At Serenus Coin we have produced a DEX-powered stablecoin. Our decentralised exchange, or DEX, trades only one pair of assets: ether against serenus. Like most stablecoins, serenus is pegged to the US dollar. It is a synthetic dollar.
What is a “synthetic dollar”?
Consider the following scenario. The creation of synthetic dollars on BitMEX — the world’s most liquid bitcoin derivatives exchange:
- Use a throwaway email account to open a new BitMEX account and deposit 1 bitcoin.
- If the price of bitcoin is currently $4000, short 4000 contracts of BitMEX’s perpetual swap. You are now perfectly hedged and your account has $4000 worth of bitcoin in it.
- Ignoring funding costs, if the price of bitcoin goes up to $8000 your account will have been debited down to 0.5 bitcoin and therefore still be worth $4000 of bitcoin.
- If the price reverses and falls to $2000, you will have been credited up to a 2 bitcoin level in your account and so still have $4000 worth of bitcoin.
The account is itself somewhat painfully fungible. You could give someone else your email account/password and BitMEX password. Once they change the passwords, they will now be in control of that same $4000 of stable bitcoin value.
Note that all of this is possible for one important reason. Someone else with an account on BitMEX was willing to buy those 4000 contracts from you. If they also had 1 bitcoin in their account they will have gone 2x leveraged long bitcoin to accommodate your desire to create 4000 synthetic dollars.
The Serenus DEX
Our DEX replicates this process of synthetic dollar creation. Except Serenus Coin is decentralised and permissionless. The contracts on the ethereum mainnet will continue to be available for any use indefinitely. And anyone can use the system. We believe that decentralised finance or DeFi is the way forward for cryptocurrencies. As a form of programmable money, ethereum is an ideal platform for Serenus Coin.
Anyone willing to go leveraged long ETH/USD can create a serenus issuer contract for themselves. This is their own contract and is fully under their control. Issuers will have to hold some ether as capital in their contracts.
Users of Serenus Coin hold ether and may wish to swap that exposure to ETH/USD for serenus. In effect, they may want to create their own synthetic dollars. They simply send their ether to an issuer contract. The issuer contract looks up the current ETH/USD price and sends back an appropriate amount of serenus less fees. Any users may cash in their serenus for ether with any issuer contract at any time. In the meantime, as serenus is a regular ERC-20 coin it can be transferred freely as a medium of exchange or held as a store of value.
DeFi and MakerDAO’s Dai
The MakerDAO Foundation have made great strides forward in the DeFi space. Their stablecoin, the Dai, has become the linchpin of decentralised finance. We believe that the move to Multi-Collateral Dai (MCD) will further bridge the gap between “real world” finance and crypto DeFi and will be very successful.
In the MakerDAO system, long-term holders of ether can lock up their ether and borrow against it. The borrowing is in dollar-pegged stablecoins. Since their launch over a year ago the expectation has developed that because these are over-collateralised borrowings against your own assets, the borrowing rate should be very low. It has been treated as a credit risk.
However in recent weeks, it has become clear that most users of the MakerDAO system are locking up their ether to borrow Dai, and then use that Dai to purchase more ether. They are borrowing against themselves to go leveraged long ETH/USD. This means that the supply of Dai is not modulated by variations in the demand for it. The Dai has been trading at a 3 to 5 percent discount to the US dollar. There is no arbitrage available that can return it to par with the dollar. The only solution is to ratchet up the stability rate to levels that match current funding costs elsewhere for being leveraged long ETH/USD. But this will break the expectation that the stability rate is a credit risk measure.
The flip side of this is also strained for MakerDAO. As Su Zhu and Hasu make clear in their cogently argued article, the Dai is not scalable. There is no tight arbitrage available that can return an over-valued Dai back down to the US dollar. In both cases supply is being created at the margin in response to a demand for being leveraged long ETH/USD, not a demand for Dai itself.
Why are synthetic dollars stable and scalable?
As long as sufficient collateral is available in the issuer contracts, serenus will remain pegged to the dollar. This is because serenus is powered by its own DEX. At all times, anyone can transact into and out of serenus at the prevalent ETH/USD rate. If cheaper serenus is available elsewhere, anyone can purchase that serenus and immediately cash it into ether. Likewise, if serenus is more expensive than the dollar elsewhere simply create new serenus on the DEX and sell it at the higher rate.
The limit to this process lies with issuer fees, currently set to 0.2% (20 bips) per new mint of serenus. Issuers collect this fee each time a user sends in ether in exchange for serenus. Serenus Coin also collects an additional 10 bips fee per trade. If the fees are too high, serenus will remain stable but users may be unwilling to convert their ether to serenus. Likewise, if the fee is too low issuers may be unwilling to carry leveraged long risk in ETH/USD on the Serenus DEX as they may find cheaper funding rates elsewhere.
The theoretical upper limit for scalability is determined only by the global appetite for leveraged long crypto risk against the US dollar.