OpenDAO
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OpenDAO

Post Public Token release Business and Tech strategy

Those who have been following our technology roadmap might be aware that the project has 2 key phases

  1. The money market
  2. The Stable coin backed by real world assets

The money market is a fork of Compound and allows tokenized real world assets as collateral and lending using stable coins. We have been running the money market at opm.opendao.io in a beta for the last couple of months and are happy to report that the technology has been working as expected with no breaks or hacks.

Our intention has always been to move towards a stable coin backed by a mix of onchain and real world assets. At a high level what it would be similar to the MAKER DAI model where onchain and offchain assets would be used as collateral to mint a stable coin.

The key differences between what we’re doing and DAI would be the collateral mix; where ours would be favoring more offchain assets. Additionally, our pegging mechanism is much simpler as compared to DAI’s.

Earlier we were planning to move to phase 2 in the second half of 2021. That plan has now been brought ahead significantly and we are currently looking at a January 2021 launch for the stable coin.

There are business and technology reasons for the acceleration.

Business

The OPM is competitive to other money markets and offerings in the DEFI space that offer a yield. We are in direct competition with Compound, CREAM, AAVE etc. While we can offer a slightly stronger and stabler yield, this is a relatively smaller advantage.

The OPM is always a tight balance between the lenders and borrowers, where we have to find borrowers with the highest interest rates and lenders with the lowest asking rates to make a spread.

The best quality assets such as real estate generate sub 5% returns which are a harder sell in DEFI where there is a new yield farming play every few days.

If we are offering higher interest rates then we have to find suitably higher interest generating assets and there is a commensurate increase in the risk. Something has to give.

Whereas if we already have the stable coin, then anyone with a high quality asset can approach us, stake it and mint the coin and the interest rates we charge are likely to be extremely competitive with bank rates.

When you are raising money for large ticket items such as real estate, the book build process can take quite long, especially if you have a money market, where you have to ensure enough lenders are corralled to fulfil the loan which can be several millions of dollars if not more. This is a time consuming process and can often lead to the deal being called off completely.

If you can simply mint the coin then you can give the cash on demand and there is no book build process.

It is also easier to offer someone money at low interest rates, than to ask for someone to give you money and offer them a high rate. It is a much simpler ask.

The TVL growth is likely to be much faster. Instead of asking someone to give their stable coins to you on a loan, all you are asking for people to do is to stake their assets which need not be stable (such as BTC etc) and mint the coin. They can unstake and exit anytime. There is no loan being made out on the other side, so there is no conflict between achieving liquidity. Someone who stakes their asset can unlock it at any point in time by burning their minted Synth.

The TVL growth is likely to also reflect in the price of the governance OPEN tokens.

At a very high level, the difference between the OPM and the Mintr is a philosophical one. OPM is about asking for permission and the Mintr is about asking for forgiveness.

In the OPM you stake your real world assets as collateral and hope that someone lends you the money.

In the Mintr you stake your real world assets as collateral, mint your own money and hope that everyone is ok with that.

The real challenge with the stable coin is how to ensure liquidity and parity with other stable coins. However that by itself is not as big an issue if the quality and liquidity of the underlying assets is solid and you have suitable incentivization mechanisms.

More on this later.

TECHNOLOGY

Now let’s delve into the technological side.

Earlier the mintr was meant to be a synthetix fork. Instead of SNX as collateral, we would use our basket of onchain and offchain assets. However the pegging mechanism was the same as Synthetix.

This part has since been rethought and we are swapping out the Synthetix fork in favor of UMA.

There are several reasons for this.

The first is reduced work on our part. Instead of building and maintaining the core smart contracts, we can focus on purely the UI, UX and focus on getting distribution. We get to piggyback on battle tested code. Just this part alone is enough of a reason to go down this path. It accelerates our development time significantly and allows us to cut almost 4 to 6 months of development time.

SECURITY

Beyond this, there are several security related reasons to go down this path that make this approach a no brainer.

In the recent past there have been a range of rug pulls and hacks.

Rug Pulls

In case of the rug pull, it is usually someone from the founding team who has admin control who disappears with the funds. The solution to this is usually offered as decentralization and hand over of admin keys. But decentralization cannot often be done early as it can get in the way of faster iterations to achieve product market fit.

However having a flexible underlying protocol to work with resolves this issue. Since we will not be having admin control of UMA contracts, the chances of doing a rug pull are significantly diminished. However we will still have enough room to iterate in our design and development process.

Hacks

Beyond the typical rug pull there have been a lot of complicated hacks even on projects that are led by well meaning and competent founders. bZX was one of the first victims and the latest is Origin protocol OUSD.

The attack on OUSD is especially galling, it has a solid team backed by the likes of Pantera. The UI, UX they had was easily the best in the entire DEFI space. On 17 November 2020 they got hacked and lost all funds. Unfortunately that included me personally as I was trying out their system.

What makes it even worse is I deposited around 10.5K USDT only 2 hours before the hack! Talk about timing.

While it is obviously a disappointment, it has led me on a path of reflection and also made me laser focused on the security aspects.

While the hacks are generally quite complex, they all seem to share a few similarities. The 2 key commonalities are

  1. They are all generally flash loans, which as the name suggests happen very fast and within the block.
  2. They usually involve an Oracle attack. A number of the systems that were attacked usually relied on Oracles and typically with reduced protections, such as relying on Uniswap for price feeds.

A well engineered attack would take out significant debt within the block and use it to influence the prices on Uniswap and then take advantage of the new arbitrage opportunities that emerged due to mismatched prices.

UMA protects against both of these attack vectors. Firstly it has a unique slow settlement process that makes flash loans all but impossible. Secondly it also does not rely on Oracle price feeds. They have a unique mechanism which completely eliminates the need for an Oracle while still protecting the integrity of the system. This model not only simplifies the design but also makes it safer due to the lack of an Oracle based attack vector.

We are currently in the process of firming up a partnership with UMA via their development mining scheme. This would mean a dual incentive system where those who mint the stable coin would get both UMA and OPEN rewards. We are trying to get some REN token rewards in the mix as well, but that might not happen. This would however be a combined marketing effort in which the UMA as well as REN team is likely to push this to their community.

UMA perpetual synth contracts are currently on Rinkeby and are in the process of audits. We expect them to be in mainnet in January at which point releasing a stable coin backed by BTC via the REN bridge should be a simple roll out.

Coming back to how you ensure liquidity and parity of the stable coin. This is generally done by incentivizing LP providers typically on Curve, Uniswap and the Cashbox itself. We will have a detailed post on that part in a future article.

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