Since the launch of USX, we have managed to deploy many features to greatly enhance the flexibility and capital efficiency of USX, i.e via POO and PDLP which create liquidity directly on the secondary market.
USX is a decentralized over-collateralized stablecoin that features vault-based as well as pool-based stablecoin minting and I propose to add a new minting and stability mechanism - Liquid Stability Reserve (or LSR) to further enhance its stability and capital efficiency.
The key challenge for decentralized stablecoins is always the pegging and the cost to maintain the peg. The typical way to do it is to set up a stableswap pool (i.e Curve pool ) and provide liquidity mining incentive to help maintain the price peg. The problem with this approach are several folds:
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Difficult to defend the peg as there is no hard redeemability backstop mechanism for these stablecoin pools, we saw many depegs during recent market turmoil.
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High friction to route your stablecoin flow to Curve-like swap because of high slippage and associated fee with each transaction. i.e if a user wants to buy USX with BUSD, but USX doesn’t have a direct pair with BUSD. It may need to route through USX->USDT->BUSD, likely incur two tx fee charges for this transaction.
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It’s costly and unstainable to maintain liquidity mining for just supporting the peg pool. Typically, those decentralized stablecoins need to run multiple fragmented liquidity pools on various chains/swaps to maintain the peg, it’s inefficient with very high friction (i.e see 1 above).
Maker introduces PSM (which can be treated as an internal stablecoin swap) to allow for zero slippage and zero fee swap between mainly DAI and USDC, it is bidirectional, this is good for tackling the above multiple tx fee problem and slippage issue and it helps DAI defend its dollar peg. However, it is still very inefficient as DAI still needs to indirectly subsidize USDC (3.5bn USDC sitting idle earning no yield at all).
I thereby propose an alternative solution, innovating on our previous dToken model, let’s call it Liquid Stability Reserve, as an addition to our current two USX minting models (Vault-based and pool-based overcollateralized minting).
These are some high level specifications of LSR module:
- Any user can use supported stablecoins (i.e USDC, DAI, BUSD etc, subject to vault cap) to mint USX on 1:1 basis, no fee charges; Vice versa, any user can elect to burn USX into any of the above supported stablecoins on a 1:1 basis so long as there is inventory liquidity in the reserve.
- Upon USX minting, the incoming reserve stablecoins (USDC, DAI, BUSD etc), will automatically be deposited into lending protocols (now only supported dForce Lending, can also support Aave etc) to earn yields. The yield from the lent stablecoin reserves will be contributed to the protocol treasury.
So, with LSR module, we are aiming to achieve the following major design goals:
- Peg stability: zero slippage, zero fee module will allow LSR to serve as the major route to peg USX to $1 via arbitrage;
- Efficient Router: Given LSR is the major peg stability module and zero fee, it basically serves as the major and very efficient central routers for all USX-paired trades via USDC, DAI etc; (i.e USX > USDC/DAI> ETH/BTC).
- Protocol-owned liquidity: Given USX’s stablecoin reserves are supplied into lending protocol, so it earns yield on the deposit at the same time, helps boost liquidity in the lending protocol as well as offsetting its liquidity mining inflation and it can also be extended to provide liquidity to DEX.
- Minimal technical risk. The feature can be implemented by reusing the audited and battle-tested codes of dToken, USR and Vaults, which does not require extra engineering efforts.
This proposal is for discussion only, once we gather sufficient community support, we will launch formal governance voting and initiate the implementation.