Analyzing USDN and Dai
Stablecoins are a key element of the DeFi industry. In this article, Vladimir Zhuravlev, Waves developer advocate, discusses three features of the stablecoin USDN, built on Waves, focusing on differences from Dai, the world’s biggest algorithmic stablecoin at this point.
In the decentralized finance (DeFi) space, a number of various instruments are available, aiming to improve the transparency and efficiency of finance transactions for mass users. Stablecoins — or crypto assets whose rate is pegged to real-world assets, such as the US dollar — remain the most commonly used DeFi instrument.
Stablecoins are popular because they protect investors from volatility, enabling them to hold funds in crypto and quickly make transactions with DeFi instruments. For many users, stablecoins are sort of a gateway to the DeFi world.
The world’s best known stablecoin is USDT (Tether). However, its rivals, algorithmic stablecoins, are quickly gaining momentum. Their advantage is guaranteed transparency of backing reserves controlled by smart contracts. A holder of an algorithmic stablecoin can be sure that the stability of its exchange rate is backed by sufficient reserves.
Let’s consider the advantages of a prominent algorithmic stablecoin, USDN, for investors, comparing it to another instrument Dai. Both assets are quickly conquering the market. Last year, both of them saw a more than ten-fold increase in capitalization. Still, there are notable differences between these coins.
Collateralization
First off, let’s compare the collateralization models of USDN and Dai. Dai’s collateralization system is quite straightforward: a user can deposit a crypto asset as collateral (for instance, ETH, WBTC or USDC) and collect Dai tokens in exchange. The condition is, however, that the value of the collateral (denominated in US dollars) has to be at least 150% of the amount in Dai the user will receive. That is, to receive 100 Dai, the user will have to deposit crypto assets worth $150.
USDN’s mechanics for issue and collateralization are somewhat different. USDN tokens can be generated through a smart contract in exchange for WAVES, and the collateral is calculated at a rate of 1:1. This is much more convenient for smaller investors who don’t want to risk a large sum of crypto by depositing it as collateral.
Why does the USDN collateralization model enable receiving stablecoins without extra collateral, while stability is equally guaranteed? The level of USDN backing can be calculated with the backing ratio (BR), which currently is 1.76 (176%). This means that the total value of WAVES tokens locked on a smart contract as collateral is higher than the total value of all issued USDN tokens by 76%. Therefore, USDN is over-collateralized. If the WAVES rate increases or users continue to swap WAVES for USDN, depositing more WAVES tokens, BR will increase, making the entire system even more stable.
The system is also protected from situations when BR falls below 100%, which could happen if WAVES’ exchange rate substantially dropped. In that case, the smart contract starts selling NSBT tokens at a very attractive price in relation to WAVES, prompting speculators to invest in NSBT, which increases the backing reserve on the smart contract.
NSBT is attractive to investors for a number of reasons. First, its holders collect a staking revenue, which is made up by fees on WAVES/USDN exchange transactions on the smart contract. Second, the new token issue formula with the variable Moon Factor limits the maximum token supply, automatically making each new issue of NSBT coin more expensive than the previous one. For more on NSBT’s role in USDN collateralization, see this article.
Staking revenue
Another feature elegantly implemented in USDN using the Waves protocol’s functionality, is a passive income from stablecoin staking. True, this sounds amazing: a user can hold a fixed-price asset and collect daily rewards.
A similar revenue option for stablecoin holders was announced by the MakerDAO team back in 2019. Then, Dai Savings Rate (DSR) was presented, a savings rate paid to Dai holders who have locked tokens on a smart contract. Rewards were supposed to be paid from fees charged on stablecoin issue transactions. For the first few months, Dai staking APY fluctuated between 4% and 8.75%, but a decision was eventually made to reduce it to 0%. Currently, Dai holders collect no passive income, but the token remains popular since it has already found its niche in the market.
An APY of above 9% for USDN holders has become possible thanks to the Waves protocol’s consensus algorithm, Leased Proof of Stake (LPoS). WAVES tokens’ leasing mechanics enable a passive income from WAVES tokens at an annual rate of 5–6%. Proceeds from leasing are split between all USDN holders who chose to stake their tokens. But, because some USDN tokens are used for trading as opposed to staking, an annual income on staked USDNs increases to over 9%.
This is built in at the Waves protocol level as part of its monetary policy. When developing the stablecoin, the Neutrino team naturally took advantage of this functionality. Therefore, all WAVES deposited as USDN collateral are automatically leased and generate an income that is split between USDN holders who chose to stake their coins as opposed to using them for trading.
USDN staking profitability varies, as it depends on the share of its holders who have staked their coins, but it is still above 9%. In fact, any other stablecoin created on the Neutrino protocol can also be staked to collect an income. APY information is conveniently displayed in this comparative table on PyWaves.
Transfer fees
Transaction fees in the Ethereum network are quite high, which has long been discussed in that blockchain’s community. Due to gas mechanics, transactions with ERC-20-standard tokens are inherently expensive, and high fees make small transactions unfeasible. On average, to run a transaction with 300 Dai, the sender will have to pay a fee of ~0.0025 ETH (more than 2 USD). In the future, this issue might be resolved thanks to network scaling, but at this point, Dai transactions remain costly.
Meanwhile, the Waves blockchain is known for cheap transactions, and, most importantly, its fees are fixed and don’t depend on either the amount or type of tokens. To transfer any USDN amount, you have to pay a fee of only 0.001 WAVES (less than 0.01 USD). Thanks to low fees, this stablecoin can be conveniently used for low-value transactions.
Transaction speed is another vital factor that has an impact on the convenience of stablecoin use. Waves-NG technology implements microblock functionality, and, as a result, USDN transactions are executed and added to the blockchain within a few seconds.
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The analysis of tech aspects of USDN and Dai shows that over the last five years, Dai has developed into a high-scale, sustainable product, securing a place in the DeFi industry. In turn, the Neutrino team has been able to create a new concept and optimize major components of the stablecoin model, preserving user experience without jeopardizing stability: thanks to extra NSBT collateralization, users don’t have to lock additional funds on the smart contract, and USDN staking takes advantage of Waves’ LPoS consensus algorithm, enabling investors to collect an income.
Dai became a breakthrough solution in the crypto space, reaching a capitalization of over 1 billion USD. It took the project just several years to achieve that. Meanwhile, USDN, launched just over a year ago, has already hit a 100 million USD collateralization mark.
The fast increase of Neutrino’s capitalization, a rapid growth of the community around the protocol and the Neutrino team’s flawless work indicate that the project has the potential to match its rival or even overtake it. Inter-chain communication is expected to foster mass adoption. USDN and NSBT are already available on Ethereum and Binance Smart Chain, and the launch of the inter-chain communication protocol Gravity will lead to an increased number of connected platforms.
And how are you using USDN? Have you tried USDN or NSBT staking?
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Neutrino website: https://neutrino.at
Medium: https://medium.com/neutrinoteam
Twitter: https://twitter.com/neutrino_proto
Telegram : https://t.me/neutrino_group
