Bluejay Finance Testnet Review
Bluejay Finance is building the next evolution of DeFi, to onboard the next billion users. With a focus on bringing financial opportunity to communities and businesses of Asia, we combine technical expertise, open communication, transparency and respect to solve the financial exclusion of the region.
We have recently launched our protocol, a capital-efficient multi-stablecoin protocol combining the role of an issuer and market maker, on the Rinkeby testnet 2 months ago.
Let’s review the performance of the protocol, as well as how our initial hypothesis has been validated or invalidated!
Some of the key questions we seek to answer with the testnet are:
- Does the protocol’s stablecoin maintain its peg?
- Does the protocol have a treasury to defend the stablecoin peg?
- How does the protocol generate revenue?
- How inflationary are the governance tokens?
Overview of Testnet Participation Rate
Before diving into the key questions, let’s review the level of participation on our testnet.
Since launching 2 months ago, Bluejay has over 20k users interacting with our protocol, with our governance token, the BLU token, being transferred over 250k times. This is a huge success in contrast to most testnet launch with less than 100 users!
As expected, we see peak activities on the protocol in the first two weeks after the testnet announcements before activities declining when participants completed the testnet tasks.
The entire experiment generated millions of datapoints which allow us to piece together a story to help us validate or invalidate earlier hypothesis of the protocol.
Let’s review how the testnet results has validated our hypothesis!
Does the protocol’s stablecoin maintain its peg?
One of the most important property of a stablecoin is its ability to track the underlying currency, meaning how close it follows the actual price peg.
For fiat collateralized stablecoin, it’s usually kept within a tight band bounded by the spread offered by the issuer. For algorithmic stablecoins, it’s usually a wider band depending on various factors.
Bluejay’s introduced the bluSGD, a stablecoin tracking the Singapore Dollars, on the testnet. Below shows the performance of the stablecoin against the target exchange rate of 1 SGD to 0.735 USD for the entire period.
While there were period of time where the price of the stablecoin on the DEX becomes significantly different from the oracle rate, the median tracking error of the currency remains under 1%.
We noted period of volatility around the SGD Price around 27 Apr and are addressing the anomaly in footnote (i) below.
In addition to the price performance, the protocol was able to ensure that the stablecoin has deep liquidity, so users can swap in and out of the stablecoin with minimum slippages — that is losses to the user due to difference in expected swap rate and executed swap rate. We noted that a 100k SGD trade will only result in less than 0.05% slippage on Uniswap.
The team is optimistic with the stablecoin peg performance and is looking to further tighten the peg with further parameter tuning and market making partnerships.
Does the protocol have a treasury to defend the stablecoin peg?
One of the biggest concerns about stablecoins is the ability for stablecoin holders to swap and redeem them.
Here, we look at statistics around liquidity that provides immediate swaps and assets in treasury to further honour redemption value on our stablecoins.
The protocol currently own 1.033B USD of assets in the treasury (ii) that can be broken down into the following distribution:
- DAI Balance: 860M USD (83%)
- BLU/DAI LP Value: 34M USD (3%)
- SGD/DAI LP Value: 139M USD (13%)
These treasury assets support the generation and upkeep of the 230M bluSGD valued at 169M USD.
The team noted that every bluSGD has sufficient level of liquidity paired up in an AMM and the protocol remains solvent to back the stablecoins generated with excess to be deployed to generate other local stablecoins such as bluPHP that tracks the Philippines Peso.
How does the protocol generate revenue?
The ability to generate sustainable level of revenue over the long term is important for a protocol to remain relevant.
As explained in an earlier article, the protocol generates revenue from seigniorage, arbitrage and swap fees. We have noted that the protocol has generate over 225M of revenue thus far.
Below shows the breakdown of the revenue:
The revenue summarised by category (iii):
- Seigniorage — 169M (75%)
- Arbitrage — 53M (23%)
- Swap Fees — 3M (1%)
By comparing the revenue generated by the protocol against the protocol treasury value, we can see that the protocol has generate 225M of revenue for 2 months using 1B of assets — that’s a whooping 21% returns.
