A Global, Local Bank: How the Onomy Reserve Works
Onomy is dedicated to a new financial system. One that’s inclusive, adaptable, and permissionless — as well as being entirely decentralized and operating 100% on-chain.
One that makes people realize the banking system we’ve been laboring under is inefficient at the very core and whose essential function can instead be comfortably replicated through code agreed upon and administered by everyone.
A financial system that can’t be switched off, manipulated, or walled behind obfuscation — but one that helps lift people out of poverty and day-to-day strife enabling all to truly take their share of the economic proceeds of human society.
A financial system that works for you, not against you.
To do that, you need a global decentralized reserve. You need easy access to adaptable liquidity that works multi-environment. You need stablecoins denominated in local currencies to foster international trade. You need decentralized, commission-free, non-custodial exchanges. You need to bank the unbanked, and install ‘instant’ banking systems in underdeveloped communities. You need better, faster, fairer and freer cash.
You need Onomy Protocol.
How It Works — The Onomy Reserve
Onomy uses a simple overcollateralization model akin to MakerDAO or Agoric. Users deposit collateral in vaults, mint the stablecoin they want, and free up active liquidity without losing their underlying exposure to the collateral asset.
Effectively, this gives you leverage opportunity — opportunity that can be gained with increasingly flexible collateral as the system expands. Onomy fully intends for the Reserve to ultimately hold a huge basket of assets to achieve its status as the world’s global reserve banks, unlike other protocols who only hold one underwriting asset like Ethereum. This potential exposes you to yield too should the underlying basket of assets grow, or should the DAO expand its holdings through Real World Assets.
To determine the price of these assets, Onomy has an Oracle Module that aggregates prices. Multiple oracles will be added over time to reduce reliances and ensure appropriate and stable price aggregation.
Vaults can be constituted of a variety of assets during a mint process — giving ultimate flexibility to savvy operators to get exactly the leverage they need, in exactly the denomination they need it, using exactly the assets they have.
Users can also transfer vault ownership, effectively creating a secondary synthetic market for the positions taken, which can create its own opportunities, vastly improving the underlying efficiency and liquidity in the system.
Of course, vaults can become undercollateralized. At this point, users must deposit more assets or lose the vault, with liquidations enforced by the Onomy Reserve, or repay the $USD (or other stablecoin) they took out when creating the vault. For vaults, creations and stability fees apply (the cost of the leverage), as well as liquidation penalties. These fees all flow back into the Onomy Reserve to continually reinforce the health of the system.
How it Works — Auctions
Should a user fail to maintain the appropriate collateral ratio on his vault, then Reserve, which periodically checks these ratios, begins liquidations through a Dutch Auction process.
A Dutch Auction is an auction whereby the ask starts extremely high and then drops continually until someone meets the ask price with their bid. On a successful bid, the user takes control of the contents and the money they pay is burned to cover the debt accrued by Reserve when it issued the required stablecoins upon vault creation.
In the event of Black Swan events (vertiginous or extreme market movements), the Reserve will simply sell the collateral outright without an auction process. Although this is extremely unlikely, if the auction fails to raise the necessary capital, the Reserve will supplement the loss through accrued fees from vaults, auctions and the PSM module (to be explained) — or simply recorded as a shortfall. The Vault Manager will also adjust the collateral-debt ratio on other vaults in the system in an attempt to claw back the losses and ensure every trader operating in it participates in its restabilization.
These functions tally with other major stablecoin foundries. Onomy’s difference is that it’s built from the ground up to be cross-integratable across the Internet’s Financial System, whilst the Reserve is multi-asset, multi-denomination, and multi-chain. The DAO intends to pursue integrations across ecosystems, making Onomy-branded stables not only the IBC choice, but an ecosystem-wide choice.
How It Works — Parity Stability Module
The PSM is simply a more direct way of getting hold of $oUSD or other o$£€ by buying it directly from the reserve rather than acquiring it as debt through posting collateral. The Onomy Reserve will simply issue it directly in exchange for other centralized stablecoins (e.g $USDC or $USDT). These stablecoins will act as a breakwater against system volatility and ensure all NOM currencies keep their peg.
There is a small fee for doing this that helps augment the overall health of the system as well as encourage and maintain that peg. The fee dynamically adjusts to maintain the peg, making it more or less expensive to mint $oUSD at various times. The Onomy DAO can also set the fees directly.
USD will absolutely not be the only stablecoin issued by the Reserve through the PSM. Remember that Onomy’s goal is to create a vibrant flexible Forex market on chain, and to do that you need multiple currencies. The Onomy DAO will vote and gradually add more stablecoins to the PSM for direct purchase. The PSM is not a one-way system either, and nom£$€ can be exchanged for their stablecoin equivalents at any time.
The Onomy Reserve
Through these three modules — Vault, Auctions and PSM — Onomy can gradually build the health of the Reserve and begin creating a vibrant multi-faceted stablecoin environment on chain that not just replicates but utterly supersedes the existing Forex market when combined with the ecosystem’s other products (like the go-to CLOB order book DEX focused on FX markets) and technical advancements. It’s a self-improving looped ecosystem that acts as a liquidity enabler for Cosmos as a whole, but also bringing financial maturity to still-developing markets. The Onomy Reserve acts as a central issuer of liquid value in ever-growing on-chain economies, securely underwritten by robust assets and equivalent capital.
As the Onomy Reserve grows, so will the stablecoins it offers to the public, and the wider its basket of assets will become. The difference Onomy offers is that through Onomy DAO, this direction will be community led. The Reserve won’t just hold equivalent stables and major cryptos, but also bonds, gold, and real estate, and other RWAs, as the DAO sees fit. It’s up to the community to decide. Stablecoins are vital, but Onomy’s stablecoins will be fully decentralized and not simply fiat banking systems in disguise.
A powerful Onomy Reserve will lead to a better, fairer, more global financial market and you — dear reader — will be the fundamental instrument of that process. Let’s change the world, one FX trade at a time.
