How A Stablecoin Expands Its Realm
Lessons learned from MakerDAO and Terra
Why is KOKOA worth holding?
In the previous post, we demonstrated why Kokoa Finance chose the collateral-backed model among various models, especially from the viewpoint of ‘long-term stability,’ a prerequisite for a stablecoin. But this doesn’t guarantee the wide usage of a currency just like DAI of MakerDAO. How can KOKOA enjoy such wide usage?
Through this post, we will 1) elaborate more on where the intrinsic value of a governance token(KOKOA in our case) comes from, 2) guide you through how Kokoafarm Labs plans to meet such conditions, and 3) share the major milestones and the overall blueprint.
MakerDAO
It’s quite overwhelming to design a new currency ecosystem from scratch. What would an ideal currency look like that would be the backbone of a DeFi ecosystem? Which “use cases” do we need to design for a growing influx of new users? These questions were at the heart of every decentralized token economy researcher during the recent years of cryptocurrency’s popularity and furthermore led to several notable experiments. For sure, we already have two successful cases to guide us through.
The first example is MakerDAO. Since its inception in December 2017, MakerDAO’s DAI stablecoin survived to become the most dominant decentralized stablecoin in various DeFi ecosystems.
Few Notable Points from MarketCap-TVL Chart of MKR
The following two charts both show the market capitalization of MKR, the governance token of DAI, and its TVL. The former shows one-year record and the latter from genesis.
Two points are worth noting from these two charts. First is the high correlation between the value(=market cap) of the governance token and TVL(Total Value Locked, in the context of Collateral-backed stablecoin). MakerDAO’s “revenue” comes from the stability fees(similar to interest) that DAI-minters pay to the CDP. Higher TVL means larger DAI debts, which leads to higher “revenue” for the protocol. In the Kokoa community, the KSD reward given in the ‘Govern’ section is the “revenue” for the protocol.
The second point of interest is that the TVL level, which was stagnant at the level of $500M for three years until June 2020, grew 3000% to $18B(as of November 2021) in just 17 months(MKR’s market cap grew on a comparable scale). What happened in those 17 months? Has MKR found special use cases to drastically bolster its intrinsic utility?
Obviously enough, no. MKR was already owned and operated by the MakerDAO by 2018, and was itself a fully-functional governance token. MKR holders could, just like today, participate in the governance process; MKR’s value-capture model was exactly the same as today, which was (and is) by burning MKR with the stability fee raised. Then what drove this staggering growth?
It’s All About the Price Stability of DAI
We need to come back to MakerDAO’s identity as a “stablecoin platform.” If nothing’s changed with MakerDAO itself, we should now turn to the stablecoin, DAI, or its market environment. To start with, let’s take a look at DAI’s price data from early-2020.
Note the improved price stability around 20Q3 and 20Q4. This is also the same period when MakerDAO’s TVL started its hike. We can infer that the significant increase in the price stability of DAI during this period was what allowed its exponential growth in the coming months. The logic goes: the price stability of DAI drove its higher demand, leading to TVL growth and higher intrinsic value of MKR. What allowed such an increase in price stability during this period?
When you think for a second, DAI — just like KSD — was already a very stable model in the sense of long-term pegging because it is a collateral-backed stablecoin. However, short-term instability inevitably occurred even into early 20Q3, due to short-term supply-demand shifts. So the question now becomes: What allowed such an increase in short-term price stability during this period?
The answer lies within effective liquidity provision. Until 20Q3, the only existing token swapping method within the entire DeFi was UniSwap’s AMM(Automated Market Maker). Blockchain is innately incapable of CEX-like orderbook swaps because of its comparatively slow transaction processing speed.
UniSwap’s proposal was innovative in that it created a sufficient liquidity pool and allowed for an automated token swapping mechanism. Yet, UniSwap’s model was designed to swap more “general” pairs of tokens and thus was incapable of an intricate swapping between pairs of tokens with extremely small price volatility, such as pairs of stablecoins.
For example, let’s imagine a DAI-USDT liquidity pool with 1,000,000 DAI and 1,000,000 USDT and Alice needs to exchange USDT into 50,000 DAI. UniSwap’s AMM would require that she pay 52,631 USDT(=1:1.05 rate). This high slippage cost is very unnecessary considering that the trading volume was a mere 5% of the whole liquidity pool. In the end, this 1~2% exchange cost is such great loss for Alice, when all she’s trying to do is swap a dollar for another dollar.
