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Akamon: a Solution For Stablecoins On Cardano

Comparing Cardano stablecoin solutions and the benefits Akamon will bring to the ecosystem— USDT is coming to Cardano 🚀

https://testnet.app.meld.com/akamon

Contents

🤖 Djed model: Ergo and COTI

There are three coins in the model:

  1. Djed (stablecoin)
  2. ADA (base coin-for buying and selling Djed)
  3. RC (reserve coin-its sales are added into the reserve fund)

The way Djed works is as follows.

  • Trader buys Djed: he sends (1+fee) USD worth of ADA to the protocol to receive 1 Djed. The protocol mints 1 Djed and puts ADA into the reserves. 1 USD worth of ADA is a liability and the fee is considered an equity surplus. However, when the price of ADA drops and the total fees are not enough to cover the loss, the equity surplus will vanish. In practice, Djed is issued only if the reserves-to-loan is beyond a certain healthy threshold.
  • Trader sells Djed: trader deposits 1 Djed to receive (1-fee) USD worth of ADA if the protocol has enough reserve to pay (otherwise will pay less). The protocol will burn this Djed. If the reserves-to-loan ratio is below 1, then traders will receive an amount of ADA from the reserve pool pro-rata with his share of Djed. In practice, there is no restriction for selling ADA back to the protocol.
  • Trader buys reserve coin: trader deposits (1+fee) USD worth of ADA to receive 1 USD worth of reserve coins. These sales of RCs are to finance the equity surplus. If the equity surplus is zero, then the theoretical value of the reserve coin should be zero. However, its market value can be non zero and that will help strengthen the reserves. I consider this as the smartest point in the design of Djed. In practice, traders can only buy RCs if the reserves-to-loan ratio is below a certain threshold to avoid value dilution.
  • Trader sells reserve coin: trader deposits 1 USD worth of RCs to receive (1- fee) USD worth of ADA. In practice, this buyback is only allowed if the reserves-to-loan ratio is beyond a certain threshold to keep the surplus healthy.
  1. High wrap fees: Milkomeda two-way fees are sitting at 0.6%, not accounting for gas fees, while Akamon offers 0.3% for two-way transaction fees, and are looking to reduce it to 0.2% in the future.
  2. Milkomeda has a smaller ecosystem compared to Cardano. On top of this. we are building bridges from other blockchains directly to Cardano instead of building bridges to Milkomeda — purely a side chain of Cardano.

⛩ Wrapped stablecoins via Akamon: a new supplement

⚔️ Wrapped stablecoins Vs. Djed

Cheaper

  1. She can buy/sell Djed from COTI or SigmaUSD from Ergo. The bid-ask spread is 4% (for COTI) and 5% (for Ergo). Plus, the gas fees are 5 ADA on each side. The two-way gas fees account for 0.05%. Hence total two-way fees will be 4.05%-5.05%.
  2. She can buy mUSD from a DEX on Cardano. Assume that the DEX TVL is 20m USD (equivalent to the TVL of the MIN/ADA pool on Minswap), then the price impact will be about 0.11%, plus liquidity providers fees of 0.3% and gas fees of 2 ADA, or total two-way fees will be 0.84%.

More stable

  1. Djed can depeg when the real equity level drops below zero, and when it happens, a bank run will follow and the system might collapse eventually. This is because Djed does not have a mechanism to liquidate the reserve. Though this is hard to happen in normal time, it is extremely likely during crypto crises. Initially, it is required that the equity should be at least three times the size of the debt, however, when the price of ADA drops more than 75% then equity will go down to zero. Note that the ADA price dropped almost 8 times during the most current crisis, not just 4 times.
  2. Trading Djed against the protocol involves expensive fees, and it is very hard to maintain the peg of Djed via arbitrage activities. Hence, the price of Djed will fluctuate in a wide band [1-fee, 1+fee], for example, for COTI this band is set up to be [-0.98, 1.02].

Higher liquidity

  • Djed is a newborn stablecoin, so it will take time for the liquidity of Djed on Cardano to build up.
  • The high minting and burning fees of Djed make it expensive to use, which prevents the growth of this stablecoin.
  • When the market is on a downtrend such that Djed depegs or is close to depegging, then stablecoin holders will bank run and redeem Djed for the basecoin, which will cause a massive drop in liquidity of Djed on the market.
  • Even if Djed does not depeg, but the price of ADA drops to the level that makes the reserves to be smaller than the minimum threshold, then equity holders will be at risk and find it unattractive to buy the reserve coin. Consequently, no more Djed can be minted, and thus the liquidity will be trapped.

🤝 Use cases for wrapped stablecoins on Cardano

  1. Pay transaction fees. Many dApps on Cardano are using ADA as means of payment, which is not a good method as ADA is nonstable. Fees may become extremely expensive when the ADA price increases, and maybe not enough to maintain dApps when the ADA price decreases.
  2. Trading pools. Similarly, all native tokens have to be traded against ADA. And during crises, all tokens tend to move together, including ADA, which means using ADA as a means to store value is not a realistic method.
  3. Lending pools. When a trader wants to take a short position on some native token X and there is no stablecoin to be used as collateral, he has to put ADA or some other native token Y as collateral. He will then be exposed to the systemic risk when the price of ADA (or Y) and X move in the same direction (downwards). As he over-collateralizes, he will tend to lose more than what he gains from the short position even when he predicts the downturn direction of the market correctly.

🏁 Conclusion

MELD — Be Your Own Bank

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