xBacked - Bringing Stability to Algorand
The Algorand network has witnessed unprecedented levels of growth since its inception and its adoption continues to surge making it one of the fastest-growing projects in the cryptoverse. The ability of Algorand to deliver on global speed, scale, and decentralization, while maintaining a lightweight, energy-efficient footprint is largely responsible for this.
Touted as the Green Blockchain, Algorand is set to build the technology to power the Future of Finance. Developed by Silvio Micali, recipient of the Turing Award, its infrastructure is designed to achieve a borderless global economy. A Layer 1 carbon-neutral blockchain with a unique pure proof of stake consensus mechanism, Algorand is able to achieve transaction throughputs at the speed of traditional finance, but with immediate finality, near-zero transaction costs, on a 24/7 basis.
Algorand’s infrastructure coupled with its unique capabilities has given birth to a multitude of successful projects which can be corroborated by the growth of its DeFi sector from less than $20 million in June 2021 to over $170 million today.
One such project is xBacked. But before we delve into the details it’s imperative to have a clear understanding of the following terms.
- DAO: xBacked is a DAO (Decentralized Autonomous Organization). DAOs are transparent organizations free from centralized influence/control and are community-governed. “xBacked is aimed at building a decentralized, permissionless stablecoin on Algorand, fully backed by crypto assets instead of centralized assets. No central entity controls the issuance of xUSD and other tokens the xBacked protocol might build in the future.”
- Stablecoin: Stablecoin refers to a class of assets aimed at providing stability and steady valuation. These coins are traded on blockchain and pegged to a traditional currency like the U.S. dollar or to a commodity like gold. The arrangement essentially enables stablecoins to eliminate volatility and achieve a relatively stable price, unlike other coins that experience massive volatility. The peg/price stability is achieved via collateralization or through algorithmic mechanisms, different stablecoins deploy different methods to achieve said stability.
- xUSD: xUSD is the stablecoin of xBacked protocol and 1xUSD is equivalent to a $1 of the underlying collateral, at all times.
- Collateralized Debt Position (CDP): Popularized by MakerDAO, CDP facilitates the creation of DAI (MakerDAO’s decentralized stablecoin) by locking in ETH as collateral into MakerDAO’s smart contract. CDP is a financial cryptocurrency concept and its working is similar to that of a loan. It essentially enables users to generate DAI (in the case of MakerDAO) once the user deposits an asset (ETH) as collateral into the smart contract for a loan. CDP is where the collateral is held.
- Collateral Ratio or c-ratio: Typically blockchain-based loans are overcollateralized to effectively manage risk in the unpredictable and volatile cryptoverse. This means the value of the collateral must exceed the value of the granted loan. The collateralization ratio is indicative of how much collateral value the borrower can leverage.
“xBacked is building the decentralized stablecoin for Algorand. xBacked ensures all xUSD in circulation is over collateralized via vaults. These vaults are collateralized debt positions (CDPs)”
Genesis
The answer to that lies in the design and infrastructure of Algorand. The blockchain ecosystem is ever-growing with new blockchains evolving and offering one or the other solution. Ethereum, undoubtedly the most popular blockchain with almost 90 percent of the dApps built on it has the problem of scalability. With as low as 25 transactions per second, how can one imagine it to be the center of the blockchain world? The other associated problem is the high gas cost. Algorand through the adoption of a consensus mechanism that is permission-less and pure Proof-of-Stake assures both security and speed within a decentralized ecosystem.
Owing to the aforementioned comparative advantages, xBacked came into being with the goal of building a suite of permissionless stablecoins on Algorand.
xBacked — xUSD and Vaults
Capital efficiency is at the core of xBacked. As mentioned, xUSD is an over-collateralized stablecoin just like MakerDAO’s DAI. However, unlike other collateralized stablecoins xBacked has an extremely low liquidation of 110%.
In order to mint xUSD, users must open a vault on the xBacked protocol. Vaults are simply Collateralized Debt Positions (CDPs) created by users when they deposit collateral (ALGO) and mint xUSD. The only collateral that is currently supported is ALGO (goBTC and goETH are in the pipeline). After a vault is created, the user will be able to deposit more collateral and mint more xUSD as long as their vault has a healthy collateral ratio.