Introduction of Curve Finance
Curve Finance was the first “StableSwap(swap protocol specifically designed for liquidity provision of inter-stablecoin swaps)” invented to address this specific problem. This post will not dive deep into the basic mechanisms of stablecoin. The focus here is that StableSwap is different from UniSwap’s AMM protocol(a.k.a. Constant Product-AMM) in that it uses a formula customized for swaps between assets of low exchange rate volatility, for example, exchange between DAI and USDT.
The above image shows when we try to acquire 80,000,000 DAI(approximately 5% of the liquidity pool volume, to make a fair comparison with the previous UniSwap’s case) from Curve. Although we can see from the bottom section that the pool’s composition between DAI, USDC, and USDT is not strictly equal(approximately 45:35:20), the swap of $80,000,000 size still protects the exchange ratio at 1 to 1.002. This is contrastive to UniSwap’s 1 to 1.05 exchange rate.
The above chart shows Curve Finance’s market cap of CRV, its governance token, and its TVL. We can easily see the correlation between the two; as liquidity gained momentum(higher TVL) in the second half of 2020, DAI’s short-term price volatility was significantly removed, as reflected in the market cap growth.
The above two figures(DAI trading volume at DEXes and DAI market cap) show a drastic increase in DAI demand around late-2020 followed by a corresponding supply of DAI, opening its golden age.
DAI has since multiplied in its utility across DEXes, lending protocols, and yield farming and is now the dominant decentralized stablecoin of the DeFi ecosystem.
To summarize the story until now, Curve’s launch allowed for a much efficient 1-to-1 exchange between DAI and other stablecoins, lowering DAI’s price volatility. This led to 1) a much higher utility as a “functional currency,” 2) higher demand for DAI, and 3) an increase in the value(=TVL) of MKR, the governance token of MakerDAO. In other words, StableSwap made DAI a “better currency” within the DeFi ecosystem and drove the fundamental demand for DAI, boosting the intrinsic value of MKR.
Terra
It wouldn’t be completely fair to compare Terra(UST) directly with other collateral-backed stablecoins like DAI or KSD, because Terra is an algorithmic stablecoin where its governance token is burnt in response to Terra’s market inflation. Nonetheless, algorithmic stablecoins too share the common purpose of a “functional currency,” so it’s worth diving into how Terra successfully secured its position as a widely used stablecoin.
Price Stability of UST
Terra achieves stability by 1) minting new LUNA for buying back and burning UST when UST is traded below $1 and 2) minting new UST to buy LUNA and burning LUNA when UST is traded above $1. It chooses a more active method of pegging UST to $1 as opposed to collateral-based stablecoins. This allowed for the high price stability of UST from the beginning. We can easily check that UST boasted much higher stability than DAI, staying in between the green line($1.05) and the red line($0.98). The model itself satisfied the first condition for becoming a widely used stablecoin.
Then, when did the demand for UST start to grow?
The Rising of the UST Ecosystem
Above is the market cap of UST. In mid-February, UST’s total supply started its sudden hike. What happened then?
Mirror Protocol — The Birth of Terra’s DeFi Ecosystem
It was the introduction of Mirror Protocol. Mirror protocol was Terra ecosystem’s second DeFi platform. (The first was TerraSwap.) It’s a synthetic asset platform over UST-based collaterals.
Various synthetic assets such as mTSLA and mGOOGL could now be minted and traded with USTs, making UST the key currency of the ecosystem. Terra’s de-fi ecosystem now attracted more users, adding to the utility of UST.
Moreover, international users who wanted direct exposure to US stocks, but had limited access to under traditional financial infrastructure, could now use Mirror Protocol to invest in its synthetic assets.
Mirror Protocol’s success was followed by the birth of Anchor Protocol, a lending platform for Staked LUNAs. Anchor Protocol provides an enormous 20% fixed APY, attracting even more users into the Terra platform(=higher Terra TVL).
Mirror and Anchor’s consecutive success was more than enough to attract attention from the global crypto community and fascinated many developers and teams into launching various DeFi protocols on the Terra-Luna ecosystem. This chain effect boosted the demand for UST, drawing an upward graph for UST’s TVL.
This effect is naturally reflected in LUNA’s(the governance token of Terra) super-fast growth. LUNA already had its governance system in place even before 2020, but it was the DeFi adoption of UST (represented by the two killer apps, Mirror and Anchor) that drove fundamental value and demand for UST.
Lessons Learned from MakerDAO and Terra
These two successful cases present us with three clear lessons. First, a successful stablecoin should secure price stability both in the long term and short term. DAI achieved this through Curve Finance and UST with its own algorithmic model.
