Zephyr Protocol FAQ

What is Zephyr Protocol?

The Untraceable over-collateralized stablecoin Protocol

Zephyr Protocol is a cryptocurrency protocol aiming to combine and refine the best proven privacy and stablecoin protocols. It utilizes a triple asset model consisting of ZEPH, ZephUSD, and ZephRSV. ZEPH is the native currency of the network, ZephUSD is the stablecoin pegged to the value of the USD, and ZephRSV acts as a reserve token for reserve providers.

What are the underlying technologies that Zephyr Protocol is powered by?

Zephyr Protocol is built by integrating a proven stablecoin solution, Djed, into a modified version of the Monero codebase. Monero, a privacy-focused cryptocurrency, provides the foundation for the private and secure transactions on the network for all assets. Djed, on the other hand, brings its over-collateralized algorithmic stablecoin mechanism to enable the creation of a truly private stablecoin, ZephUSD, within the Zephyr Protocol ecosystem.

Why were Monero and Djed chosen as the basis for Zephyr Protocol?

Monero and Djed were chosen for their unique qualities and proven performance. Monero is widely recognized as the leading privacy coin, offering robust transactional privacy that many other cryptocurrencies cannot match. Djed, inspired by AgeUSD and developed by renowned organizations Emurgo, IOHK, and the Ergo Foundation, is a stablecoin protocol with a proven stability mechanism.

Combining these two powerful components, Zephyr Protocol aims to offer the best of both worlds — the privacy and security of Monero, and the stability and reliability of Djed. This blend enables Zephyr to deliver a unique offering in the crypto space: a private, stable, and secure digital currency, which is particularly essential in an era where privacy and stability in the cryptocurrency markets are highly sought after.

How does Zephyr avoid a “death spiral”?

A “death spiral” often refers to a scenario in which an algorithmic stablecoin protocol is forced to mint an excessive amount of its base coin to maintain the peg of its stablecoin, leading to a downward spiral in the value of the base coin. Zephyr Protocol is designed to prevent such a scenario.

Zephyr Protocol ensures that no additional ZEPH (the base coin) is spontaneously created because the backing of ZephUSD is over-collatorized by ZEPH in the reserve and importantly: not algorithmic. The supply of ZEPH grows only through scheduled emission. This unique proposition safeguards the stability and value of the network, as the constant emission rate eliminates the risk of sudden inflationary shocks that could destabilize the system.

In other algo stable protocols, the spontaneous and often unlimited minting of base coins is often employed to ensure the stability of the stablecoin, leading to potential death spirals. Fundamentally, Zephyr does not follow this approach.

What are the differences between Zephyr and fiat-backed stablecoins?

Zephyr Protocol and fiat-backed stablecoins represent two distinct approaches to achieving price stability in the volatile crypto market, and they differ significantly in terms of their underlying structure, issuance process, and overall decentralization.

1. Underlying Asset: Fiat-backed stablecoins, as the name suggests, are backed by fiat currency reserves, typically held by a centralized entity. Each stablecoin is pegged 1:1 with a particular fiat currency, like the US Dollar. On the other hand, Zephyr Protocol’s stablecoin, ZephUSD, is backed by an over-collateralized reserve of the native ZEPH asset.
2. Issuance and Redemption: The issuance and redemption of fiat-backed stablecoins involve interaction with the centralized entity that holds the fiat reserve. Users must trust this entity to manage the reserve properly and honor redemption requests. Zephyr, in contrast, is entirely decentralized. Users can directly mint and redeem ZephUSD within the protocol, without needing to trust a centralized party.
3. Decentralization and Transparency: Zephyr Protocol is built on a blockchain, offering full transparency and decentralization. Every transaction and operation can be publicly verified on the blockchain, providing users with confidence in the system’s integrity. Conversely, while some fiat-backed stablecoins undergo regular audits, they lack the same level of transparency and are dependent on the trustworthiness of the centralized entity.
4. Robustness: Zephyr’s reserve system and in-built mechanisms offer a more robust approach to maintaining stability. It eliminates the “death spiral” risk commonly associated with many algorithmic stablecoins. Meanwhile, fiat-backed stablecoins can face challenges such as bank account freezes or regulatory crackdowns, potentially impacting their stability.
5. Permissionless and Open: Zephyr Protocol operates on a permissionless and open platform, enabling any user, anywhere in the world, to interact with the protocol as long as they have access to the internet. Fiat-backed stablecoins, on the other hand, may have restrictions based on geography or regulations.

What mechanisms are in place to ensure the health of the reserve in Zephyr Protocol?

The Zephyr Protocol incorporates several robust mechanisms to uphold and strengthen the health of the reserve, thereby ensuring system stability.

A key mechanism involves transaction fees collected whenever ZephUSD is minted or redeemed. These fees gradually accumulate in the reserve, thereby increasing its value over time and promoting the stability of the ZephUSD stablecoin.

