Proposal to add BTC collateral to Xar

Published in

Fantom Foundation

3 min readDec 17, 2019

https://explorer.xar.network/proposals/8

Since proposal 8 was introduced via the governance system, there have been quite a few interesting debates around the effect this will have on the system.

To try to quantify these effects, I want to unpack and look at a few specific areas related to this addition. I will also be using 3 terms, collateral coin (anything that can be used as collateral — for purposes of proposal 8 this includes FTM, and BTC), governance coin(that is assigned voting and configuration rights — for purposes of proposal 8 this is FTM), index coin (or stable coin— for purposes of proposal 8 this is CSDT)

Impact on DeFi feature set

The most immediate effect of introducing new collateral is its value in the DeFi feature set, the feature set is available here; https://www.blog.xar.network/interacting-with-xar-modules/ and a up to date list is kept here; https://xar-network.github.io/awesome/

So introducing new collateral makes it available for;

Lending (via the CSDT module), coin swaps (via coinswap module), dex trading (via dex module), auction (via auction module), shorting (via synthetic module)

While adding the collateral itself does not automatically create a coin swap liquidity pool, or a dex market pair (those need to be voted in separately via governance). It does allow the token to become part of this ecosystem.

2. Impact on fees and on-chain activity

The secondary effect on the DeFi feature set, would be on-chain fees and usage of the underlying fee coin (governance coin in this case). The more activity, the more usage, the greater the fee ratio. This increases the velocity value of the underlying fee (governance coin).

More collateral increases the activity pool, which increases the governance fee usage. More collateral also gives access to new user-bases that allow for growth outreach.

The greater the activity on the DeFi modules, the higher the fees rewarded in governance coin.

3. Impact on Chain security

The next effect is the impact on chain security, by adding more collateral it deleverages the risk on a single collateral volatility and starts functioning like a security index fund. Not only does this decrease volatility risk, but it increases the base net value of the security. To explain;

You as a bond issuer would like to issue $200MM of bonds on-chain. Would you be comfortable issuing these bonds on a chain that was worth $2MM? For $2MM you could attack $200MM worth of value. So being able to scale chain security becomes critically important for on-chain security.

The addition of collateral increases system security and decreases system volatility. Both of these are a function of governance, as governance sets the collateral ratio, and the maximum debt limit. So in the case of proposal 8, the debt limit is $250k, so the ratio of BTC to FTM would be $250k to $5MM, roughly 4.7% value of the ecosystem.

4. Governance Coin

During all the above, I have frequently referred to governance voting. This is all done via the governance coin (as proxy for the index coin). So the collateral that’s added, the ratio, the debt limit, its coinswap pairs, its availability as a short instrument, even its pair on the dex are all controlled via the governance coin.

The utility of the governance coin does not diminish in this ecosystem as other collateral coins are added, instead, it maintains dominance over them. The indirect effect of this, is that people wanting to have a governance right over their additional collateral, need to use the governance coin to do so.

TLDR

Additional collateral allow for;