In-Depth Analysis on Stablecoin QIAN 2.0 — From Staking Loan to Token Swap
From BW Investment by The Force Da Pang Yu
This is the second article of In-Depth Analysis on the Stablecoin QIAN 2.0 Series. In this series, I will talk about the development of cryptocurrency, decentralized stablecoin, and DeFi, as well as analyze the innovation in the design of QIAN 2.0, to welcome the upcoming stablecoin QIAN 2.0. Suggestions and corrections from readers who have an interest in DeFi and open crypto finance are welcome and appreciated.
1. The Ceiling of Decentralized Stablecoin
Decentralized stablecoin DAI has encountered a bottleneck in its development.
For a decentralized stablecoin system, the most important measure of its performance is the amount of on-chain asset locked on its contract.
Statistics from DEFI PULSE shows that from 2018 January till today, the locked ETH reached its peak at 2.516 million on Jan 29th, 2020, followed by a bumpy ride. Up until 21:00, May 29th, 2020, Beijing time, the locked ETH on MakerDAO was 2.001 million, indicating a 515-thousand decline compared to its peak.
According to CoinMarketCap, the current circulation of ETH is 111,128,791 (as of May 30). ETH locked on MakerDAO accounts for 1.8% of the total circulation of ETH.
As the DeFi application with the highest volume of locked assets, the MakerDAO system did not demonstrate a climbing trend in terms of locked ETH between February and May. This indicates that with the current business module, all ETH holders with a need for a loan in the MakerDAO system have already borrowed; and the majority of the remaining ETH holders do not have an interest in MakerDAO’s collateral loan module, nor a need for a loan. To attract these users, MakerDAO needs to spend a significantly higher customer acquisition cost compared to the project launch period in 2018 and 2019.
So, has the development of decentralized stablecoin reached its ceiling? Is there still any value in developing or investing in this kind of product?
2. The Emerging Multi-Collateral Module
Apparently, with the current business module, the decentralized stablecoin has a limit on the market scale. For a stablecoin with multiple collateral tokens like DAI, when a certain underlying crypto asset (e.g. ETH) reaches its lock ceiling, the volume of the locked assets can be increased by expanding the variety of the underlying assets, and in return, grow the supply of the stablecoin.
However, several factors, including holder volume, market consensus, market capital, need to be taken into consideration when it comes to choosing an underlying asset, which has led to a limited range of collateral options. DAI has only added BAT, USDC, and WBTC to its collection so far.
The amount of locked WBTC in the MakerDAO system is still rising, as indicated by the above graph. According to WBTC’s official site, there are 3851.3273 WBTC issued so far. Up until 21:00, May 29th, 2020, Beijing time, there were 2639 WBTC locked in MakerDAO, representing 68.52% of its total supply.
It can be seen from the above graph that there have been great leaps in the amount of locked WBTC in MakerDAO since May 20, 2020, followed by a stable period at around 2600. We can reasonably believe that among the current WBTC holders, most available users have already participated in the MakerDAO system. In order to bring the amount of locked WBTC in MakerDAO to the next level, we need to increase the supply of WBTC.
2639 WBTC only accounts for 0.01%, a negligible percentage, of the total circulation of BTC, which is 18,388,687. This shows a great room for the development of BTC-pegged tokens on Ethereum platform. The swap token of BTC will become the next battlefield for decentralized stablecoins.
Let’s take a look at other BTC-pegged tokens, with several well-known examples including HBTC, imBTC, and tBTC. tBTC is still under construction due to technical difficulties. The current circulation volume of HBTC is 710.11035999, and the supply of imBTC is 479.0004. The two make a sum of 1,189.11075999, accounting for about three-tenths of the supply of WBTC.
Why is the supply of WBTC significantly higher than the combination of HBTC and imBTC? What is going on here? We can use some statistics to analyze the inherent logic.
The above two supply change graphs demonstrate a surge in the supply of WBTC when it was launched in MakerDAO. The increase in the supply of WBTC mostly synchronized with the climb of the locked BTC in MakerDAO, which tells us an apparent trend: almost all new users of WBTC in May 2020 were attracted by the loan service of MakerDAO.
It becomes clear that some BTC holders have the need for stablecoin gained from staking BTC. Therefore, when a decentralized stablecoin project like MakerDAO starts to support BTC staking, the transaction volume of WBTC welcomes a surge as it functions as a bridge. Meanwhile, when the WBTC is generated, users soon stake it in MakerDAO to gain DAI.
Is an Asian team led BTC cross-chain project, like imBTC or HBTC, able to obtain support from an American/European team led decentralized stablecoin project like MakerDAO? To realize this may require high business development costs.
Meanwhile, even though some BTC holders have the need for loans, it can still be seen that the current locked BTC in MakerDAO only represents 0.01% of its circulation, which indicates a huge potential in decentralized stablecoin when attracting BTC on one hand, and that a great number of BTC holders have not accepted the business module of “staking BTC to borrow stablecoin”, on the other hand.