The price of ZephRSV is calculated based on current reserve ratios, when the reserve ratio drops, the price of ZephRSV decreases and incentivizes users to become reserve providers.

Additionally, the protocol has a maximum reserve ratio of 800%. This upper limit restricts the minting of new reserve coins (ZephRSV) once the reserve ratio reaches this cap. This safeguard protects the existing ZephRSV holders from potential dilution and helps strike a balance between growth and stability within the protocol.

These combined mechanisms actively work to enhance the reserve’s strength, fostering stability and resilience within the Zephyr Protocol’s economy.

What happens if the reserve ratio falls below 100% (worst case scenario)?

If the reserve ratio happens to fall below 100%, indicating a shortfall of ZEPH in the reserve to fully back each ZephUSD, each ZephUSD will be only able to be redeemed for its share of what is actually in the reserve.

Importantly, any redeeming action taken in this worst-case situation serves to improve the network state and not exacerbate it. The fees collected during this period, along with the discrepancy between the spot and moving average price of ZEPH, contribute to enhancing the overall system stability and restoring the reserve ratio.

In addition, in extreme scenarios where a sharp drop in ZEPH’s value causes the reserve ratio to stay below 100% even after considering the accumulated fees, the Zephyr Protocol’s treasury fund comes into action.

This fund, composed of 500,000 ZEPH, can supplement the reserve to ensure that ZephUSD remains fully collateralized.

In Djed, this limitation is referred to as a “Haircut” for Stablecoin Holders: when the peg is lost, the SC holders suffer financial losses.

Debt-for-equity swaps is an identified solution for this.

Since keeping the value of stablecoins is an ultimate goal of the system, it is undesirable to cut it when the SC the peg is lost without any compensation. Thus, it is suggested to compensate a user with reservecoins on the equivalent amount of retained basecoins. This exchange resembles what is known as “debt-for-equity swaps” in the traditional financial world.

Zephyr Protocol aims to implement a system to compensate ZephUSD redeemers in this worst case scenario which may be debt-for-equity swaps as outlined in extended Djed or a system inspired by it.

What’s the current progress on the project’s roadmap?

The protocol is currently in the private testnet stage, with about 90% of its implementation already completed. This stage will help identify potential glitches and performance issues. Once the private testnet stage is successfully completed, a public testnet stage will follow, enabling a broader user base to explore the functionalities of the Zephyr Protocol.

What are the long-term goals of Zephyr Protocol?

Zephyr Protocol is designed with the vision of revolutionizing the stablecoin industry. It seeks to act as a hedge against protocols that rely heavily on central entities. The project aims to merge the best of stablecoin and privacy protocols to facilitate anonymous cash transactions and storage with stability. In the long run, the project aims to get ZephUSD adopted as a quote pair similar to USDT and BUSD.

What is Zephyr Protocol’s marketing plan?

Although the Zephyr Protocol team believes in grassroots marketing, they recognize the importance of strategic marketing to scale up. A portion of the treasury fund is set aside specifically for marketing purposes. They believe that branding, website design, resources, and exchange listings are important elements that contribute significantly to their marketing plan.

Is Zephyr Protocol looking to get more exchange listings?

Yes, securing more exchange listings is a major focus for Zephyr Protocol. Exchange listings are crucial in determining the price of ZEPH for the pricing oracle and will aid in increasing the protocol’s visibility and liquidity.

How is Zephyr Protocol funded?

Zephyr Protocol operates with a treasury fund of 500,000 ZEPH and a governance fee of 5%. These sources of funding ensure continuous development, marketing efforts, and operational activities. This financial structure is designed to support the protocol’s longevity and robustness.

Is Zephyr Protocol hiring?

Absolutely. The project is keen to recruit individuals who can add value to their team. This includes graphic designers, developers, and individuals with connections in the crypto industry. The team recognizes the importance of bringing in diverse skill sets and expertise.

What are the technical specifications of Zephyr Protocol?

Zephyr Protocol employs a RandomX proof-of-work (PoW) algorithm, which is optimized for general-purpose CPUs. It has a total supply of 18.4 million (+ tail emission 0.6 ZEPH per block), and a block time of 120 seconds.

Are there plans for wallet improvements?

Indeed, Zephyr Protocol plans on making improvements to its wallet offerings. These improvements may include adding support for existing third-party wallets and developing other implementations tailored to Zephyr’s unique needs.

Will there be bridges to other chains?

Although the immediate focus is on building and perfecting the Zephyr Protocol, the team is considering implementing cross-chain swaps via exchanges or services. The team is also exploring the possibility of adding wrapped ZEPH/ZephUSD tokens, which would enable these tokens to function on different blockchains.

How will Zephyr address regulatory concerns?

Zephyr Protocol is designed to be a decentralized and anonymous project, which makes it less susceptible to regulations. The team is focused on trading on privacy-friendly exchanges and listing under a broad spectrum of jurisdictions. Integrations with decentralized exchanges (DEXs) is another method that the team uses to address potential regulatory concerns.