STATIK Stable Coin — Reorchestrated Stability Metric
We more thoroughly examined the shortcomings of our previous stable coin model and its peg mechanisms to make adjustments to its stability measures. However, after diving deeper into the many facets of pricing volatility, we are happy to announce more robust changes to its peg mechanism.
To assist with risk assessment, data analysis, and formula metrics, we have preliminarily partnered with ethere.al to overhaul our $STATIK coin stability mechanisms. Future partnership developments will unfold after our launch to continually bring updated risk metrics and innovative pairings to ensure stability and growth long term for all holders. More to follow at a later date in 2022.
To preface these structural changes, we would like to mention that we have lowered the total collateral rate behind STATIK to 20%, down from 25%. In part, we have made this decision due to the limited total mint rate per block 25% would have been able to undertake safely. We have safely increased this rate by nearly 50% by reducing the collateral rate. However, once TVL grows on the platform, we can adjust the collateral rate accordingly. Secondly, we have reduced the backing because of the effects on stability, which we will discuss further below. With that being said, here are the changes that have been made.
To break down the core solution, we must first return to the central issue of prolonged pegging times experienced during the continual sell pressure of our previous commerce-backed stable coin. While the four previous stability mechanisms, in theory, should have resulted in a 1:1 peg at some point in the future, the price drop is an exponential function. The further the decline, the longer it takes to regain peg. This problem was partially rectified by the collateralized Treasury system and its backing for THO. The principle here involves continual buy support at a predetermined floor price which would, in turn, set a hypothetical minimum price for THO. However, it has become apparent that we have also doubled the allocation weight of THO within STATIK from 10% to 20%. While this, in theory, should provide more rewards that are resistant to stagnation, therefore promoting holding, in practice, it has shown not to have as significant of an effect as we would have hoped.
Furthermore, the psychological aspect of a 20% risk on an item deemed stable has been determined to outweigh the potential reward, even if the system returned 30% a year. In addition, after further analysis of the relative relationship to price decay to inflation and projected STATIK mint rates, such a return would be unlikely to withstand a sustained price drop. This creates further sell pressure as a downtrend develops, and given the 20% weighting, accelerates the depeg to a value that becomes incredibly difficult to overcome. As such, the four stability measures can only do so much to fight against human inclinations to preserve capital. At which point, it becomes a question of, “why would you invest in STATIK with an inherent and likely risk of 20% for a maximum realistic return of 20–25% return per year, which would innately fall if STATIK and THO collapsed?” Furthermore, considering the leveraged nature of STATIK to the ecosystem, the relationship inherently creates volatile spikes that can seismically grow.
With this preliminary partnership, we have begun to examine traditional market volatility rates to uncover ways to artificially generate similar systems to help deleverage and reduce the return to peg period for STATIK.
To break this down, we have looked at a 1.3 standard deviation move in the market and the effects that it would have on traditional derivative products as it closely mirrors the 20% risk STATIK carries. At the time of this article, moves within the market have a roughly 80.6% chance of staying within the 1.3 range. However, the same cannot be said for crypto, where many orders of magnitude greater moves are not uncommon. However, the more critical piece missing in crypto is controlling risk beyond just position sizing. For example, you have various Greeks in traditional investing that can help you manage a position and its inherent risk to the trade itself and your overall portfolio. As such, we’ve examined various avenues of replicating specific derivative-based tools to help stabilize the price of STATIK.
Three such instruments are Theta decay, DvegaDtheta (Veta), and the overall correlation to the Treasury as a whole (Beta). Now the purpose of this article is not to decipher these terms, as you can do that through research on your own time. But the short hand version is that time, realized volatility, and correlation all play a role in the price action of STATIK – in retrospect to platform-based inflation.
To utilize all of these metrics, the following equation was derived:
Now, this was left non-simplified to isolate each piece separately and experiment with it individually to comprehend the specific weighting in the overall formula. It is also a “dirty” calculation undergoing continual revision to factor additional data points and optimize emission usage while also introducing other fail-safes beyond the reserve and fee manipulation.
To summarize these separate theories, the acronym ATVR was created which stands for Artificial Theta Value with respect to Reserve. At its core, we are prioritizing the return to peg time with regards to the minimum amount of total emissions relative to realized volatility levels needed to maintain a positive correlation with respect to platform-based inflation.
