The Stability & Peg of jUSD

Where will demand for jUSD come from?

We’ve previously done a deep-dive on jUSD and its many attributes — how it is decentralized, collateralized, scalable, algorithmic (sorta), and capital efficient.

However, one common question we get is: how will jUSD maintain peg? What will make it stay at $1? What will stop borrowers and bonders from dumping jUSD immediately after they obtain it?

A reliable stablecoin simply must remain stable. For Ripe to work longterm, jUSD needs to stay pegged to the dollar. Stability brings confidence. And confidence brings participation, deposits, growth and momentum.

One way of reframing the question is: where will demand for jUSD come from? What are the incentives for someone to hold on to and utilize jUSD?

Today let’s break down how we think about some of these questions.

Debt Markets

One of the strongest demand drivers for stablecoins like jUSD will be debt. Examples already in the wild include DAI (Maker), LUSD (Liquity), and MIM (Abracadabra). When someone borrows against their crypto assets, the only way they will ever be able to release those assets (collateral) will be if they pay off their debt. That is jUSD buy pressure that will always exist. When/if jUSD ever goes slightly below peg, the protocol will always have willing jUSD buyers. Buying jUSD at a discount means they can pay off their debt at a discount.

One of the best recent examples of this was MIM (Abracadabra). When UST/Luna was collapsing earlier this year, there was an enormous amount of MIM sell pressure as a result of the FUD surrounding the UST degenbox. On multiple occasions, MIM depegged below a dollar. Each time, there was enough buy pressure to restore peg. The MIM buyers were borrowers in the protocol who wanted to pay off their debt at a discount.

In times of extreme market volatility, when borrowers are at risk of their collateral assets getting liquidated, they are even more eager to pay off their debt (regardless of the stablecoin price). This creates a nice counter-balance to any stablecoin sell pressure during market turbulence. A lot of healthy debt in Ripe protocol will create strong demand for jUSD. There are multiple case studies that have proven this.

Endaoment Yield

jUSD stakers will receive a portion of the yield generated from The Endaoment. This will be a low-risk source of passive yield for jUSD holders. It is a set-it-and-forget-it strategy. The options for staking jUSD will be single-side asset or the LP token (likely jUSD/3pool).

Not all Endaoment yield goes to jUSD stakers. In a previous post, we’ve discussed how $RIPE token holders also get yield from The Endaoment. The breakdown of how Endaoment yields get distributed between $RIPE vs $jUSD is based on system health. For example, if the jUSD Curve pool is negatively imbalanced (a lot more jUSD than other stablecoins), then more Endaoment yields will be directed at jUSD stakers. Yield generated from The Endaoment is a lever the protocol can use to create more (or less) demand for jUSD.

Liquidation Profits

Ripe users can deposit crypto assets and borrow against that value. Those crypto assets serve as collateral. If the value of their collateral dips down to a dangerous level relative to their debt, those assets will be liquidated and sold (to pay off debt).

jUSD stakers can participate in these system liquidations. They can be first in line to buy the liquidated assets at a discount (sometimes 10%+). In exchange, their staked jUSD is used to pay off the debt.

This mechanism is inspired by Liquity’s “Stability Pool.” In our case, users can opt-in to specific assets (including NFT collections). And many stable assets will be absorbed directly by The Endaoment (and not available for jUSD stakers to buy).

Curve Wars

Curve is one of the most popular decentralized exchanges in DeFi and very popular among stablecoins. Over the coming years, Curve is giving out their governance token (CRV) as an incentive for those who provide liquidity on their protocol. CRV holders (if you lock it) can vote to decide what Curve pools receive CRV token rewards. “Curve Wars” refers to the tactics/strategies in getting your pool to receive as many CRV tokens as possible (and other related tokens) in the most cost-efficient way. “Yield” on Curve pools comes from these token rewards (CRV, CVX, FXS).

While playing the Curve Wars is expensive and sometimes difficult to navigate, having a highly-profitable stablecoin pool is a great way to create demand for jUSD. Yield Farmers buy jUSD, supply liquidity in the pool, and start participating in that juicy APY. It ain’t much, but it’s honest work. 🌾

These token incentives attract liquidity. Thicker liquidity means there will be less slippage for bigger trades. The pool becomes easier for whales to enter, exit, and participate. Stronger liquidity builds confidence, which begets more liquidity. Rinse and repeat. The peg becomes more resilient. It’s a playbook we’ve seen over and over again in DeFi. Of course, if one’s Curve Wars strategy requires constant token emissions (instead of obtaining protocol-owned liquidity), then it is not sustainable long-term.

