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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

Cardano has no real stablecoin solution at the moment… As a result, all native tokens on Cardano are being traded against ADA and all transactions in Cardano have to be paid in ADA (Babble Fees will help this). However, like any major crypto currency in a bear market, ADA is not the safest token to store value as it dropped almost 8 fold from its peak price of $3.1 to a bottom price of $0.4.

The lack of a stablecoin has a direct consequence: while most major trading pools and lending pools involve stablecoins, token holders tend to move away from Cardano to trade their assets elsewhere, which causes a bad prospect for Cardano as a growing ecosystem. Thus, designing/bridging a stablecoin that works for Cardano is a real demand…

In this article, we break down the current attempts for stablecoin solutions on Cardano, along with bridging options available and ultimately why Akamon will be a superior solution amongst the competition — as it will bring forth tried and trusted USDT into the Cardano ecosystem at the cheapest rates!

Contents

Djed model: Ergo and COTI
Milkomeda: a Cardano’s sidechain that brings wrapped stablecoins
Wrapped stablecoins via Akamon: a new supplement
Wrapped stablecoins Vs. Djed
Use cases for wrapped stablecoins on Cardano
Conclusion

🤖 Djed model: Ergo and COTI

Djed is an algorithmic stablecoin that uses smart contracts to ensure its price stability. Currently, there are two implementations for the Djed:
SigmaUSD from Ergo and Djed from COTI.

Djed is just another version of DAI without liquidation (hence the price of the stablecoin can go down to zero in extreme cases when reserves are not enough to keep the stablecoin at peg). In order to strengthen the stability, the Djed model requires the collateral ratio to be between 400%-800%.

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 Djed model is very similar to a traditional firm that is financed by both debt and equity. The price of the base coin can be thought of as the asset value of the firm, while the stablecoin corresponds to the corporate debt, and the reserve coin is exactly the stock issued by the firm. In traditional finance, a firm’s debtors are prioritized compared to the firm’s equity holders in the sense that equity holders can take whatever is left after the firm’s assets are paid to debtors. Therefore, if the firm’s value is not enough to cover the debt, then equity holders are left with nothing. In a similar manner, if the reserves are not enough to cover the nominal value of Djed, then this stablecoin will be depegged and the reserve coin's fundamental value will be equal to zero.

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.

It is the buying-selling of Djed at face value (adjusted by bid-ask spread) via base coin that will help stabilize the stablecoin price. In theory, the price of a Djed should fluctuate within the band [1-fee, 1+fee], if we ignore the fees associated with buying/selling the basecoin on the secondary market.

Milkomeda to Cardano is like Polygon to Ethereum, which means it is a side chain to Cardano. They connect to major blockchains via Multichain and Celer bridges. As a result, stablecoins from other blockchains can be wrapped to Cardano via these bridges.

However, the wrapped stablecoin solutions brought forward by Milkomeda cannot compete against that of Akamon because of two reasons:

  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

Besides native stablecoin solutions like Djed or SigmaUSD, there is another solution: wrapped stablecoins. Simply speaking, USDT will be bridged from the Polygon or Ethereum networks to Cardano so that each wrapped token mUSDT on the Cardano side will be backed (1 to 1) by exactly one USDT locked in smart contracts on Polygon.

⚔️ Wrapped stablecoins Vs. Djed

Why do we need a stablecoin on Cardano while Djed is already ready? There are multiple reasons for that. Wrapping stablecoins via Akamon will be cheaper, more stable, and offer higher liquidity. Let us dive deeper into each point…

Cheaper

Assume that Alice wants to buy/sell 10000 USD worth of some stablecoin on Cardano by ADA (this is a typical transaction size, for instance, the average transaction size through Polygon via Synapse bridge is about $7000).
Alice has two options:

  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%.

The above estimates show that Alice has to pay ~4.82 times more fees if she chooses to use Djed instead of wrapping mUSDT with Akamon.

NOTE: Alice would be paying even less if she decided to use the MELD token as a means for payment with Akamon

More stable

Being a wrapped version of USDT, mUSD will be considerably more stable than any algorithmic stablecoin like Djed.

  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

The liquidity of wrapped stablecoins depends on the total supply of USDT on Polygon or Ethereum. Currently, there are 40B USDT circulating on Ethereum, of which a small portion will be enough to provide liquidity for the Cardano network. On the other hand, the liquidity of Djed is arguably going to be low due to the following reasons.

  • 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

As discussed above, there are many benefits to bringing USDT over to the Cardano ecosystem via Akamon — compared to the current solutions that exist. Akamon will be cheaper, and more efficient and be able to bring forth tried and trusted stablecoins we all know and use.

USDT will be the most efficient stablecoins on Cardano for a multitude of reasons. It should be interesting to see what sort of liquidity-providing incentives arise as more and more mUSD enters the ecosystem.
What’s ahead for Akamon after stablecoins on Cardano?
mETH, mBTC, then lending and borrowing! 🚀

Thank you all for your continued support, Akamon will be live soon! 🥳️🎉

MELD — Be Your Own Bank

We think it’s essential for everyone to gain control of their financial lives and have equal access to financial instruments used by professionals, not just centralized institutions, governments, or the 1%. We want to provide financial freedom and control to the masses, including the unbanked.

We have a long-term goal to enable the $15 trillion that is currently locked out of the global economy, including 2 billion individuals worldwide that are either underbanked or have no access to banking services whatsoever, access to these tools. These are the people that are paying the highest fees, getting the worst customer service, and they are the ones that are having the most problems.

Our vision is to create an ecosystem that empowers individuals to regain financial control by providing them with the tools and services they need to manage their money on their terms. Whether that be creating a collateralized debt position (CDP) with cryptocurrency, earning an interest return for lending fiat to borrowers, or even participating in reward incentive programs, we strive to provide our users with the functions they need to manage their own financial lives.

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Stuart

Stuart

MELD is the future of DeFi. DeFi is life.