tDOLLAR — Crypto Stablecoin Case-Study
ExoniumDEX is currently revamping our tDOLLAR mechanism. To find out what tDOLLAR and stablecoins are all about, check out this brief introduction.
Within the Exonium DEX ecosystem, tDOLLAR will be the platform’s stablecoin. tDOLLAR is a decentralized, unbiased, fractional crypto-collateral-backed cryptocurrency soft-pegged to the US Dollar. tDollar will be used as collateral for new synthetic assets minted on Exonium DEX.
tDOLLAR utility within the ExoniumDEX ecosystem plays a huge role in -
- tDOLLAR trading pair with tASSETs
- Collateral to mint synthetic assets
- The native stablecoin standard for future use-cases in DeFi (eg. payment)
To counteract the higher relative volatility of backing stablecoins through crypto, tDOLLAR will maintain an over-collateralized position.
In other words, tDOLLAR will circulate a much lower supply against the reserve as compared to fiat backed currencies. For instance, a crypto backed stablecoin such as tDOLLAR may issue only $500 worth of coins for every $2,000 worth of cryptocurrency such as tEXO in reserves rather than keeping a 1-to-1 ratio.
Finalised mechanism and tDOLLAR launch will be released prior to tASSETs launch.
The state of Stablecoins
Stablecoins have become a crucial component of the cryptocurrency ecosystem, and their usage is growing. More than only a useful form of collateral in DeFi, stablecoins have shown promise in solving issues such as the hyperinflation crisis in Venezuela.
Algorithmic stable coins value are pegged to a fiat currency which is usually the US dollar. They respond to market events using predetermined stabilisation measures hardcoded into smart contracts. This promotes decentralised form of money and has the opportunity to create a global currency that is not governed by a single institution, acting as a medium of exchange not just for DeFi but globally.
Stablecoin is not a fail-proof concept in the current stage. A smart currency that never deviates from its peg and doesn’t require any capital lockup to back up its validity has yet to be fulfilled. In practice, this space is still nascent and hasn’t reached peak potential or actually acquired the critical mass of users and liquidity to accurately keep their pegs and offer a viable incentive to users to stabilise the currencies.
The goal of this project was to find how viable algorithmic stablecoins are in practice, how accurately they keep their pegs, how they are governed and how they interact with the user and the broader ecosystem.
During the development and planning for tDollar protocol, we’e included various major stablecoin projects into our research and case study.
Algorithmic stablecoin is still a new mechanism that is being explored. We have experimented with coupon-based mechanisms that do not seem to work in holding its peg. Pure algorithmic stablecoin with rebasing could have some potential, but it seems like the best and most promising solution so far is fractional collateralisation with algorithmic mechanisms to maintain the peg.
The concept of hybrid stablecoins is an innovation in the right step and its potential will be unveil in no time. Protocol that offers a stable pegged value, fully decentralised and working economic incentives has much to evolve. Given the rapid growth of the stablecoin and cryptocurrency sector and the bright minds working on these issues, the future is optimistic.
Advantages of crypto-backed stablecoin — tDOLLAR
- Borderless. Stablecoins retain the power of all cryptocurrencies to move without regard to physical borders.
- Transactional speed. Financial transactions on blockchains are objectively faster than traditional processes. Stablecoin transactions don’t have to wait on a 3rd party to verify the transfer, which means no one pays fees to any 3rd party either.
- Transparency. Transactions using stablecoins are recorded on a public ledger that can be monitored by anyone, unlike fiat currency.
Case-study — Stablecoin
Throughout the development and planning for tDOLLAR mechanism, the team looked into various existing stablecoin concept.