For Ripe, a nice side-effect of having a profitable jUSD pool is that The Endaoment could put jUSD to work directly into it (instead of using the bonding mechanism to swap into another asset, then entering another pool). It eliminates the “cost of capital” for bonding. If this jUSD pool became one of the core strategies of The Endaoment, then it creates a beautiful fly-wheel where The Endaoment is not only generating yield, but is also thickening its own liquidity, therefore strengthening its own peg.

There are a lot of ways to play the Curve Wars and we’re working with big brains to refine our strategy. We’re also looking at a Balancer + Aura combo.

Redemption Mechanism

A stablecoin redemption mechanism is as much about human psychology as it is about strong mechanism design. Knowing that an offramp or exit is there — even if I think I’ll never use or need it — goes a long way in building trust and confidence.

Vitalik poses a good hypothetical question as it relates to stablecoin projects (mentioned in a previous post): can the stablecoin, even in theory, safely “wind down” to zero users?

In other words, if all jUSD holders decided to opt-out of this stablecoin experiment, could that happen gracefully and orderly? Or would it be a game of musical chairs where some are left holding the bag at the end?

To answer that question for Ripe, it’s important to understand the primary methods in which jUSD goes into circulation: 1) debt, 2) bonding mechanism, 3) Endaoment gains.

Let’s start with #1, debt. In their case, “winding down” means buying back jUSD, paying off their debt, and then they can withdraw their collateral and exit the system. And what about #2 and #3?

For these users to gracefully exit the protocol, there must be a redemption mechanism. They need to be able to exchange their jUSD for something like USDC — regardless of the Curve pool exchange rate. The Ripe protocol has exactly that. If a user wants to redeem jUSD back to USDC (or other blue-chip stablecoin), they can do that in The Endaoment. That escape hatch can and should give users confidence.

From a practical standpoint, a redemption mechanism is a great way to help jUSD maintain its peg. During times of market turbulence, when panic sellers push the price of jUSD below a dollar, arbitrageurs buy jUSD, redeem in the Endaoment, and generate a profit.

Transparency Leads to Trust

Ripe is all open-source and onchain. Out of the box, it’s transparent. However, we know not everyone knows how to dig around Dune or Nansen, etc. Not everyone is a blockchain data sleuth who can write Graph queries or decrypt Etherscan transactions.

We will do everything we can to make it easy for users to see and understand what is happening with Ripe at all times. We will have public dashboards with metrics, data visualizations, feeds. We will use terminology that is approachable and understandable. Users deserve to know exactly what is going on.

You’ll see a breakdown of assets and strategies, how The Endaoment is generating yield, collateralization ratios, circulating jUSD, revenue and costs, bad debt (hopefully rare), and more.

You’ll see the good, the bad, and the ugly. No sleight of hand. Open book. As you see everything happening, hopefully you’ll start to trust the protocol more. You’ll trust that there are no rugs sold here. You’ll trust that we’re all just trying to create something valuable in the world.

If you trust Ripe, you are more likely to use it and defend it. When markets get turbulent or when FUD gets bad, you won’t be panic selling jUSD below $1. Hopefully you’ll be slurping that dip up!

Integrations + Real-World Partners

We’ve already highlighted a few things people can do with their jUSD (staking to get Endaoment rewards, yield farming on Curve, participating in liquidations). But we certainly won’t stop there. We will keep working to get jUSD integrated in broader DeFi. The more utility there is for jUSD, the less likely people will be insta-dumping.

We will also work to get jUSD adopted in the real world — some of this will take longer. We have one strong partner lined up on on the consumer fintech side of things (mobile app, downloadable from app store, fiat onramps, etc). Soon there will be more partners.

Not only will partners like these help bring in deposits, TVL, and sticky backing for jUSD… they will also be a great source of user debt and loan origination. Imagine a fintech app plugging into Ripe to help finance auto loans, credit payments, and someday even mortgages (yes, someday all of those assets will be tokenized and supported as collateral in Ripe). These real-world borrow use cases create demand for jUSD.

Another exciting use case for jUSD will be payments — whether peer-to-peer or with merchants. I’d love to be able to buy my groceries with jUSD. Or pay my rent. When people can use jUSD in the real-world, then there will never be a reason to sell jUSD. Sell pressure eliminated. The adoption and usage of jUSD in the real world will make Ripe protocol that much stronger, stable, and resilient.

Is all of this enough to keep jUSD pegged and stable? I hope so! I believe so! But of course, I don’t know. We won’t know until we start putting this out in the wild and testing it.

What I’ve outlined today may not be enough. And that’s okay. As I shared in my last post, we will keep learning, iterating, experimenting, and growing. This is a marathon, not a sprint. One step at a time. 🍋