synthetic assets and algorithmic stablecoins
- The role and importance of Algorithmic stablecoins and XST(USD) for DeFi
- What XST is and how it works
- How XSTUSD compares to other algorithmic stablecoins, along with some examples
- Stablecoins in the Polkadot & Kusama Ecosystem and some examples
- Use cases of XST and the significance of its implementation for users
- Conclusions and future outlook
The Meaning of Synthetic Assets and Algorithmic Stablecoins
In 2018, an early design for a native stablecoin for the SORA ecosystem was proposed.
The SORA team concluded that the best solution for a stablecoin on the SORA network would be a synthetic stablecoin, based on the American economist Irving Fisher’s theory of the “Compensated Dollar”.
A valuable summary of Fisher’s theory can be found in the SORA article “Introducing XSTUSD” which we will share next: “In 1912, the USD was backed by gold, a highly volatile asset. Instead of keeping the dollar fixed to a certain amount of gold, Fisher proposed that the dollar be backed by varying amounts of gold, and pegged to a basket of goods (an index).
Fisher’s groundwork could finally be translated into the realm of crypto economics and given new life as part of a crypto economic system: “a blockchain-based token can be created as a derivative of another one, targeoted at holding a stable unit of value”. SORA synthetics implements this concept and in a way, you could say that Irving Fisher is the father of SORA Synthetics.”
A synthetic asset is simply a tokenized derivative that mimics the value of another asset. It is therefore an asset that keeps its value by following the original asset through an oracle, while an oracle is a service that connects blockchains (via smart contracts) with data from the outside world, automatically and without the need for human intervention. The SORA community is working on its own Oracles aptly named SORAcles.
Eventually, thanks to SORAcles, users will be able to enjoy new synthetic assets that are linked to different indices of value, such as the Euro, JPY, GBP, etc.
More on SORAcles will follow in later communications.
XST are synthetic assets pegged to an index of value and backed by XOR.
The first one to launch in the SORA ecosystem will be XSTUSD, an algorithmic stablecoin pegged to the value of DAI and claimable in XOR. DAI is an algorithmic stablecoin backed by Ethereum as collateral, which is pegged to the value of the US Dollar.
For XST, XOR is minted or burnt to ensure the value of the pegged index, e.g. DAI for XSTUSD. An example of another XST could be XSTCHF, where 1 XSTCHF is pegged to the value of 1 Swiss Franc, and is backed by XOR. (note: this is an example given by the writer and not a communication of intention by the team)
So far, we have determined that XSTUSD is an Algorithmic Stablecoin, which is a variety of a Synthetic Asset, pegged to the value of DAI and backed by XOR.
And, What is an Algorithmic Stablecoin?
An algorithmic stablecoin is a type of cryptocurrency that offers price stability (in this case the price of 1 DAI or 1 USD) and is backed by a reserve asset (XOR) using an algorithm to maintain its value.
This stablecoin’s algorithm is usually pegged to fiat values, or to other indices to back their value. In the case of XSTUSD, the algorithm also has a liquidity source built in to Polkaswap where users can deposit XOR to receive proportional amounts of XSTUSD, or deposit their XSTUSD to receive an equivalent amount of XOR.
What is the role of stablecoins in crypto and DeFi ?
Stablecoins were created with the purpose of offering more stability in value, compared to other existing crypto assets, as they are pegged to the value of a stable asset. They have gained traction as they attempt to offer the best of both worlds — the instant processing, security and privacy of crypto payments, with the volatility-free, stable valuations of fiat currencies.
As more users turn to crypto assets for their financial needs, it has become all-important to provide price-stable currencies to empower the mainstream adoption of Decentralized Finance (DeFi). A vast majority of people still think in the fiat value of goods and services, and it is the main medium of trade. Accommodating the needs of everyone’s daily finances requires a bespoke stable currency.