The team also noted that since there are limited trading activities on the testnet, there may be more revenue generated from the swap fees as we expand on the usecases of the local stablecoins.
Governance Token Inflation
How inflationary are the governance tokens?
Protocols that do not have fixed token supply often come under scrutiny for creating excessive amount of “governance token” to fund growth.
Here, we look at how much BLU tokens were generated for different activities to understand if the inflation are due to increased productivity of the protocol or otherwise.
We can see the breakdown of the BLU minted:
- Stabilizing Bonds — 2.34M (53%)
- Treasury Bonds — 1.74M (39%)
- Staking Rewards — 0.36M (8%)
We can see most of the BLU tokens were generated from productive sources, from either raising funds through treasury bonds or operating stablecoin issuance through stabilizing bonds. Only about 8% of the token generation comes from non-productive sources such as staking — even at 5000% APY level.
Furthermore, we can see from the previous sections that the treasury bonds have helped raise 1B of assets and the stabilizing bonds have generate 53M of revenue during the same time period.
Each BLU token holder currently has claim to 189 USD of value in the treasury and 20.8 USD of income per month (iv).
With the observed data on the testnet, the team is able to validate our initial hypothesis around the protocol design and is now more confident in bringing this protocol onto Ethereum mainnet.
The team is currently finalizing the smart contract audit process and will be in final stages of ensuring the smart contracts are ready for launch in Q3 2022.
In the coming weeks, you will be hearing from the team:
- Funding Announcements
- Partnership Announcements
- Whitelist Announcements
- Launch Announcements
In the meanwhile, there are multiple ways you can be part of the non-USD stablecoin growth story by:
- Participating in our Testnet (guide)
- Following our Twitter account (@bluejayfinance)
- Joining our community on Discord
- Subscribing to us on Medium
(i) SGD Price anomaly around 27 Apr
If we zoom into the anomalies in the price data, we can see that the bluSGD stablecoin became excessively expensive against USD, at a maximum of 1 bluSGD = 2.45 DAI.
If we cross reference the price data to the swaps happening on the DEX, we can see that these huge deviation were caused by high volume of swaps in a single direction sustained over time.
In the example above, we can see that the protocol was able to quickly expand on the supply of bluSGD to quickly get the price back to peg in a couple of hours.
In fact, because of the expanded supply of bluSGD, the protocol becomes more resilient to price shocks in subsequent incidents where a large swaps happen and the price of the stablecoin was less impacted.
We also note that because real value are not exchanged on the testnet, there is no natural incentives for arbitrageurs to perform opportunistic swaps to correct the price and there is no disincentives for traders to break down large swaps into smaller trade to minimize losses due to slippages.
(ii) LP Valuation
We value the LP tokens by taking a 0 value for any protocol generated asset to avoid overvaluation.
Using an example of a pool with 1M DAI and 100K BLU, we will value the pool to be 1M USD.
(iii) Revenue Calculation
Seigniorage revenue is the net value of stablecoin created.
(361–130.80) * 0.735 = 169.197
Arbitrage revenue is the sum of differences of swap vs the oracle price.
11.3*0.735+45.5 = 53.8055
Swap revenue is the sum of all swap inputs multiplied by swap fees (0.3%) across all pools (bluSGD/DAI & BLU/DAI).
1.5*0.735+1.2 +3.6/1000*0.735 +711.2/1000 = 3.016346
(iv) Token Valuation
The claim on treasury assumes a liquidation of the protocol treasury, distributing equal value to all BLU holder. At current levels, we distribute 1B or value to 5.4M BLU holders.
1,033,870,422.89/5,457,098.374= 189.45 USD/BLU
The claim on revenue estimates growth of treasury value per BLU token using past revenue data. (We divide above revenue by 2 for the 2 months the testnet is live)
225M/(2*5.4M) = 20.8USD/BLU
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