PLAAS (2/4): synergies with crypto-backed stablecoins for borrowing stablecoins!
This article is the second of a series of 4 articles related to our PLAAS program.
Most crypto-backed stablecoins are based on the CDP model, which is similar to borrowing: users deposit a collateral and, borrow stablecoins. But instead of borrowing them to someone, the stablecoins are minted, and somehow borrowed from the protocol.
But these stablecoins suffer from a low liquidity and a poor peg, which limits their usability. However, paired with jFIATs in a Curve pool, they enable the most powerful, flexible and cheap way to borrow stablecoins, and can rivalize on par with money markets like Aave or Compound.
In this second article, we will focus on the synergies between jFIATs and their crypto-backed equivalent that are using the CDP issuance model.
An efficient credit line
Most crypto-backed stablecoins are following the Collateralized Debt Position (CDP) model, popularised by MakerDAO’s DAI: users deposit collateral in a vault, from which they can draw stablecoins.
For example, fxAUD, a crypto-backed Australian Dollar stablecoin from Handle, or PAR, a crypto-backed Euro stablecoin from Mimo Capital are CDP-like stablecoins. Handle and Mimo users can borrow fxAUD or PAR by depositing BTC, ETH, MATIC, or USDC as collateral.
Minting a stablecoin through this mechanism is equivalent to borrowing, and is very similar to using money-markets like Aave. But unlike the latter, there is no pool or a floating interest rate based on its utilization, and borrowing a stablecoins does not require to have depositors on the other side, since they are minted by the protocol.
In that regard, CDP-based stablecoins provide the most efficient and convenient way to borrow stablecoins, and because they do not require depositors, they are also more scalable in terms of offering: protocols only need a price feed to launch a new stablecoin and to allow people to borrow it!
These protocols provide their users with a credit line denominated in the currency of their choice without having to find depositors!
PLAAS = Peg and Liquidity As A Service
Like fiat-backed stablecoins, CDP-based stablecoins suffer from a lack of liquidity which results in a poor peg. This prevents them from being used for leverage for example.
And like for fiat-backed stablecoins, pairing a jFIAT with these CDP-based one provides the latter with the peg and liquidity they need.
Relying on this efficient peg mechanism, should allow them to have stable interest rates: in fact, some of these protocols adjust the interest rate according to the peg of their stable; when they are below their peg, the protocol tries to motivate people to repay their debt, thus buying back the asset, which makes its prices going up, and vice-versa when the asset is traded above its peg.
Fiat on and off-ramp
While fiat-backed stablecoins have already their dedicated fiat gateway, it is very rare to see CDP-based stablecoins having one, due to their lack of liquidity, or risks (considering that they are using volatile collateral-type). Since jFIATs have been integrated into Mt Pelerin’s fiat on and off-ramp, they also provide off-chain fiat liquidity to the CDP-based stablecoins they are paired with.
Better credit line!
Thanks to the PLAAS, DeFi users have now a convenient way to borrow in many non-USD stablecoin without being imprisoned in an illiquid asset and at a low-interest rate! They can enjoy deep on-chain liquidity for their leverage trading for example.
Combined with jFIATs fiat on and off-ramps, the borrowing capacity of CDP-based stablecoins, provides users with a smooth way to borrow in various currencies using partnering protocols like Handle or Mimo, and to cash them out through Mt Pelerin’s jFIATs integration.
For instance, one can borrow PAR at a 2.99% yearly interest rate, swap it for jEUR and cash them out for real Euros, or swap them for any other token leverage jEUR’s deep on-chain liquidity, in order to leverage!
CDP-based stablecoins, combined with jFIAT’s liquidity, create a new standard for borrowing stablecoins, and can rivalise on par with money market to capture this emerging niche.
Pascal (pscltllrd on Twitter).
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