Collateral Ratio = Total Value of Collateral/ Total Value of Debt
For the xBacked protocol, a Vault is liquidated once the collateral ratio is under 110%. There is no repayment schedule laid out as the vaults close post repayment of debt or through liquidation. When the vault debt is paid, the vault is closed and collateral is transferred back to the user. To withdraw collateral, or to mint new debt, the collateral ratio must be above 120%. The minimum mint amount to open a vault on xBacked is 100 xUSD. xBacked vaults have a fixed interest rate, which can differ per collateral type.
Liquidations, Staking, and Governance
This section elaborates on xBacked’s value proposition.
Liquidations — When the c-ratio of a Vault drops below 110%, the Vault becomes available for liquidation. In this scenario, xUSD is used to repay the vault debt. Redemption Keepers can propose risky vaults that should be eligible for redemption and receive a 0.1% bounty. xBacked turns to its network of liquidator keepers to run liquidations. Keepers have two options
- Utilize their own xUSD to liquidate unhealthy vaults and in return keep all of the liquidated collateral. Liquidators receive discounted collateral which is 3.5% of the spot rate. The protocol takes a 1% fee from the liquidated collateral and the liquidator gains a 2.5% discount to the spot.
- Utilize staked xUSD to liquidate healthy vaults and in return receive 0.5% of the liquidated collateral.
Note: Liquidation of vaults is partial in nature. Vaults are only liquidated back to a healthy collateral ratio of 120%.
Staking — It is simply depositing your xUSD for returns. The staked xUSD pool earns 5% of all fees generated by the protocol and users receive a pro-rata distribution of these fees based on their ownership of the pool. Additionally, users also earn discounted collateral from liquidations. The staked xUSD is used for liquidations which the bots run on users' behalf. The user receives a 2% discount to the market, the bot receives 0.5% of the collateral, and the protocol takes a 1% fee.
It is important to mention that xBacked is doing something similar to what Kujira is doing with Anchor Protocol on Terra Blockchain. Staked xUSD from users is used for liquidations that are run by the bots. These bots are developed by developers who might not have the capital. xBacked helps to bring capital from users who can’t build bots to people who can build bots and don’t have capital. Users supplying xUSD get the largest portion of the liquidation and the bot that ran it gets a tiny fraction (0.5% of the collateral).
Governance — Governance Token Stakers will get 50% of all Supply Fees from xUSD and voting rights on project decisions. (This might change in the future through governance).
xBacked provides value to all the participants including Vault holders, Staking users, Governance participants, and Keepers.
xUSD Stability
There are different stability levers incorporated to maintain the xUSD peg. One such mechanism is redemption which is different from withdrawal. A withdrawal is simply withdrawing the collateral or minting more xUSD using that collateral. Redemption guarantees that 1 xUSD token can be redeemed for $1 USD of underlying collateral from the riskiest vault(s) in the system. The fee for this mechanism is 2%. This creates a hard peg and a floor to the xUSD price.
An oversupply of debt in the system will push the peg below $1 USD. The collateral ratio, in this case, will be less than 110% resulting in vault liquidations. This creates an arbitrage opportunity where users can buy xUSD on DEX at a discounted price to repay their debt or simply redeem for ALGO. Likewise, if there is a debt shortage, the peg will be pushed above $1 USD in which case the system partially liquidates risky vaults. Again, the arbitrageurs have the opportunity to mint xUSD and sell this xUSD for a profit on a DEX. However, the peg difference has to exceed the 2% redemption fees to make a profit.
Another interesting feature of the protocol is the Isolated Risk Markets. This implies each of your vaults exists in isolation meaning one vault with a volatile asset as collateral will have no effect on your other open vaults. The purpose of this is two-fold. Firstly, it serves as a risk management tool for the user and secondly, the risk to xUSD stability can be maintained as it will affect only a small portion of xUSD in supply. What this essentially means is, “More speculative collateral types can be constrained to a healthy ratio within the protocol”.
Stablecoins can be touted as a critical component in bringing together the best of the decentralized, volatile, and anonymous world of cryptocurrency, and the volatility-free world of fiat currency.
The extreme volatility present in the cryptocurrency market serves as a major deterrent to its mass adoption and acceptance. Crypto’s highly speculative nature makes it attractive to several investors however, this very characteristic also restricts its use in payments and trade.
xBacked with its suite of decentralized stablecoins on Algorand signals a strong move towards a future that unlocks immense financial potential powered by blockchain technology.
To learn more, check out xBacked on its Website, Twitter, Medium, Discord, and Telegram.
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