From Maker,Liquity to EthCash (ETHC), the development path of collateralized stablecoins
Under the radar, stablecoins have experienced hypergrowth over the past few years. Centralized fiat stablecoins have mass adoption in the market. (e.g. USDT, USDC). The decentralized stablecoin — MakerDAO is regarded as the most reliable coin, which has 57 billion dollars in Total Value Locked (TVL).
DAI is worth around to US $2.4 billion on 1st March. In addition to MakerDAO, other substitutes have other decentralized stablecoins(e.g. Algorithmic stablecoins and partially collateralized stablecoins).
The reason is that MakerDAO(or Maker Decentralized Autonomous Organization)’s ingestion of centralized stablecoins to mint DAI. It exists without the authority of a centralized entity. This has been mentioned by users. However, many algorithmic stablecoins have not been stable. The mechanism is nominal price instability, but is more prone to volatility and more speculative than over-collateralized stablecoins such as MakerDAO and fiat stablecoins. In the past half year, the price of many algorithmic stablecoins has experienced large fluctuation, it makes these coins cannot achieve their main stablecoins’ goal in the short term.
Stablecoins are crypto holy grail
Stablecoins are crypto holy grail, because stablecoins have own 3 different functions, such as the scale of price, exchange approach and hold value. From the maturity perspective, BTC > ETH >Stablecoins, many people’s potential perspective is that stablecoins> ETH >BTC.
As the name suggests, stablecoins are designed to have a fixed price not affected by market forces. This is often achieved by tying each unit of a stablecoin to a fiat currency or an underlying asset.
Stablecoins consists of 4 types of Stablecoins: Fiat-Collateralized Stablecoins, Crypto-Collateralized Stablecoins, Non-Collateralized (Algorithmic) Stablecoins and partially collateralized stablecoins.
1. Fiat-Collateralized Stablecoins
Fiat-collateralized stablecoins are, as the name suggests, backed by sovereign currency such as the pound or the US dollar. It means that to issue a certain number of tokens of a given cryptocurrency, the issue must offer dollar reserves worth the same amount as collateral.
The reserves are often maintained by custodians that function independently and are audited for compliance on a regular basis. Cryptocurrencies that are backed by dollar deposits include Tether (USDT).
In addition, the fiat-collateralized stablecoin model becomes dangerous when there is a lack of trust in the central party’s ability to cover IOUs issued, as was the case with Tether earlier this year. Of course, these issues can be resolved if assets are auditable and there is sufficient data to show that the centralized entity has enough assets to cover outstanding IOUs.
2. Crypto-Collateralized Stablecoins
The value of crypto-collateralized stablecoins is pegged to that of other cryptocurrencies. Since the underlying asset, in this case, is also a cryptocurrency, it is not conventionally safe and may also be highly volatile.
The term used to refer to such kinds of stablecoins is “over-collateralization.” It means that a relatively large amount of reserve cryptocurrencies may be needed to issue even a small number of tokens.
Currently, MakerDao has evolved from a single collateralized ETH to support multiple collaterals such as ETH, wBTC, USDC, etc., while Liquity only supports ETH. Another problem of MakerDao is that the ultra-high mortgage rate reduces the user money utilization rate. Although Liquity has a low mortgage rate, it only supports ETH. EthCash is based on collateralizing a basket of digital assets for minting stablecoins, which has achieved a lower mortgage rate on the basis of supporting multi-asset debt through the innovative design of stablecoin model, to provide a brand-new decentralized stablecoins issuance mechanism for token holders to reduce systemic risks and improves liquidity for value assets.
3. Non-Collateralized (Algorithmic) Stablecoins
Non-collateralized stablecoins are those that do not involve the use of any reserve asset. Instead, their stability is derived from a working mechanism, such as that of a central bank.
For example, the cryptocurrency base coin uses a consensus mechanism to determine whether it should increase or decrease the supply of tokens on a need basis.
However, non-collateralized stablecoins is not very stable. Their mechanism cannot defend severe price fluctuations. On the contrary, they are more prone to volatility and more speculative than over-collateralized stablecoins such as EthCash Buildr and fiat-Collateralized Stablecoins.
4. Partially collateralized stablecoins
It mainly solves the problem that the utilization rate of excess mortgage funds such as DAI is not high and the liquidation risk, as well as AMPL and other algorithmic stablecoins that have no collateral are far more speculative than practical.