1) MakerDAO — DAI
As one of the pioneer in the crypto-backed stablecoin sector, MakerDAO aims to use its native MKR tokens coupled with the Ethereum blockchain with the intention of minimizing price volatility. MakerDAO uses a smart contract and the Ethereum blockchain, which allows collection of ETH (collateral) into Pooled Ether (PETH). This becomes the collateral which helps maintain the peg. The smart contract can then generate MakerDAO’s DAI token, which gains interest “stability fee” over time. If a user wants to withdraw ETH (collateral) from the contract, they would need to pay back the same amount of DAI and fees. OASIS now accepts various cryptocurrencies as collateral instead of just ETH.
The loans in the MakerDAO system must retain at least 2/3rd of the value of the underlying collateral, in other words requiring at a maximum a 66.7% loan-to-value (“LTV”) ratio or a minimum 150% collateralization ratio at all times in order to avoid default. In other words, $1.50 of collateral allows for a $1.00 loan to be issued to borrowers; if the borrower’s collateral drops in value such that these covenants are breached, then some of the borrower’s collateral is automatically sold to garner proceeds that can partially pay down the loan.
The MakerDAO platform backs and stabilizes the value of Dai, MakerDAO’s native collateral-backed stablecoin that is soft-pegged to 1 USD and backed by Ether, the native digital asset of the Ethereum blockchain, as collateral. Dai operates as the by-product of loan generation (or margin), through a dynamic system of collateralized debt positions, autonomous feedback mechanisms, and appropriately incentivized external actors. To get a loan, borrowers first create a collateralized debt position (“CDP”) by posting Ether as collateral through an Ethereum transaction.
Upon the creation of a CDP, borrowers then issue themselves a Dai-denominated loan against the Ether each borrower posted as collateral at a globally standardized rate that currently sits at 0.5% (otherwise known as the “stability fee”), denominated in Dai but paid in MKR.
2) Synthetix (sUSD)
sUSD is perfectly positioned in the evolution of DeFi, elevating sUSD as the permissionless alternative with the foremost commitment to the values of decentralization.
In its current form, Ether collateral on Synthetix isn’t all that useful for traders who want to lever up their Ether position. That’s because ETH collateral allows traders to mint sETH debt at a 150% C-RATIO. The drag is that a trader is trading against the price of ETH. In an ecosystem made mostly of long term crypto bulls, this is an especially unattractive proposition. Synthetix’s sUSD-denominated ETH collateral delivers more utility to trader, it will also expose a key advantage sUSD has over DAI as a stablecoin. sUSD has a native use case in the Synthetix system without comparison in Maker. A trader can sell that sUSD for ETH, just like a CDP holder might. Or − this trader can sell sUSD for sBTC, sETH, iTRX, sFTSE, sGBP or any of the other ~30 synths currently available on Synthetix. Even in the most DAI-like scenario where a trader uses sUSD to lever an ETH position, traders on Synthetix will soon have 5x, 10x and greater leverage opportunities available natively with their sUSD.
sUSD is poised to appropriate DAI’s foremost use case. And when the dust settles, the utility gap will have been blown open.
3) Frax Finance (FRAX)
FRAX is an algorithmic stable coin that is partially collateralized. Basically, it can be minted by any individual who provides two USDC and FXS, which is the protocol’s native token.
The minting process uses a collateral ratio to create new tokens. In the case of a 50% collateral ratio, the individual would have to provide $0.5 of USDC and $0.5 of FXS to mint one FRAX.
At any point in time, users can redeem the FRAX token for $1. If the user wants to redeem his collaterised asset , he can repeat the process and receive $0.5 USDC and $0.5 FXS for the single FRAX token.
Unlike other stablecoins like DAI, FRAX is only partially collateralized to USDC. FRAX’s reserve of USDC is always lower than the amount of circulating FRAX tokens.
To safeguard its stable ratio against the USDC, Frax Finance utilizes arbitrageurs who are financially incentivized to buy FRAX and redeem it if the token goes below $1. By doing so, they make a profit and create a buying pressure that restores the token’s stability.
Likewise, the same arbitrageurs restore FRAX’s original value if it goes above $1. They will mint FRAX using USDC and FXS and sell the token to profit, which pushes the price down with enough selling pressure.