Second, the stablecoin should have various use cases throughout the DeFi ecosystem. DAI already had various DeFi apps in Ethereum, so it was ready to fly high right once it secured its price stability. UST, on the other hand, already had its price stability from its birth but lacked its own DeFi ecosystem. Once it had its DeFi building blocks(such as Anchor and Mirror) in place, it paved its way into exponential growth right away.
Lastly, growth in fundamental demand of the stablecoin as a consequence of price stability and larger DeFi applications will lead to the promotion of the governance token value along with platforms’ TVL expansion.
Conclusion
KSD’s current status is a mix of DAI’s and UST’s situation(before their mass adoption). KSD’s price stability has not been achieved(Edit: i4i Finance was launched in January 2022) and Klaytn lacks a fully-functioning DeFi ecosystem yet. Luckily, following the launch of KlaySwap in late-2020, loads of new DeFi projects are entering Klaytn’s ecosystem; KlaySwap’s monthly trading volume($3B) is very indicative of the Klaytn DeFi’s potential.
Just as DAI secured price stability and expanded its realm into various DeFi platforms such as UniSwap, Compound, and Yearn Finance, KOKOA will follow MKR’s exponential path given KSD achieves short-term price stability and the surrounding DeFi application infrastructure is expanded. KSD will act as a powerful propellant of the growing Klaytn DeFi ecosystem.
Kokoafarm Labs’ Next Steps
In that sense, Kokoafarm Labs’ next steps are quite clear. KSD’s short-term price stability must be secured, and its utility must be expanded in various services such as swaps, lending protocols, or synthetic assets. The former can be achieved directly with StableSwap(which we don’t yet have in Klaytn), while the latter requires efforts on a longer time horizon. We can start with some killer dApps and broadening of Kokoa ecosystem as following the path of the Terra ecosystem. Kokoafarm Labs have already made a CIC(Company in Company) Team dedicated to launching a StableSwap platform. After KSD has secured its price stability, Kokoafarm Labs will redirect its efforts into other decentralized applications that would broaden the utility of KSD within Klaytn ecosystem.
Some components, like StableSwap, will be developed directly by Kokoafarm Labs but other components can still be constructed in the form of collaborations/partnerships with other fantastic teams or investments/grants into new projects. Kokoafarm Labs pursues a DeFi ecosystem where all players collaborate and grow together as a community.
Contribution to the Community
All these efforts at Kokoafarm Labs are aimed at bolstering the intrinsic value of the Kokoa Finance platform and expanding the realms of KSD. Thus, the rewards from the platform should be directed towards the DAO stakeholders(=governance stakers). For example, Terraform Labs, makers of the Terra blockchain, made sure to redirect incoming rewards from Mirror, Anchor or Pylon protocol(apps that they developed themselves) to the LUNA stakers in the form of airdropping (or staking rewards) the governance token of each new projects such as MIR, ANC, and MINE respectively. This in turn contributed to a successful Terra-Luna ecosystem in general, rapidly attracting more users and developers. Kokoa Finance will make sure that such proven community-building mechanism is on its way within the Kokoa ecosystem.
Development Schedule
Kokoafarm Labs is working day and night to improve Kokoa Finance’s services and expand the usage of KSD in the Klaytn Ecosystem.
In preparation for higher KSD demand, Kokoa Farm Labs is working on projects aimed at the expansion of the stablecoin along with further improvements of the Kokoa service itself.
A multi-Collateral CDP system that will allow for a sufficient supply of KSD in the future is on its way in 22Q1. The multi-collateral system will accept LP tokens such as KLAY-USDT LP as collateral and mint KSD.
Kokoa’s version of Curve’s StableSwap is set to launch in 22Q1(Edit: you can find it here: i4i.finance); partnerships with newly launched DeFi projects are still ongoing to expand the “realms” of the KSD ecosystem. Furthermore, decentralization of Kokoa’s governance will be a key issue as Kokoa’s ecosystem grows. Effective governance should take into account stability and sustainability, not to mention its technical requirements. Thus, an exact expected launching schedule has not yet been decided, though technical requirements will be developed and tested by June 2022.
In the near future, Klaytn’s DeFi will naturally be in need of more native stablecoins throughout the ecosystem, and when that happens, KSD and Kokoa Finance will be at the center of it.
It would be a pleasure to take on that journey with you. Stay tuned.
Website: https://kokoa.finance
Telegram (KR): t.me/KokoaFinance
Telegram (Global) t.me/KokoaFinanceGlobal
Twitter: https://twitter.com/KokoaFinance
Medium: https://medium.com/kokoa-finance
