Learn about the stablecoin rookie DefiDollar in this article, how to create a "stablecoin for stablecoin" in the DeFi ecosystem
Editor's Note: This article comes fromBabbitt Information (ID: bitcoin8btc)Editor's Note: This article comes from
Babbitt Information (ID: bitcoin8btc)
Babbitt Information (ID: bitcoin8btc)
, Author: Arpit Agarwal, Compiler: Kyle, Published with permission.
Recently, there has been a lot of discussion about Dai de-pegging and the governance proposals involved in maintaining its stability. Likewise, even centralized stablecoins often fluctuate up and down their pegged prices.
"Oddly enough, on average, fiat-pegged stablecoins consistently trade above the peg, while fully crypto-pegged stablecoins trade below the peg (except @Gemini) - Dev Engineer Alex Lebed”
Other risks faced by centralized stablecoins include counterparty risk, run risk, asset forfeiture risk, and the impact of negative interest rates.
According to a survey on Twitter, 61% of users believe that law enforcement officers can freeze users’ Tether (USDT), USDC is 23%
DefiDollar seeks to be a stablecoin index that uses Defi primitives to maintain the USD peg and subsidize collateralization rates. Let me walk through the entire DefiDollar life cycle to demonstrate how it works.
Since DefiDollar (DUSD) is backed by existing stablecoins, as an illustration, we first choose two stablecoins, such as A and B to represent Dai and sUSD, with the same exchange rate as the basic reserve.
To mint 200 DUSD, a user deposits 100 A and 100 B.
In the minting transaction, A and B are locked in Aave, and the corresponding interest-bearing Aave tokens aA and aB are deposited into the liquidity (balancer) pool. Interest income from Aave is redirected to a yield pool.
AA and aB in the pool can use the automatic market maker mechanism (the pool-based exchange mechanism used by Uniswap and curve.fi and provides a framework for the balancer) to trade.
Now, suppose A's price fluctuates to $1.1 and B's price fluctuates to $0.9.
Oracle
This provides an arbitrage opportunity because in the pool, A and B are still in a 1:1 ratio. So the arbitrageur trades A from the pool for B, which will cause the two pools to be worth close to $100 each, and the DefiDollar will again be balanced. A small fee for these transactions will also go directly to the yield pool.
While the arbitrage opportunities discussed above will keep the relative prices of the underlying tokens in sync, it is still possible for DefiDollar to slip from its peg. Here are a few such scenarios where all underlying tokens fall below $1.
Oracle
To be able to explain this, let's first focus on the yield pool discussed above, which earns income from interest and transaction fees. Suppose the pool has accumulated 5 A and B coins over a period of time. The pool will act as a sort of buffer against volatility.
Assuming the prices of A and B fall to $0.97 and $0.98 respectively, then the DUSD price will be around $0.975. To rebalance these pools again, an oracle (Chainlink) will periodically push the price of the base token to the core smart contract.
Price fetched from Chainlink reference contract
Since pool A is worth $97; to cover this $3 deficit, the protocol will send (3 / 0.97) = 3.092 coins from the yield pool to the main pool. Likewise, there is a $2 deficit in Pool B, so (2/0.98) = 2.04 B will be sent to the main liquidity pool. In this way, DefiDollar will return to the $1 position again.
Once there are enough funds for volatility buffer, all proceeds will be used as protocol fees.
What If DUSD Unpegs From Price?If DUSD is trading above the peg, the protocol will allow people to generate DUSD by locking up $1 worth of other stablecoins, making an instant profit on the difference. Arbitrageurs will mint more DUSD and sell it on the market, driving the price of DUSD down.If a DUSD is trading below the peg, an immediate profit can be made as the protocol allows one DUSD to be redeemed for $1 worth of other stablecoins. Arbitrageurs will buy DUSD tokens and redeem them from the protocol, causing their price to rise.
The above mechanism works differently than the Maker system. The following is "
The rise of sUSD
Partial excerpt from the article:
Maker is a clever system: leverage and pulley are designed to maintain a kind of non-enforced soft peg. A combination of monetary policy and arbitrage opportunities keeps the peg around $1. However, during the small swings in the peg seen in March 2019, Twitter user and DeFi commentator @DegenSpartan highlighted subtle flaws in this arbitrage model.
When this peg is below $1, the Maker system theoretically incentivizes CDP owners (users who mint DAI with ETH collateral) to repurchase this stablecoin at a discount to pay down debt below cost . However, the mechanism was not efficient during the March volatility, and to understand why we just need to remember that the most common type of CDP user is one who is long ETH and wants to leverage DAI. At this stage of the market cycle, sentiment is overwhelmingly bullish. Unfortunately, in this peg, a few pennies of arbitrage is not enough to encourage enough traders to close their positions.
There are always some arbitrageurs waiting, but at some point, the overlap between CDP owners and traders ready to take arbitrage disappears. The equilibrium price at which this happens is likely to be 96 cents or 97 cents or 98 cents.
The main benefits of DUSD
A more stable stablecoin.
As a hedge against other stablecoins
A method for efficient stablecoin swap based on AMM.
Requires minimal governance.
To capture the instantaneous upward trend in yields that occurs on a specific underlying asset, i.e. we sometimes see 30%+ APR (annual interest rate) on Dai, sUSD, bUSD, but only for a few hours.https://defidollar.xyz/Risk diversification. The protocol has no objection to whether centralized stablecoins can be used as underlying assets. However, there could be some substantial diversification potential here.
