Yield Stable Coins #103

Andre Cronje
Jul 15 · 3 min read

To explain the next part, we need to understand stable coins.

Why is 1 USDT worth 1 USD? Simply, because if I own 1 USDT, I can go to Tether as a registered entity, and trade 1 USDT for 1 USD. So if the price of USDT is 0.9, then I want to buy it all the way up to 1 and trade it for 1 USD, making profit. If the price is 1.1, then I want to “mint” USDT with USD and sell it all the way down to 1, again, making profit.

The same is true for USDC and Circle, or TUSD and Trust.

What about DAI? DAI is not backed by dollars, but instead by ETH. I can supply $100 worth of ETH, and then I can mint $100 worth of DAI (this part is not true, you can only mint $66, this is because of how the liquidation system protects the value, but to keep things simple, assume 1:1).

If the price of 1 DAI is 1.1 USD, I can mint DAI with ETH, and sell the minted DAI for ETH. But, you needed to provide 1.5 USD worth of ETH, to mint the 1 USD worth of DAI. So now you can sell your 1.1 USD worth of ETH, but you are still -0.4 USD down. (this is why DAI sometimes struggles to keep its peg).

The solution to the above problem is easy right? Just let the minter create 1 USD worth of DAI with 1 USD worth of ETH. The problem with this, is ETH’s own inherent volatility, if ETH drops by 1% then, the whole system becomes unstable, as there is no longer enough ETH should all the DAI be withdrawn.

The above is the same reason why there are so many legal cases around companies like Tether, with regards to “are they 1:1 backed”, meaning, if every person holding USDT today, tried to withdraw USD, would they have enough to cover it? That is a critical question for something to remain stable. There always needs to be enough of the underlying asset for people to exit the full sum.

With the above explained, we propose a new kind of stable coin (yes, we know, we don’t need another one, and technically this isn’t). This is an AMM (Automated Market Maker) transfer mechanism.

When you create a new uniswap pool, you provide 50/50 value. So you would provide $1 worth of BAT and $1 worth of ETH. Another pool, would have $1 worth of DAI and $1 worth of ETH. If you wanted to trade BAT for DAI, you would actually be trading $1 worth of BAT for $1 worth of ETH, which is swapped for the other $1 worth of ETH, and traded for $1 worth of DAI.

So in the example above, the ETH is just a value transfer, and 1 ETH needs to simply remain equal to 1 ETH. If 1 ETH = 1 ETH, then $1 worth of BAT = 1$ worth of DAI.

This “value transfer asset only needs to be equal to one of itself” allows us to do something interesting. When you provide $1 worth of BAT to this new AMM, it also creates $1 worth of transfer token. When someone else provides $1 worth of DAI, it also creates $1 worth of transfer token.

Now a few interesting things happen;

  1. We only needed to provide single sided liquidity
  2. The value of the transfer token is equivalent to the value of all assets put into the system combined.
  3. If a trader adds more of asset A into the ecosystem, they need to remove more of asset B from the ecosystem. Thus abiding by rule #2
  4. If the value of transfer token becomes more than the value of the assets in the ecosystem, traders are incentivized to sell transfer token into the ecosystem and remove other assets. Thus abiding by rule #2

We have launched this as Stable AMM, a single liquidity provisioning system, which maintains its own internal stability, while benefiting from our yield improvements to the underlying AMM protocols.


yearn.finance defi made simple

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