Understanding Standard Potocol in one article - a hybrid mortgage flexible supply stablecoin agreement
The Standard protocol is the first Collateralized Rebasable Stablecoin protocol based on the Polkadot ecosystem. It introduces a new model for liquidity aggregation. Compared with the previous generation of algorithmic stablecoins, Standard will adjust the stablecoin supply every cycle. And realize efficient liquidation of assets through the AMM system, and ensure price stability through leveraged trading and arbitrage mechanisms. At the same time, Standard's innovative decentralized oracle system can be used to generate synthetic asset market agreements.
If you’re new to this space, you might be wondering: What are the concepts of collateral, elastic supply, and stablecoins? As the first article in the series of hybrid mortgage elastic supply stablecoins, we hope to help you better understand these concepts and understand the advantages of the Standard protocol.
Chapter 1: Stablecoin Background
The prices of most cryptocurrencies are volatile, making them difficult to use as a medium of exchange. Take an everyday scenario as an example: Suppose Alice owns a bakery and sells bread for $1, it would be risky for her to accept payment in currency that fluctuates by 20% per day, especially when she needs at least $1 per day. Dollars to avoid loan or rent arrears. Therefore, Alice can only accept stable currencies, such as fiat currency, that is, legal tender issued by the government and supervised by a central authority. Stablecoins can play a role in this scenario: as a stable medium of exchange, stablecoins can maintain a fixed price by pegging to stable assets such as the U.S. dollar (USD). With stablecoins, people like Alice can accept and hold cryptocurrencies (in the form of stablecoins) without worrying about price fluctuations affecting earnings.
Precisely because stablecoins lower the barriers to entry for crypto investments, more funds have entered the market. If Alice is a trader, by purchasing a stablecoin, the value of her funds does not change. In addition, when Alice successfully closes her position, she can rest assured that the profit has been locked. In addition to transactions, stablecoins can also generate universal value. In Venezuela (2020) with a high inflation rate of 6500%, it is futile for workers to guard their hard-earned cash, but by buying stablecoins pegged to assets with lower inflation rates, their daily income can be preserved. can be well resolved.
Chapter 2: Types of Stablecoins
There are 3 main types of stablecoins – fiat-collateralized stablecoins, cryptocurrency-collateralized stablecoins, and algorithmic stablecoins. Here's how they work and their main drawbacks.
l Legal currency collateralized stable currency
Such stablecoins are backed by a central reserve of fiat currency. The first successful stablecoin, Tether (USDT), was launched in 2014. Essentially, the IOUs issued by Tether are backed by dollars stored in their bank accounts. For example, if Alice sends 1 USD to Tether, she will receive 1 USDT, which can be paired with other cryptocurrencies and exchanged back to 1 USD.
As Tether grows at an exponential rate, it becomes tempting to misuse funds or mint USDT without the necessary 1:1 reserve level. Too likely to happen. Therefore, we may see more applicable scenarios, such as in 2018, when Tether transferred about $750 million in reserve deposits to its sister company Bitfinex without notifying token holders (the loan was later has been repaid). Of course, this ultimately raises public questions about the credibility and transparency of the growing USDT, which would consume even more resources if the reserves were to be independently audited.
l Cryptocurrency-collateralized stablecoins
Crypto-collateralized stablecoins are backed by other cryptocurrencies and allow holders to use leverage. Let’s look at the example below using MakerDAO’s Dai. Bob is optimistic about the price of ETH. The transaction price of ETC today is $1,000, because he only has $3,000 on hand, so he can only buy 3 ETH. According to the MakerDAO protocol, Bob can use his 3 ETH to borrow Dai (a stable currency pegged to the US dollar at a ratio of 1:1). Since the price of the collateral (ETH) is volatile, Dai is over-collateralized, which means that the value of ETH should always be higher than the value of Dai issued.
Source: Cyrus Younessi
If the mortgage rate is 150% (the ratio of the maximum collateral to the issued Dai value), Bob can borrow 2000Dai and use it to buy 2 ETH. The only problem is that Bob must repay the principal with interest. If Bob is right and the price of ETH jumps to $1,500, his portfolio will be worth $7,500, leaving Bob with $5,480 after repaying the 2,000 Dai at 1% interest. But what if Bob is wrong and the price of ETH drops to $500?
Bob's Collateralized Debt Position (CDP) is monitored by a smart contract that uses an oracle to check the price of ETH. At a liquidation ratio of 125% (the liquidation price is $833.33), Bob’s ETH will be auctioned off to cover his debt. While this sounds like a great way to amplify profits (and losses), crypto-collateralized stablecoins also have their weaknesses: the concentration of power in governance token holders, rather than all members of the community.
The centralized oracle system is centrally managed and selected by governance token holders (mainly composed of the creation team), which may cause conflicts of interest and price manipulation.
