Introducing XSTUSD — A Stablecoin on SORA for the Polkadot Ecosystem

XST Synthetic assets on the SORA network recently received their own XST token platform

SORA

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SORA

7 min readOct 18, 2021

TL;DR

SORA Synthetics are tokens pegged to value indices, backed by the XST platform token
The first SORA Synthetic Asset is the DAI-pegged XSTUSD
SORA Synthetic XST assets for other major stores of value will be available in the future, once oracles are integrated into the SORA network
XSTUSD was proposed as an RFP and is currently live

XSTUSD — A Stablecoin on SORA for the Polkadot Ecosystem

What is XST?

Fisher’s Compensated Dollar

XOR SynThetics, hereafter, XST, are synthetic assets pegged to an index of value and backed by the XST platform token, but, what is a synthetic asset or stablecoin to begin with?

Long before cryptocurrencies (or even digital computers) existed, back in 1912, the American economist Irving Fisher questioned the instability in the purchasing power of the gold-backed US dollar, explaining:

“We now have a dollar of fixed weight (25.8 grains), but varying purchasing power. Under the plan proposed, we should have a dollar of fixed purchasing power, but varying weight.” This would come to be the groundwork for the “compensated” dollar.

In other words, because gold was highly volatile in purchasing power, instead of keeping the dollar fixed to a certain amount of gold, Fisher proposed that the dollar be backed by varying amounts of gold, but pegged to a basket of goods (an index). However, at the time, Fisher’s ideas were not adopted due to operational and harmonization issues of the economy of that period.

With the advent of cryptoeconomic systems on blockchains, the “compensated” dollar principles, Fisher’s groundwork, could finally be translated into the realm of cryptoeconomics and given new life as part of a cryptoeconomic system: “a blockchain-based token can be created as a derivative of another one, targeted at holding a stable unit of value”. SORA synthetics implements this concept and in a way, you could say that Irving Fisher is the father of SORA Synthetics.

Stablecoins and Synthetic Assets Today

Currently, there are 5 different types of stablecoins/pegged assets:

Fiat-Backed Stablecoins (or Tokenized Fiat): These stablecoins are backed by and pegged to dollars (or other fiat currency), and their value remains tied to the price of the pegged currency. For example, USDC.
Crypto-Backed Stablecoins (or On-Chain Collateralized Stablecoins): These are backed by other crypto assets. For example DAI.
Precious Metal-Backed Stablecoins (or Off-Chain Collateralized Stablecoins): Like gold-standard fiat, these stablecoins use gold and other metals to back their value. For example Tether Gold.
Algorithmic Stablecoins: These stablecoins use algorithms to back their value, there are some variants that can be pegged to fiat values, depending on the algorithm used. For example AMPL.
Synthetic assets are tokens with value pegged to an oraclized asset. Purely synthetic assets can be used to represent many types of value, such as, to track the shares of financial instruments and securities. For example, SYNTHETIX.

XST is an algorithmic stablecoin for the SORA ecosystem, initially proposed in 2018, based on the ideas of Irving Fisher’s compensated dollar. However, instead of being backed by gold, XST synthetic assets are backed by the XST token.

XST: A Platform for Synthetic Assets on SORA

What Makes SORA XST Different?

Now that stablecoins and synthetic assets have been defined and classified, you might be wondering what makes XST stand out from the rest?

XST helps to solve the problem of XOR liquidity by creating synthetic assets backed by a variable amount of the XST token and pegged to a target index (e.g., a currency). The XST token is minted/deminted to always guarantee the value of the pegged index. The first index implemented is linked to the value of DAI and will be called XSTUSD.

Non-Collateralized Stability

In the case of XST assets, as they are backed by the XST token platform, XST can be algorithmically minted or deminted (burned) to provide the full value for the XST assets upon demand. The XST Primary Market Maker that mints/demints XST assets and the XST platform token are built-in as a liquidity source into Polkaswap’s liquidity aggregator, so buyers/sellers will always get the full value in XST platform tokens for their XST assets, and the price will never deviate (lower or higher) from the asset price. Therefore, XST assets are not subject to price slippage or a lack of liquidity. This works, for example, in the case of XSTUSD, because a single XSTUSD is a claim for $1 USD worth of XST, and not a claim for the actual $USD itself.