Use cases for stablecoins include loans, payment settling, escrow, and more. Users often need to rely on an asset’s stability to execute low-cost value transfers, assess the risks of lending strategies, and ensure that their transition to-and-from a digital financial environment is approachable and predictable.
Currently, the most used asset is the US Dollar — in spite of its recent inflation and instability in the global market. Other stablecoins follow assets such as the EURO or GBP, while some even follow the price of gold.
We have referenced the aforementioned article by the SORA community to explain the different kinds of stablecoins currently available:
- Fiat-Backed Stablecoins (or Tokenized Fiat): These stablecoins are backed by and pegged to dollars (or other fiat currency), their value remains tied to the price of the pegged currency. For example, USDC.
- Crypto-Backed Stablecoins (or On-Chain Collateralized Stablecoins): These are backed by other crypto assets. For example DAI.
- Precious Metal-Backed Stablecoins (or Off-Chain Collateralized Stablecoins): Like gold-standard fiat, these stablecoins use gold and other metals to back their value. For example Tether Gold.
- Algorithmic Stablecoins: These stablecoins use algorithms to back their value. There are some variants that can be pegged to fiat values, depending on the algorithm used. An example: AMPL.
- Synthetic assets are tokens with value pegged to an oraclized asset. Purely synthetic assets can be used to represent many types of value, such as, to track the shares of financial instruments and securities. For example, SYNTHETIX..
At the time of writing (November 2021), the total market cap of stablecoins was $135.78B USD, with a daily trading volume of over $127B USD according to CMC. When looking at Uniswap’s top 20 trading pairs by volume, we notice that 10 out of 20 pairs contain a stablecoin. These key pieces of information helped us determine that the stablecoin digital asset class is one of the highest valued categories of the whole cryptosphere, and accounts for half of the total liquidity sources provided in DeFi.
What is the Difference Between Algorithmic Stablecoins such as UST, AMPL, and OHM Compared with XSTUSD?
In this section, we will make a comparison between four algorithmic stablecoins that are different in design and dynamics: OlympusDAO’s OHM, Ampleforth’s AMPL, Terra’s UST and last but certainly not least, SORA’s XSTUSD.
This is a high-level overview. If you find the topic of stablecoins interesting enough, please do your own research and due diligence. The content presented here is not investment advice and should not be treated as such.
Algorithmic stablecoins are cryptocurrency protocols with elastic supplies that can expand and contract based on market demand, with protocol-owned liquidity. The first comparison we will make is the backing asset and pegged value of these coins:
- XST is designed to follow an index through an oracle, and is backed up by a floating amount of XOR. XST assets are minted by burning XOR. The quantity of XOR burnt per every XSTUSD minted is known because there will be an oracle following a specific index. XST is a representation of the value of the pegged asset in XOR, so for example 1 XSTUSD = XOR worth $1.
A series of native oracles (SORAcles) are in development for the SORA network.
XST is a great option for people who are looking for stability during times of volatility. But instead of just exiting XOR, they can opt to mint one of the XST assets like XSTUSD without suffering from any slippage as the price of XOR will never deviate from the asset price. - OHM is backed by a mixed basket of digital assets from the OlympusDAO treasury, and every OHM is backed by at least 1 DAI. OHM is a free-floating token and is not pegged to a certain value, unlike XSTUSD or UST. OHM does not try to align its value as a stablecoin with the USD. Due to the instability of the USD and the ever- present issue of inflation, the effective purchase power of the pegged currency is subject to change. OHM is designed to be a currency that has an ever-growing purchasing power despite market conditions.
OHM is quite different from the traditional reserve currency defi protocols today, as OHM is a free-floating currency backed only by what’s held in the Olympus DAO treasury and thus, OHM gives a different dimension to what you can consider a stablecoin.