For example, governance token holders can build large collateralized debt positions and collude to pick out oracles whose collateral coins are highly inflated. This would allow them to issue more stablecoins, causing their value to plummet and trigger emergency liquidations, at worst halting all operations and compensating stablecoin owners, while governance token holders receive more income.
Auctions are sometimes inefficient and unfair. Ideally, there are several conditions that should be met for an auction to go smoothly:
1. There is more than one bidder;
2. Bidders should operate independently;
3. The bidding power among the participants is similar;
Judging from MakerDAO, these conditions are not always met; in March 2020, the liquidator used"zero bid"In the way of auction, 8.32 million USD was withdrawn with 0Dai. Furthermore, since usually only governance token holders are able to participate in the auction, the group with the most concentrated holdings of these tokens has a greater chance of winning, leading to the emergence of giant whales and largely preventing new members from participating in arbitrage opportunities.
Algorithmic Stablecoins
Algorithmic Stablecoins
Algorithmic stablecoins are not backed by any collateral, but instead employ algorithms to manipulate the circulating supply in order to maintain a target price, typically $1. Below is a simplified example using Ampleforth (AMPL). Alice exchanges 1 USD for 1 AMPL. Not long after, Bob and his friends also bought AMPL. Ampleforth's algorithm is to adjust the supply every 24 hours, supply more tokens when the price rises, and reduce the supply when the price falls. If the demand from Bob and his friends increases, the price of AMPL will jump from $1 to $2, and the algorithm will increase the supply so that Alice ends up with 2 AMPLs worth $1 each (the ideal price).
system"system", and participate in the price of an algorithmic stablecoin, which doesn’t make a lot of sense because people tend to lose faith in the market during times of extreme volatility. More specifically, if selling pressure is maintained during a bear market or flash crash, it could cause further panic and sell-offs, triggering a death spiral that leads to a complete breakdown of the system.
Chapter 3: Standard's Solution
Standard has created a new protocol - a hybrid mortgage supply stablecoin protocol, which can not only solve the above problems, but also has more advantages.
The Standard protocol runs on 3 token ecosystems.
Meter(MTR)、Liter(LTR)、Standard(STND)
1. Meter (MTR) is a stable currency minted by mortgage digital assets. Similar to Dai, the stablecoin maintains its value at $1. MTR can be used to buy other liquidated assets at a discount, and will only be recalculated if its price deviates sufficiently (>3.5%) from the target peg.
2. Liter (LTR) is a liquidity token, representing the rights and rewards of the AMM module to holders who provide liquidity. Standard has a built-in AMM to facilitate peer-to-peer (P2P) transactions, such as trading liquidated collateral for arbitrage opportunities.
3. Standard (STND) is a governance token, which can be used to pay fees, obtain pledged equity rewards and participate in on-chain governance.
Standard mechanism
We still use Alice as an example to illustrate the advantages of Standard. Alice puts 10 DOTs in the fund pool of the Standard protocol and mints them in exchange for MTR. If Alice is optimistic about DOT, she can use MTR to buy more DOT to earn more profits. Even in a bear market, Alice can still buy discounted liquidation assets through the AMM in the Standard agreement to arbitrage. Whenever Alice executes a transaction through the AMM, she has to pay transaction fees, which go to LTR holders.
Therefore, the holders of MTR and LTR together form an ecology, and holders can maximize fixed income by utilizing asset mortgages and participating in arbitrage opportunities. As this community grows, STND holders benefit as more transactions equal more staking rewards and fees.
Here is how the Standard Protocol solves the current stablecoin problem:
1. High degree of decentralization mechanism: Unlike fiat currency-collateralized stablecoins, the Standard protocol is completely transparent and decentralized. There is no centralized entity to control the price changes of the deposited collateral or tokens. The risk of malicious attacks and internal corruption is curbed.
2. Fair and effective arbitrage liquidation: There will be inefficiency and unfairness in liquidation collateral auctions, but the Standard protocol uses built-in AMMs on decentralized exchanges, so that everyone has an equal opportunity to buy liquidated assets at a discount.
3. Oracle reward mechanism: Unlike most oracle machines for cryptocurrency-backed stablecoins or algorithmic stablecoins, the oracles on the Standard protocol system are decentralized (generated randomly by community members and verified by verifiers), through Block rewards are used to incentivize accurate price feedback behavior, which is not easy to be manipulated.
4. High price stability: Because MTR is mortgaged by digital assets, the Standard protocol is more stable than the algorithmic stable currency. At the same time, the Standard supply adjustment cycle is short and the timeliness is higher. When we allow synthetic assets such as sGold to be mortgaged, the price of MTR will be more stable.
5. Interoperability between assets: The Standard protocol is currently based on the Polkadot ecosystem (which may be connected to BSC in the future), and builds a bridge between ecological tokens and other cryptocurrencies through Substrate, which is more practical than other stable coins.