It mainly solves the kind of over-collateralized asset utilization rate like DAI is not high and liquidation risk, as well as AMPL and other algorithmic stablecoins without collateral are far more speculative than practical issue. Introducing the concept of mortgage rate is well regulated these two mechanisms. Meantime, it has been successfully transferred speculators to pay more attention on the price of stablecoins. It has not discovered suitable scenario.
The development path of over-Collateralized stablecoins.
Several improvements to MakerDAO mechanism as following:
- Low capital efficiency, such as over-collateralized
- Inactive Governance;
- Potential human error
- Only soft anchor
Capital Utilization Lending Protocol
EthCash is flexible stablecoins with over-collateralized cryptos (solve issue mentioned above), and aims to be a decentralized and anti-censorship stablecoins (eUSD).
In short, key advantages of EthCash are:
- Crypto-Collateralized Stablecoin：eUSD
- Low mortgage rate — — 110%
- The policy of algorithmic currency
- Non-governance to reduce human error
- Lower price limit：eUSD can swap ETH at current price anytime
- The decentralized protocol
- Free Interest Rate
The following table shows the comparison between the mechanism of MakerDAO, Liquity and EthCash. It also explains why we believe EthCash has the potential to challenge MakerDao in the crypto space.
Comparing with MakerDao, EthCash has a lower mortgage rate. On a macro level, EthCash can release more liquidity than MakerDao. At the micro level, users can obtain high leverage and lower liquidation risk. So how to realize this low mortgage rate?
First of all, MakerDAO are required ETH to provide 130/150% collateral because of liquidation mechanism. Assuming the long auction process, it has more time to swallow the value of collateral by price fluctuation. It means that extra collateral is the cache approach against price fluctuation risk. Besides, EthCash provides the function of liquidation. It doesn’t bear the risk as same as MakerDAO. It has ability to reduce mortgage rate. The innovative liquidation mechanism integrates 3 layers of defense functions:
1. Stable Pool
EthCash does not refer the long liquidation mechanism of MakerDAO and other lending protocol. The system supports automatic liquidation with stable pool. Stable pool aims to absorb and eliminate default debts. Once collateral is lower than 110%, all debts can be liquidated at once.
So, if stable pool does not have enough liquidity to support the system?
2. Redistribution Mechanism
If stable pool does not have enough liquidity, redistribution mechanism will be activated in second phase. The redistribution mechanism can redistribute the remaining debt from all liquidation level. Under the circumstance, comparing with low collateralized level, high collateralized level will take more debt and gain more collaterals. In order to provide the extra layer of security in the system, liquid provider will have high collateral as reward, so as to get basic collateral after liquidation.
eUSD Anchor USD
DAI has no redemption mechanism, so it is not anchored to US dollar. It relies on governance to implement the currency policy for pushing the value of DAI to 1 dollar. On the other side, the anchoring of eUSD to dollars is the implicitly designed in the protocol.
- eUSD token can be returned to the protocol to swap ETH at any time, according to the price, CDP: USD and redemption fee.
- The redemption is very important, because the price of eUSD is lower than dollars. Investors can buy in eUSD, swap into ETH, sell ETH to gain dollars. Then, gain reward by staking.
- In addition, the process can improve the system’s operation. As redemption occurs, the supply of eUSD will decrease by low -collateralized borrowers. That is, the system uses the redeemed eUSD to repay the highest risk assets.
- On the other hand, the lowest mortgage rate is 110%, the price will up to 1.10 dollars by the market.
- When the eUSD:USD ratio exceeds 1.10, the borrower can make a profit by borrowing the maximum amount of collateral and selling eUSD for more than 1.10 USD.
This concept provides a soft anchoring mechanism for the price trend of eUSD.
The degree of decentralization, hard anchoring of USD, algorithm driven and non- governance protocol, free interest rate, high capital efficiency are unique combinations in the DeFi field. EthCash will become the highest expectation project in 2021. Hence, it provides a highly alternative proposal by MakerDAO mechanism.
We believe EthCash has a good potential for embracing adventurous and avoid risks users. Adventurous borrowers can use a lower mortgage to exert higher leverage, while borrowers with high collateral will get reward by redistribution mechanism. In addition, EthCash will be very important in entire DeFi ecosystem. The capital efficiency enables greater ETH liquidity to unlock and use in DeFi protocol. EthCash is expected to launch in the future. Participants can provide liquidity or join tech developments to gain eUSD as reward for the protocol. We believe that the simple design of EthCash will be the game changer. It provides more capital efficient lending with lower risk.