- S = STATIK Units Minted
- C = Collateral Rate Percentage
- B = Total THO Emission Units Per Period
- A = Starting THO Emissions Balance
- Ti = THO Starting Price Per Period
- Tf = THO Final Price Per Period (Tf becomes the next cycle Ti Value)
Beyond completely restructuring the logic that guides the stability of STATIK, we are also examining the introduction of a positive Artificial Theta Value by implementing a time lock on mints/redeems/swaps while establishing a dynamically adjusting rate that funnels consistently and predictably into a reserve contract for STATIK. This Artificial Theta Value is proportionate to the trailing realized volatility rate of THO itself — i.e., when the price decreases, this implies volatility is rising. Therefore the variable emission rate would increase proportionally to the decline. However, if STATIK is already at its $1 peg, this additional ATV would be deposited into the Reserve, which would funnel conversely back during a period of increased realized volatility. This structure, paired with adding a time lock on liquidations of STATIK, would force the peg to return significantly faster and decrease the inherent 20% risk due to THO exposure.
By default, the maximum time to peg on a significant drop at the beginning of a cycle is one month. However, if the decline is slower and sustained, this dynamically proportional weight system would allow STATIK to maintain peg day over day (DoD). That being said, another benefit is the ability to apply a multiplier to the overall formula. This, in theory, would allow the time to peg to be shorter on substantial collapses -potentially up to two-three times as quickly.
Furthermore, the dynamic ATV over time increases its correspondence to the platform overall (Artificial Beta). Therefore, it has an inherent correlation to the Treasury balance on a more permanent basis than relying solely on a predetermined floor price. These two items, paired with the time locking of certain STATIK transactions, limit arbitrage potentials but replicate multiple important stability mechanisms found in traditional marketplaces and essentially cause Thorus to back STATIK and vice versa. It also stabilizes the risk to return profile to match more closely with even something as “unexotic” as a SPY position.
You can view the performance metrics below:
Difference on emission drain 20% has (chart #2) vs 25% backing (chart #1)
- The first three data sets represent inflation for three months and a stable $1 THO price. The corresponding percentage of emissions would be deposited in the STATIK Reserve because the $1 stable THO price represents enough people buying per month to curb inflation from the increasing supply. Therefore, this inherently means STATIK is also stable on its own. However, as you can see, the larger the STATIK balance grows, the larger the Reserve needs to be to hedge future realized volatility.
- Data set four shows that if demand stays constant, inflation will crush the price, meaning STATIK also collapses. The percentage of emissions determined will subsequently feed into STATIK directly to maintain the peg. In this example, we have set the minted STATIK balance to 5m, which is a realistic starting target for initial adoption, in our opinion.
- Data set five shows a stable 5m STATIK balance and an increasing price month over month. In this example, the designated emission requirements for the Reserve decrease proportionally.
- Data set six shows a growing price and a growing STATIK balance month over month (MoM). As a result, the Reserve’s emission requirements are higher due to more THO in the STATIK contract that needs to be hedged.
In summary, if the price collapse is linear — this method equates to a stable peg day over day. However, if the crash is immediate and substantial for the one-month period — the maximum peg time is one month from the stabilization of the collapse. This is due to the limited maximum emission reallocation we can perform without disproportionately decreasing rewards elsewhere in the ecosystem. However, as mentioned previously, there is potentially the ability to manipulate the peg time by setting a multiple function to the entire equation — though the scenarios where this is performed will be calculated and analyzed on a situational basis.
Another point to note, the inherent requirements of STATIK can be significant as the mint balance grows. Therefore, we will be experimenting with taking 20% of fees collected from the platform — which would have been used to buy THO for the Treasury — and instead using them to support the STATIK Reserve to ensure an optimal balance between dynamic emission allocations and direct support. The method of this direct support would consist of either purchasing THO and depositing it into the STATIK contract — which subsequently also helps the price of THO proportionately to the size of the Mint balance — or by depositing the stable coin aspect of it (USDC/DAI for example) thereby deleveraging STATIK from the ecosystem slightly. However, these methods will be determined on a case-by-case basis in unison with our preliminary risk assessment partnership with ethere.al.
Given the complexity of this newly derived peg mechanism, we will be implementing it manually with an initial 10% reserve to lead the dynamic portion. As we further refine the mechanism, we will be working closely with individuals with risk assessment and traditional finance knowledge to bolster performance. Furthermore, with the introduction of the Reserve fund specifically to house the excess emissions collected during times of STATIK stability, we can further ensure there is an ever-increasing buffer to maintain peg during increased realized volatility.
Finally, this experimentation and refinement phase will last several months to ensure an optimal balance is achieved — during which an ever-increasingly complex artificial backing will be derived. Any significant updates to this logic or its parts will be written about accordingly.