3. Discover the New Continent beyond Collateralized Loan
The collateralized loan is the most common business module among decentralized stablecoin projects so far. It originates from bitUSD of BitShares and then was modified to adapt to the Ethereum environment. After DAI achieved some success, KAVA, Reserve, and other projects have been released one after another. They chose either other public chains or a unique market positioning. Although no one expressed it openly, the ultimate goal is to be the top decentralized stablecoin in MakerDAO.
However, the history of the internet industry has repeatedly told us that once there is a first mover in a product or business, it would become insanely hard for latecomers to catch up or overtake. First movers have advantages and can easily gain market recognition. If latecomers do not make any breakthrough or innovation to create a new generation and fundamentally different products, then it is almost certain that they will be forgotten eventually.
In the article Redesign the Crypto-Asset-Collateralized Stablecoin Based on the Issuance Mechanism of Hong Kong Dollars, I have mentioned that the product design of MakerDAO has clearly taken the issuance mechanism of USD into consideration, given its team’s nationality. Just like USD is the collateral issued by the US Federal Reserve, DAI is indeed the collateral of the MakerDAO system. The issuance of US dollars is secured by the US Treasury bond (T-Bond), whereas the issuance of DAI is secured by CDP. However, CDP holders need to not only spend money on purchasing crypto assets like ETH but also cover DAI’s stability fee. To put in the T-Bond context, this means that the US government would need to purchase gold in order to issue Treasury bonds based on its gold reserve, showing a great cost increase. The issuers of DAI will only make negative profits in this collateralized loan module from any analytical perspective. Hence. this design fundamentally restricts the issuance volume of DAI.
When designing the decentralized stablecoin QIAN 2.0, my technical team has fully recognized that the collateralized loan module indeed has its positive effect in the initial development stage of decentralized stablecoin. However, it will inevitably hit a ceiling for market scale. For decentralized stablecoin to make a big breakthrough, the underlying business module has to be disrupted.
The path we have chosen is to entirely abandon the business module of the collateralized loan. When designing QIAN 2.0, I have taken the issuance mechanism of Hong Kong Dollars into consideration, whose essence is that when a bank holds foreign exchange assets, it can put up the assets for collateral at zero cost, in exchange for the power to issue the currency from the Hong Kong government; and the Hong Kong government redeems Hong Kong dollars from the bank without having to pay additional costs. The two parties only need to agree to an exchange rate in advance. Only with this minimum friction mechanism can a seamless conversion between the Hong Kong dollar and the US dollar be ensured, thereby inspiring the issuance of the Hong Kong dollar and driving the continued economic prosperity of the entire Hong Kong region.
A successful crypto-asset-collateralized stablecoin should learn from the issuance mechanism of Hong Kong dollars, and make sure its issuance is secured by ETH, BTC, and other assets. Meanwhile, stablecoin QIAN functions as a token exchange proof for the crypto holders issued by the smart contract. Hong Kong banks who hold US dollars are like holders of ETH and other crypto assets, and the Hong Kong government that issues the HK dollar is similar to the smart contract system that controls the issuance and redemption of QIAN.
4. Choices By QIAN 2.0
Holders of crypto assets like ETH and BTC only need to lock their assets into the smart contract of QIAN 2.0, to obtain QIAN stablecoin pegged to fiat currencies, without having to pay the interest. Unlike the Debt Positions mechanism adopted by MakerDAO, we utilize a Currency Swap Agreement (CSA) for QIAN’s lock contract. Unlike CDP, holding CSA does not require any interest payment, which makes it possible for CSA to be held long-term.
In practice, QIAN may experience appreciation compared to fiat money, which means an insufficient supply of QIAN. At this time, more CSA needs to be generated to bring the supply and price of QIAN back to normal. And the negative interest rate is introduced to further adjust the exchange rate of QIAN.
To maintain the development and stability of QIAN ecosystem, no interest will be generated while mining QIAN by locked crypto assets in the default mode. When the system believes that it needs to incentivize miners to increase the supply of QIAN, it will pay interest in FOR to new CSA users. Interest will also be distributed in FOR.
As a liquidity provider, holders of the CSA of QIAN do not need to pay any interest. On the contrary, they can obtain interest from the smart contract as extra income, which will incentivize users to hold the CSA of QIAN long-term and give QIAN multiple function possibilities, including cross-border payment, customer payment, asset trading, loan, etc. Only when there is no holding cost can QIAN truly participate in and promote the prosperity of open crypto finance, creating strong competition against stablecoins backed by fiat money, which do not require any holding cost neither.
QIAN 2.0 system will support the token swap between multiple crypto assets and smart contracts. We will collaborate with top Asian DeFi projects like HBTC and imBTC to bring more value to users of BTC cross-chain projects. In the near future, holders of crypto assets like HBTC and imBTC will be able to conduct various trading and investment activities with the QIAN gained from locked crypto assets like HBTC and imBTC in QIAN’s smart contract. The elimination of interest reduces the financial burden for the holders and brings more additional value to crypto assets. We believe the market positioning is able to make an all-win situation come true.
If you are interested in the product design and investment opportunities of QIAN 2.0, please contact me by email: david@theforceprotocol.com
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