Implications caused by black-swan events-
Crypto-backed stablecoins need to be overcollateralised because assets like ETH are volatile. If the price of ETH drops, more collateral needs to be added to maintain the peg.
Crypto-backed stablecoins have become a backbone of the DeFi ecosystem, but they’re also prone to risk. On “Black Thursday”, when crypto assets plummeted 50% in response to Coronavirus, many MakerDAO loans became undercollateralised, which resulted in DAI losing its $1 peg.
Algorithmically Stabilized Stablecoins
Regarding algorithm stablecoins, ExoniumDEX team decided not to go ahead with this approach as we have seen many projects tried but failed to show success in their peg ratio to USD. However, we look into hybrid stablecoins for solution to existing implications affecting volatility of stablecoins.
Algorithmic stablecoins do not essentially require the use of backing assets. Such coins typically solely depend on algorithmic stabilization, oracle price feeds and user participation (trading) to maintain their peg. Ampleforth is an example of a purely algorithmic approach to reducing the volatility of cryptocurrencies. It is a synthetic commodity money based on algorithmically enforced elastic supply. The Ampleforth platform has a single ERC20 token called AMPL. It should be noted that Ampleforth does not claim to be a stablecoin but rather a low volatility coin that is designed to diversify risk. High correlation among cryptocurrencies results in a vulnerable ecosystem and introduces systemic risk. Ampleforth’s elastic supply tackles this challenge by an algorithmic rebasing mechanism that applies countercyclical pressure against the fluctuation in the market. The rebasing mechanism helps maintain stability by incentivizing users to stabilize the system via arbitrage opportunities.
Possible implications of crypto-backed stablecoins
In traditional finance, a bank run occurs when a large number of clients of a bank or other financial institution withdraw their deposits simultaneously over concerns of the bank’s solvency. We’ve seen this incident happen in the crypto space before on polygon chain.
As more people withdraw their funds, the probability of default increases, prompting more people to withdraw their deposits. In extreme cases, the bank’s reserves may not be sufficient to cover the withdrawals. A bank run triggered by fear that pushes a bank into actual insolvency represents a classic example of a self-fulfilling prophecy. The bank does risk default, as individuals keeping withdrawing funds. So what begins as panic can eventually turn into a true default situation.
That’s because most banks don’t keep that much cash on hand in their branches. In fact, most institutions have a set limit to how much they can store in their vaults each day. These limits are set based on need and for security reasons. The Federal Reserve Bank also sets in-house cash limits for institutions. The money they do have on the books is used to loan out to others or is invested in different investment vehicles.
Because banks typically keep only a small percentage of deposits as cash on hand, they must increase their cash position to meet the withdrawal demands of their customers. One method a bank uses to increase cash on hand is to sell off its assets — sometimes at significantly lower prices than if it did not have to sell quickly.
You may find out more about the recent incident surrounding Iron.Finance in this brief tweet:
ExoniumDEX is an Omni-chain decentralised exchange (DEX) primarily designed to be a unifying DeFi protocol and synthetic assets AMM through a unique oracle concept and bridging function. It will be used to support all on-chain or off-chain assets on various blockchain, providing significant liquidity to the decentralised finance (DEFI) universe by being all-inclusive.
As a one-stop DEX, ExoniumDEX will be positioned as a pivotal platform in the cryptocurrency space, allowing inter-exchange of all assets and yield opportunities regardless of blockchain technology in a safe, transparent and permission-less environment. The recent expansion of DeFi projects brought multiple innovative platforms to the ecosystem but most projects are still centralized or governed by a small group of participants making it difficult to make a smooth integration with other platforms.
We aim to aggregate all current and future DeFi applications under the same ecosystem that can be managed in a decentralized way without unnecessary fragmentation. This approach will allow for quick development and a more efficient market for users.
DeFi protocols like ExoniumDEX are the future for savvy investors to mitigate regulatory risk in a world of uncertainty.
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