With normal stablecoins (specifically fiat-backed), the adjustment of collateral value and the value of the issued stablecoins is not automatic. This is due to price changes in the collaterals, and it is, therefore, necessary to overcollateralize. With stable tokens like DAI, for example, you have to lock up 130% of the value in ETH to mint new DAI, and your vault gets liquidated if you go under the required collateral level.

XST does not require over-collateralization and users of XST assets do not risk liquidation. This is because new XST can always be minted to provide the full value of an XST asset upon exchange back into the XST platform token.

Normally, algorithmic stablecoins derive their value from smart contracts linked to oracles that determine current prices, however, XSTUSD’s value is currently derived from the price of XST-DAI, although (Spoiler alert) there will be an implementation where the community can mint XST-based assets backed by other currencies, more about that in a future article.

How Will This Be Implemented?

XST implementation is quite an exciting topic, however, it isn’t complete yet. The RFP proposing the implementation of XSTUSD was published and now it is live on the SORA network. The implementation scenario includes whitelisting XSTUSD on Polkaswap and subsequently setting up a liquidity source, as mentioned before, where the price users pay would never deviate from the price of XST-DAI.

Some more interesting details available from the XSTUSD RFP mention: “If the XSTUSD-XST price goes lower than DAI-XST, then when the user is buying, new XST will be minted and used to fill the order (similar to the token bonding curve). When buying XSTUSD with XST, then new XSTUSD can be minted/deminted when filling the orders, in order to maintain the peg.” Before you ask wen, there is no concrete answer …for now.

XST implementation is just the beginning and, as was hinted earlier, SORAcles are also in the development pipeline which will ensure that a variety of XST assets can be implemented for many different indices of value. Another interesting implementation tied to this is the SORA Social Insurance.

In the meantime, you can find XSTUSD & XST on Polkaswap.io. The XSTUSD asset ID is 0x0200080000000000000000000000000000000000000000000000000000000000 and the XST asset ID is 0x0200090000000000000000000000000000000000000000000000000000000000

You can swap XST to XSTUSD and vice-versa. After getting some XST, you can swap it for XSTUSD in the swap section by selecting it as the TO value.

After you click on SWAP, you will receive a confirmation message with the transaction details. Click CONFIRM and sign the transaction with the Polkadot.js browser extension in the popup window.

Finally, if you’re interested in how the SORA RFP system works, take a look at this complete guide on Proposing New Functionalities to Polkaswap and the SORA Network

Sources:

Kołodziejczyk, H., & Jarno, K. (2020). Stablecoin — the stable cryptocurrency. Studia BAS, 3(63), 155–170. https://doi.org/10.31268/StudiaBAS.2020.26

J. M. Keynes, Irving Fisher, Harry G. Brown. The Purchasing Power of Money: Its Determination and Relation to Credit, Interest, and Crisis, The Economic Journal, Volume 21, Issue 83, 1 September 1911, Pages 393–398, https://doi.org/10.2307/2222328

Patinkin, D. (n.d.). Irving Fisher and His Compensated Dollar Plan. 34.

Takemiya, M. (2019). Sora: A Decentralized Autonomous Economy. 2019 IEEE International Conference on Blockchain and Cryptocurrency (ICBC). doi:10.1109/BLOC.2019.8751489

About SORA, Polkaswap, and Fearless Wallet

SORA is a new economic system aimed at creating a supranational multiverse economic system with built-in tools for decentralized finance (DeFi). The SORA network implements a new way of parachain architecture on Polkadot and Kusama network, with the capability to bridge external blockchains (like Ethereum) to the Polkadot ecosystem.

One of the DeFi applications that will run on the SORA network is Polkaswap, a noncustodial liquidity aggregating, cross-chain AMM DEX designed uniquely for the Polkadot ecosystem with boundless liquidity through its one-of-a-kind Aggregate Liquidity Technology (ALT).

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