Road to Productive Asset backed currencies — pt 3
TLDR: We started with directly tokenizing illiquid assets such as real estate on the OTL and then moved to shares because of their programmable liquidity. We have now moved to fully onchain liquidity pools for stable coins. We intend to create a stable coin which would be a hybrid between DAI and sUSD backed by a pool of various different tokenized assets. We intend to incentivize liquidity for this coin via governance token rewards, and also allowing the liquidity providers to borrow against their pool tokens.
Our thinking has undergone a bit of an evolution/refinement over the past weeks.
Our earlier approach was basically to represent the real world asset in the form of an ERC20 token and then use it as collateral on the OTL to borrow against it.
The obvious question then was what to do if the borrower does not repay, how would enforcement be handled and how will liquidity be handled if someone wanted to withdraw and the underlying asset was illiquid?
To address this issue we decided to start with liquid assets such as shares which could be programmatically liquidated via APIs.
However in the recent few days there has been a flurry of activity in the DEFI space, particularly around the yield farming space.
We discovered that the USDC USDT Uniswap v2 pool was offering really high returns and on a consistent basis.
For those who do not know how liquidity pools work, here is a primer
The beauty of liquidity pools is they are tokenized, and are liquid. Even better, USDC and USDT are quasi equivalents which means there is no impermanent loss.
The last question we had was if the returns are sustainable.
Our thesis is yes they are.
USDC can be bought by US residents for no fee. It effectively acts as an on and off ramp mechanism.
However once you get USDC, people do not want to stay in it for reasons of anonymity. They usually swap out to another stable coin and then take advantage of various DEFI opportunities.
Given the expected rise of DEFI over time we believe more people will continue to want to do this and the opportunity size will only expand.
This is too good of an opportunity to let go of. Here we have an onchain asset that could serve as collateral on the OTL. Yes it is not a direct real world asset, but we will discuss that shortly and the community will likely find an onchain liquid asset as more safe.
So we decided to take a position in the liquidity pool and used the pool tokens as collateral on the OTL alongside the shares.
Note that there is no tokenization step here as the liquidity pool is already tokenized and is an pre-existing onchain asset.
While this might seem an opportunistic move, this opens up a door for us as described in the last article (pt 2).
We believe that DEFI is likely to experience massive growth in the coming months and years. This will necessitate the need for more stable coins, more efficient on and off ramps.
DAI finds it hard to meet its peg, USDT is not credible. USDC is non anonymous and custodial. sUSD cannot scale.
As described in the previous article we believe there is an opportunity for a new stable coin that is backed by a multitude of collateral that includes real world assets similar to what is being done by MAKER DAI. However the means of maintaining its peg will be like SNX.
Essentially you should be able to lock any approved collateral and mint a stable coin.
The first approved collateral will be onchain assets with high liquidity such as BTC (ideally renBTC). Later other chains such as LTC, XRP etc can be brought in (again via REN).
Eventually this collateral pool will include real world assets such as shares, property etc. This would mean that anyone who has collateral can lock it in and mint a stable coin (with the necessary due process).
The real question becomes who will accept this stable coin as valuable. Going back to part 1, this meets the valuable collateral benchmark.
We will also support this token as a Cash equivalent on the OTL. Which means it can be used to do interesting things such as day to day transactions, lending, borrowing, speculation.
And we will also have a SNX style conversion mechanism that would allow the holders to convert to various different currencies, leading to support of more worldwide onramps.
These new Asset backed currencies can also be added onto the OTL as cash tokens that can be used for lending and borrowing.
The final piece of the puzzle is how to achieve parity against other stable coins for our new coin.
That can be done via setting up of liquidity pools on Uniswap, Curve, Balancer etc.
Anyone who provides liquidity can be rewarded via governance tokens. Governance tokens can also be given to those who mint the new coin as well as lenders and borrowers of the platform.
Given that the coins are backed by hard assets the market will create opportunity for astute investors who see the value in them and are willing to provide liquidity to it.
Offchain assets will be held by custodians who act on instructions from the governance token holders.
And there is one last ace up our sleeves.
We will allow these pool tokens (which provide liquidity) as collateral on the OTL, similar to the USDC USDT pair which we already have on there.
This would allow liquidity providers to use leverage and maximize the availability of liquidity.
Pool fees, leverage and OPEN governance token rewards make an unstoppable trifecta for anyone who wishes to be a liquidity provider.
Liquidity is everything for a fledgling currency, these feedback loops will give it the best shot at success.
The model may seem involved, but it means that users will be able to mint new cash tokens on demand, in real time without waiting on the OTL. It effectively mirrors what a bank does in real life where they create money by locking in assets.
Astute readers may also notice that liquidity providers can employ fractional reserve moves.