You can read more on the OHM tokenomics on their web page. - AMPL is a non-dilutive algorithmic unit of account, meaning that the supply can change, but that, as the supply changes, users retain the same proportion of the overall supply. AMPL is not backed by anything but the protocol. AMPL is designed to stay between $0.96 USD and $1.06 USD. However, at the time of writing, AMPL’s price was $1.69. The reason AMPL’s price has often been higher than the aimed value is because the demand for the token has been outpacing the rate at which the protocol is able to adjust its supply. The protocol modifies the total supply of AMPL as if it were doing so over a 10 day period which constantly “resets” every day (assuming that demand is continuing to increase or decrease at a rapid pace). Therefore, it is important to include the market cap curve of AMPL when examining its price.
Read more on Ampleforth on their web page. - TerraUSD (UST) is pegged to the US Dollar, and is backed by LUNA. The latter allows holders to pay network fees, participate in governance, stake in the Tendermint Delegated Proof of Stake consensus mechanism, and peg stablecoins.
A USD value of LUNA is convertible at a 1:1 ratio with UST tokens. If UST’s price is, for example, at $0.98, arbitrageurs swap 1 UST for $1 of USD and make 2 cents. This mechanism increases UST demand and also reduces its supply as UST is burnt. The stable coin then returns to its peg.
Read more on TerraUSD and Luna on their website.
After this comparison, we can conclude that SORA’s XSTUSD is designed in a similar way as Terra’s UST: when more UST is bought and put in circulation, Luna will grow in Price. The same will happen with XSTUSD and XOR: when more XSTUSD is bought, the price of XOR will go up with $1 per 1337 XOR minted (once XOR’s TBC is collateralized). Remember: every XSTUSD is backed by $1 USD worth of XOR.
OHM was built like all fiat currencies have been for the past century, as a reserve currency backed by other inherently valuable assets, like gold or strong currencies of other nations (in OHM’s case: crypto assets). XST is built to seek stability, being backed by XOR, a stronger and more stable currency than the aforementioned assets backing “classic” reserve currencies. Read more about XOR and why it is a strong currency here.
XOR is native to the Polkadot ecosystem, but it is not the only project that has a stablecoin among its ranks. Next in this document we assess the existing stable currencies in the Kusama and Polkadot ecosystems.
An Overview of Stablecoins in the Polkadot & Kusama Ecosystem and their Comparison with XSTUSD
With an increasing growth in adoption of blockchain technology and of cryptocurrencies as means of payment, the understanding of what stability is and how we see and use money in general will evolve. Algorithmic stablecoins reinstate what has to be seen as “stability” and is further proof that current monetary systems can and should be questioned and improved, to everyone’s benefit. It is safe to say we have not seen the last innovative stablecoin protocol being created, impacting DeFi and our monetary system as a whole.
As in any ecosystem, stablecoins will play a big role in the evolution and adoption of the DeFi platforms and protocols on Polkadot and Kusama. The first Kusama parachain auction winner Karura has its own stablecoin on Kusama. kUSD is a multi-collateralized stablecoin backed by cross-chain assets. It’s stable by design, and pegged to the USD. kUSD is now on its way to become the de facto stablecoin of Karura.
An example of its utility in the ecosystem is that in order to bootstrap liquidity for Bifrost’s BNC token on Karura Swap, users could provide either kUSD, BNC or both assets to the BNC-kUSD pool and generate rewards.
When Acala, the sister network of Karura, will win it’s parachain slot they will launch the stablecoin aUSD for Acala on their network, similar to kUSD.
Unlike with Acala/Karura, SORA will become a parachain on both Polkadot and Kusama and thus XSTUSD will be used on SORA for both relay chains.
Even after outlining the main stablecoins available in Kusama and Polkadot, DAI is de facto still the main stablecoin on SORA. This statement is supported by the current 3,841,000 DAI locked in liquidity pools with XOR on Polkaswap since its soft launch in April 2020 (see Ceres’ Polkaswap tracker).
However, with the launch of XSTUSD we predict a user shift to SORA’s algorithmic stablecoin as the dominant choice, gathering more volume and liquidity than DAI.
