Dexy USD - Simplest Stablecoin Design

SigmaUSD worked well during the recent cryptocurrency markets flash crash, however, with some shorters taking profit draining bank reserves. Other stablecoins were devalued, liquidations triggered etc. Thus still we are in search of stablecoin design resilient to market events.

Continuing the old topic with a simple but fuzzy and controversial design ( A Simplest Stablecoin? ) , I am going to propose another simple stablecoin design where stability is based on liquidity pool.

In short, the design is about two contracts:

  • still, we need for a trusted oracle. It would be better to have an oracle reacting fast (not lagging one) now

  • one contract is holding all the stablecoins (after bootstrapping the second contract) and doing one-way tethering, so selling stablecoins for ERGs , with some fee like 1%. ERGs received to be kinda burnt, e.g. sent to a contract paying to miners few years after.

  • another contract is AMM DEX ERG/stablecoin liquidity pool bootstrapped just before the first contract with some amount of ERG and stablecoins such that the price is corresponding to oracles.

Now, if price on the DEX is going above $1 by more than 1% (+DEX fee), it is profitable for arbitrage traders to mint more $$$ and take quick profit. Also, with growing volume it would be profitable to mint $$$ and add liquidity to the pool.

But what if the price on the DEX is going below $1? We’re modifying known AMM DEX contract (from EIP-0014: Decentralized Exchange Contracts by kushti · Pull Request #27 · ergoplatform/eips · GitHub) by including oracle, and then there’re two options:

  1. liquidity removal is prohibited if price is below X. Then liquidity providers need somehow to manage the issue (in the long-term at least). Here we rely on social consensus outside the blockchain.
  2. if price is going below Y for some time, some amount of $$$ in the pool can be burnt, getting the peg back.

Both means can be combined, with different X and Y values (e.g. 0.95 and 0.9).

9 Likes

Dexy is a really interesting framework.

I am all for monetary plurality in stables, let them compete and see how each financial product performs in different situations.

I have a question for potentially hardening this framework.

Could the 1% go to a 3rd smart contract that accumulates fees?

Let’s call it (emergency reserve)

Liquidity removal is prohibited if price is below X. (At a certain threshold) Could the emergency reserve transfers funds to create liquidity? It might help prevent a situation where liquidity providers need to manage the issue

If the price is going below Y for some time (At some threshold), an amount of $$$ in the pool can be transferred to the emergency reserve to restore the peg and also harden the protocol if the price is below X.

6 Likes

It can be another stability gadget:

  1. One-way tethering contract can accumulate all the ERGs, and they would be spendable on buying $$$ back from the liquidity pool if price is below some threshold. Or can be split between miners and emergency fund.

Gadgets (1) , (2), (3) can be combined.

Btw, for the gadgets lagging oracle pool would work better I guess.

2 Likes

Yeah I think a lag for the gadgets makes sense here.

Some combination fo 1,2,3 seems attractive to all parties.

Burning $$$ could work too… No Risk It, No Biscuit.

I do think some emergency fund is a good idea in the event of !oh shit! scenarios.

I guess it just depends on where the thresholds for the gadets are seems there is flexibility in the implementation here.

2 Likes

Could there be any danger of a malicious actor trying to force the emergency fund to be released?

2 Likes

It could be the case, so maybe some delays are needed to let market to get back on the peg before an intervention

1 Like

the problem would be the lack of liquidity in dex pair. even though dapp peg don’t go below $1, dex peg can be more volatile with high volume trading

1 Like