rUSD Stablecoin: Collateralization and Liquidation Design
In RAMP DEFI’s design, we have proposed the creation of a stablecoin, rUSD, which is backed by non-ERC20 collateral, to interact with the “fiat-equivalent” ERC20 stablecoins (such as USDT, USDC, TUSD).
As this collateral has fluctuating value, RAMP DEFI uses a “Collateralization Ratio” system to ensure that the minted rUSD is always fully collateralized, which is crucial for rUSD to gain acceptance as a currency of stable value.
Below, we present the concepts underlying the collateralization and liquidation design that underpin rUSD issuance.
Minimum Collateralization Ratio (MCR)
The “Minimum Collateralization Ratio (MCR)” for staked digital assets on each blockchain starts at a default 200%. This means that $200 worth of Token X can at most, mint $100 worth of rUSD. The user may choose to issue at a higher Collateralization Ratio if a larger buffer is preferred (e.g. 400% collateralization: stake $200 of Token X to issue $50 of rUSD).
Liquidation Ratio (LR)
The collateralization ratio at which liquidation is triggered, called the “Liquidation Ratio (LR)”, starts at a default 120% for each blockchain.
Re-Collateralization Ratio (RCR)
The Collateralization Ratio at which a re-collateralization request is triggered (“Re-Collateralization Ratio”) is the midpoint between the Minimum Collateralization Ratio and the Liquidation Ratio.
In the event that a user receives a re-collateralization request, the user simply needs to send more Token X into the native staking contract to issue more Wrapped Token X and re-collateralize the position back to the MCR.
In the event that the Liquidation Ratio is triggered, the users’ tokens are considered “sold” to rPool, the universal liquidity pool that underpinned the RAMP ecosystem.
rPool liquidates these tokens on exchanges and deposit the liquidated value into rPool. At the same time, rPool uses the existing liquidity within the pool to repurchase the same amount of rUSD minted by the user from the open market.
The difference in value between the liquidated assets and the repurchased rUSD accrue into rPool, to be distributed to RAMP token holders during the weekly value distribution.
Collateralization Management Score (“CMS”) and Guassian Curve Design
While the MCR and LR are set as 200% and 120% respectively in the initial stage, good collateralization management should be rewarded and bad collateralization management should be penalized, using a “Collateralization Management Score (CMS)”.
The CMS is administered on the blockchain population level, rather than the individual user level. Each blockchain integrated to RAMP is assigned a default CMS of 0. Changes to CMS will affect the MCR and LR applied on the blockchain when minting rUSD.
The Gaussian normal distribution curve approximates the probability of liquidation events. The CMS continually adjusts to reduce the possibility of long-tail liquidation events, until it is at equilibrium where the probability of liquidation ≤ 0.3%, which is 3 standard deviations away from the mean, and the probability of liquidation occurrence is deemed statistically insignificant.
The CMS decreases by 1 if the total value of liquidated assets exceeds 0.3% of the total value locked for the blockchain. Conversely, if the total value of liquidations stays at or below 0.3% of the total value locked, the CMS increases by 1. The CMS for each blockchain is assessed on a weekly basis, using a rolling 30-day average data.
How It All Works Together
The CMS rewards blockchains with users who actively manage their collateralized positions and re-collateralize when necessary. Good behaviour results in the Gaussian curve moving to the left (lowering the MCR, allowing more rUSD to be minted with the same collateral); and the curve being “pulled” upwards (tighter LR, and lower liquidation fees if triggered).
For illustration, Blockchain X starts with a default CMS of 0. If after one week there are no liquidation events, it is deemed “statistically safe” for the MCR/LR to be reduced (CMS +1). However, if there are liquidation events, it is deemed “statistically unsafe” and the MCR/LR are increased to place more stringent collateralization requirements on the users.
The advantage of this CMS system is that it not just takes into account the price volatility of staked assets in assigning the MCR/LR (higher price volatility will likely result in more liquidations resulting in lower CMS), but also takes into account the behaviours of users on a blockchain population level, to assign a balanced and reasonable MCR/LR threshold.
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