With more DeFi protocols and platforms joining the Polkadot and Kusama relay chains, we predict there will rise more stablecoins next to XSTUSD and kUSD/aUSD. Each will likely have a bespoke design and mechanism to fulfill a distinct role. Therefore, it is useful to investigate for each stablecoin how they are backed and to which index they are pegged.
XSTUSD Benefits and Use Cases
While other stable assets such as Tether (USDT), USDC, DAI and Paxos have been in the market for years, none of them have been able to achieve real decentralization while offering scalability and most importantly, stability.
Below you can find a graph showing DAI’s volatility during the last three months. As you can see, in such a short span of time, and even while DAI tries to maintain a peg with the USD, the need for collateralization makes it highly volatile.
Source: https://dai.stablecoin.science/
XST plays an important role not only in the SORA ecosystem, but also for blockchain in general as it offers fast transaction speed and low cost remittance while offering a shelter against volatility. We believe XSTUSD holders will benefit from unrestricted access to their funds without the need for third parties and in a secure manner.
Unlike most of the stable assets present in the current market, XSTUSD has a big advantage as there is a minimal cost to mint, solving one of the major issues most of the stables in networks like Ethereum have where the cost of minting can be higher than the mint itself sometimes. Furthermore, there is no overcollateralization nor slippage. With XST you get back everything you put in (unless the US market crashes and the dollar is rendered worthless).
Even though the XST assets are still new, the number of possible use cases is endless.
Not only can XST be used for DeFi, but also in other areas such as commerce, gaming, art, etc.
Both XST and its underlying asset XOR are flexible (they can be minted or burned according to the current market needs), XST assets are scalable by nature as well, so DeFi apps deployed on the SORA network can grow with boundless liquidity.
XOR is used and needed for every transaction on the SORA network, not just on Polkaswap. If you believe the amount of dApps and transactions on the SORA network will increase, then you should also expect an increase in demand for XOR.
When the amount of transactions on the network increases, validator and nominator rewards will appreciate in quantity. You can stake your XOR to earn VAL, which will become more lucrative in correlation to the increase of transactions on the network.
Read more on VAL and the dynamics of XOR on SORA’s wiki page.
You will also be able to provide liquidity with style and freedom on the XSTUSD liquidity source available soon on Polkaswap!
Conclusion and Future Outlook
After all the explanation and history of stablecoins and synthetic assets, the bottom line is that in order to make cryptocurrencies trustworthy stores of value, stablecoins are the way forward. Traditionally speaking, cryptocurrencies are considered volatile gambling since you never know what can happen.. However if the value of a token remains stable for long enough, this has the potential to foster trust among users and regulators, and subsequently generate important strides in the widespread adoption of these technologies by societies and the status quo.
The positive effects of synthetic assets are longer than the article itself. Consider a day when the value of money is not affected by speculation, a day when payments, services and finance are safe, instant and connected. Consider the advantages that this could bring to societies and individuals alike.
All of this will be possible soon, and stablecoins are the first step to achieve it.
XST will play a significant role in the development and adoption of SORA as a DeFi native network. Moreover, they will play a leading role in the exploration and innovation of what synthetic assets should look like on Polkadot, Kusama and beyond.
Creating a native stablecoin XSTUSD is needed to strengthen SORA’s vision of a better supranational cryptoeconomic system, to attract new users and builders, while improving and solving the flaws of other stablecoins.
If you have not tried XSTUSD yet, it is currently available on Polkaswap
Finally, we would like to thank the SORA community for their help with this article.
SORA is both a new economic system that decentralizes the concept of a central bank as well as a network in the Polkadot ecosystem that will connect to the Polkadot relay chain and the parachains with built-in tools focused on Decentralized Finance (DeFi).
The community envisions a new economic world order — one that is truly decentralized and democratic. SORA is building to deliver financial inclusion for all without discrimination, and provide a better method to manage day-to-day finances.
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