Real USD: Exploring the Benefits to Minting on Gains

Introduction

As covered in the launch article on Real USD, USDR v2 optimizes collateralization management by minting against system gains. This new approach responsibly maximizes yield for token holders while also hardening the system against volatility of the underlying assets.

There were three primary assumptions driving this optimization in Real USD:

1. A higher yield is better for customer acquisition. USDR’s growth will be maximized by an increasingly competitive yield.
2. The v1 mechanism to boost yield required 130% collateralization. This would take years to reach and holders would not benefit from value accrual in the system until that time.
3. USDR’s main competitive advantage is the real estate backing, an asset projected to increase in value over time. This attribute should be optimally leveraged to drive utility and adoption.

To preface the conversation, this is the approximate allocation of USDR treasury assets from the v2 whitepaper, publishing shortly.

• 50–80% Tangible Real Estate NFTs (percentage increasing over time with market cap)
• 20–30% DAI (decreasing over time based on redemption projections and real estate allocation)
• 20–30% Protocol Owned Liquidity (USDR-3CRV on Curve on Polygon)
• 5–10% Insurance Fund (additional insurance to protect users in the case of 100% redemptions, ensures all users receive $1 worth of DAI back)
• 0–10% TNGBL (TNGBL can mint USDR 1:1 up to 10% of the total amount of minted USDR minus USDR redeemed)

Minting Against System Gains

A major improvement in the release of Real USD is the automated minting of new USDR against system gains. As assets in the treasury increase in value, pushing the collateralization above 100%, instead of holding that value in the appreciated assets, we immediately realize the incremental value and use it to add new property to the treasury. We do this by minting new USDR 1:1 against those gains, every 1% increase to collateralization above 100%, and then using that USDR to purchase additional real estate through the Tangible marketplace.

With the current treasury composition, the two assets that have the potential to appreciate in value over time are the TNGBL token and tokenized real estate. Below we’ll look at a few examples on how minting against system gains benefits USDR token holders as well as the system overall.

Having passed 100% collateralization, these gains can be minted to new USDR without risking the peg or a 100% token backing. And in fact, minting against these gains actually brings additional stability to the system while boosting yield. At times, some of the Real USD minted against gains will be used to incentivize yield by swapping it for DAI and adding that money to the incentive vault.

Example 1: TNGBL Price Action

In the first scenario, we’ll look at a rise and fall in the price of TNGBL.

TNGBL value doubles and is reallocated to real estate.

We start with the price of TNGBL doubling over a period of time, expanding from 10% to 20% of the backing. This pushes the collateralization rate for USDR to 110%. The additional collateralization makes USDR stronger, however keeping the incremental value in TNGBL brings no additional financial benefit to USDR holders. Further, like many other digital assets, the price of TNGBL is much more volatile than real estate and can easily lose whatever gains it had made.

Instead of holding that new value in TNGBL, Real USD will immediately convert it into real estate. New USDR is minted against the appreciation in TNGBL, growing the market cap 1:1 against this value. The USDR is then used to purchase new real estate in the Tangible marketplace.

This process shifts the value accrual from TNGBL to real estate with two primary benefits:

1. Unlike TNGBL, real estate produces yield. By shifting this 10% gain in value from TNGBL to real estate, we can increase the yield by 10%, adding ~80 bps to the yield. This is a huge benefit to USDR holders.
2. By moving the gains from TNGBL to real estate, the value is locked into the stability of a real world asset. If the TNGBL price subsequently falls the gains have already been realized.

Continuing in the example, let’s explore the impact of a 50% drop to the price of TNGBL.

TNGBL value falls, but gains have been locked into real estate and yield.

TNGBL now constitutes only 5% of USDR’s backing and the collateralization rate falls to 105%, but the real estate portion is still 10% larger than it was prior to TNGBL’s initial move up and the incremental yield is locked in. Had the TNGBL gains not been shifted to real estate, the rise and fall of TNGBL would have been a circular move with no lasting benefit to the system, collateralization falling back to 100%, no incremental RWAs or yield.

Example 2: Real Estate Price Action

In the second scenario we’ll look at how the system responds when the price of property fluctuates. The baseline is 100% collateralization where the real estate allocation is 50% spread across 50 units. All of the current real estate holdings are in tranche #1.

Real estate value increases and is reallocated into new properties.

Over a period of time, the property in the treasury appreciates by 20%, as real estate is 50% of the collateralization, this is a net 10% gain on the backing. The 50 units in tranche #1 are now 60% of the total backing of USDR, pushing the collateralization rate to 110%. As the total units remain the same, the yield remains the same.

By minting against these gains, Real USD can realize that 10% appreciation in value and reallocate it into new units, thus increasing the yield. The 10 points of net value gained in tranche #1 is used to purchase 10 new units for tranche #2, moving that value to tranche #2. Real estate still comprises 60% of the backing, the collateralization rate remains 110%, but 10 new units have been added to the treasury, increasing the yield by ~80 bps. More units = more yield.

Now let’s see what happens when the value of the real estate starts to fall:

Real estate value falls, but gains have been locked into incremental yield.

Over a second period of time, the value of real estate falls by 10%. This reduces the value of the assets in the USDR treasury, lowering the collateralization rate to 104%. However, because the gains had already been realized and used to purchase new property, the decline in value does not impact the recently improved yield.

Conclusion

In the initial deployment of USDR, real estate assets needed to hit 130% over collateralization for USDR holders to see a boost in yield, minting yield against incremental gains in the property values beyond that point. Rental yield remained the same up to that time as the rental assets grew linearly with market cap.

Moving gains immediately into additional real estate is a greatly optimized approach, benefiting the system in multiple ways:

1. We speed up the timeline to boost the yield above the 8% target rate. In a category where yield is the primary value prop, it is imperative we responsibly maximize yield to drive increased adoption of USDR.
2. With Real USD, every 10% gain in property prices results in an approximate .8% net gain in yield, assuming a 8.5% yield on the individual property.
3. Moving the gains out of volatile digital assets and into stable, yield-producing RWAs strengthens the system and better insulates it from the cycles of the cryptoeconomy.

These new updates remove the automated burn of TNGBL in the treasury, deployed in v1. Any percentage gain in TNGBL is turned into an equivalent gain in real estate, maintaining the allocation of TNGBL in the treasury at approximately 10%.