Reflex Bonds: Achieving Stability Without Anchors
Editor's Note: This article comes fromBlue Fox Notes (ID: lanhubiji), reprinted by Odaily with authorization.
Editor's Note: This article comes from
Blue Fox Notes (ID: lanhubiji)
Blue Fox Notes (ID: lanhubiji)
, reprinted by Odaily with authorization.
Foreword: Encrypted stablecoins are designed to be anchored to $1, giving people a more intuitive stable imagination. However, judging from the Black Thursday incident, it is difficult to bring down the price of DAI after it soars. This paper proposes a model for reflective bonds, which aims to reduce the volatility of its collateral. Reflex bonds are similar to hedging strategies, "you can think of the system that creates the bond as a washing machine, but instead of washing clothes, it washes some of the volatility of its collateral." Reflex bonds can act as middleware between collateralized assets and final agreements, and it can even serve as collateral for stablecoins, reducing exposure to more volatile assets. The author of this article is Stefan Ionescu, translated by "SIEN" of the Blue Fox Notes community.
It's time to let an old idea shine!
In the past few years, the term "stablecoin" has meant "anchored coin". In the long run, its value is closely linked to a specific asset or a basket of assets. Recent market dynamics suggest that the pegged token narrative raises questions for asset-collateralized stablecoin projects.
That is, it limits the economic incentives that the system can use to influence the stablecoin market price, one of which is the implementation of negative interest rates for all token holders. If the system had a built-in interest rate, the stablecoin would be unpegged, and therefore, the original "anchor" narrative would be destroyed.
Many people in the Ethereum community have asked why the DAI rate cannot be negative, so that governance can exert more influence on the market. The answer is simple, the imagination of 1DAI=1USD must be maintained at all costs, so the system design does not support negative interest rates.
At least the current system does not support it. In its original design, DAI did have a negative interest rate. More importantly, though, the design shows that the market price of DAI does not always return to the same exchange price of 1USD. In contrast, the redemption price itself is also floating. Frankly, stablecoins are defined as low-volatility assets (compared to their own collateral) whose redemption prices and interest rates are determined by the market, rather than "distributed" governance.
The original motivation for the redemption price to be variable was the anticipation of the Black Thursday scenario. If the system had been designed according to the original specification, it could have responded more decisively to offset the sharp increase in the price of the stablecoin market. Sadly, the correct mechanism was abandoned.
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Talk about Reflex Bonds
Next, let’s talk about the entire mechanism of the new system, which will combine the original ideas of the DAI Purple Paper. The asset generated by this system is not pegged to anything, but it is designed to remove most of the volatility present in its underlying collateral. I will use the term "reflection bond", which was pioneered by Nikolai Mushegian, to refer to this new asset.
The purpose of reflective bonds is to be a more stable representation of their collateral, while still maintaining a high level of trust. If used in other protocols, reflective bonds can protect their users against significant and sudden changes in the crypto market. For example, if Maker had used reflective bonds as collateral prior to Black Thursday, CDP creators would have had more time to avoid being fully liquidated.
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Reflective Bonded ETH = Delicious ETH
Before we go through a few examples to see how reflective bonds can keep volatility low, let's review the terminology we'll encounter in this article:
*reflection bond
Collateralized non-pegged assets with low volatility compared to their own collateral
*Redemption price
The price the system wants the reflective bond to have; always keep DAI at 1USD, but reflective bond variable
*market price
*Redemption rate
Borrowing capacity: How much reflective bonds can be lent relative to 1 unit of collateral; each time the system receives a price feed update for the type of collateral it accepts, it divides the price feed data by the redemption price, and in order to calculate the borrowing capacity again Divide by the liquidation rate; if we use ETH as an example: Suppose the price of ETH is $100, the liquidation rate is 150%, and the current bond redemption price is 1USD; the borrowing capacity of 1ETH is approximately equal to 100/1/1.5=66.67USD.
As an example: the following two graphs show a scenario similar to Black Thursday and how a reflex bond managed by a proportional controller would react:
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Figure 1A
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Figure 1B
Until day 30, the reflex bond has a call price and market price of $1. Because the price deviation between the two is 0, the redemption rate is also 0. Furthermore, the average collateralization ratio of the entire system is 190%, and for simplicity we assume that the collateral price is always $100 and the liquidation ratio is always 150%.
Between days 30 and 40, the reflective bond market price rises to 1.1USD as people start paying more (eg, they want to pay off their debt and there is not enough liquidity in the market). In order for the market price to drop, the system needs to generate more bonds. To encourage bond creation, the call rate should be -10% per annum as the market price rises by 10% (Figure 1A). Please note that -10% redemption rate will result in a redemption price of 0.9USD one year from now)
As CDP holders realize their borrowing power has increased, they have an incentive to generate more bonds even if the price of their collateral remains the same. That's why on day 75 we start to see a slow decline in market prices as more and more bonds come into the market. At the same time, as the deviation between the market and the redemption price narrows, the redemption rate begins to approach 0%.
A similar situation occurs if the market price is lower than the redemption price (Figure 2A). The redemption rate will become positive and the redemption price will start to rise. Reflex bonds are being repriced as call prices rise, and it becomes more expensive to generate them (e.g., at an annualized call rate of 15%, with an initial call price of $1 and a collateral price of $100, after one year, The reflective bond will be repriced to 1.15USD, the collateral borrowing capacity is 100/1.15/1.5=57.97USD), and all collateral rates currently generate CDP declines. (Figure 2B)
This means that CDP creators will realize that they either need to add more collateral to their positions or pay off some of their debt and avoid being liquidated.
Figure 2A
Figure 2B
For the sake of a simple example, I have intentionally left out some details. Most of the time, there will be a small deviation between the market price and the redemption price, and the controller can be set to classify noise. Also, ideally, the redemption rate should be modified by a PI controller, which helps to minimize the market/redemption price deviation (as shown in the ideal and simplified scenario), or even by a PID controller via an integrator to reduce the maximum deviation. (there is smart contract code available for PI, probably soon for PID controller)
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Figure 3A
Figure 3B
Another important detail is that the redemption rate mechanism replaces the savings account (in the case of Maker, the Dai Saving Account) and implicitly removes the savings rate (DSR), where holders of stablecoins earn interest.
Finally, even when the redemption rate is negative, the system can still charge stability fees. The amount of stability fee charged does not change (in denomination of the reflective bond) when the interest rate reflective bond reprices due to redemption. But that's not all: a version of the system could charge a fixed stability fee and only modify the redemption rate. Fixed fees and redemption rates that can be estimated from market/redemption price spreads allow CDP creators more predictability in terms of costs and risks associated with their open positions.
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You can always predict the sign of the redemption rate because it is the opposite of the sign of the deviation.
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How do reflective bonds achieve trustlessness?
In order to create a reflection bond, a lot of pieces need to come together:
* A reliable oracle system that provides price feeds for bonds and their collateral
* Rate setter to change redemption rate
*Borrowing Mechanism
*Clearing mechanism
* Component to set lending rate (stability fee setter)
All will be discussed in detail in future white papers and future articles. Now, let's assume that, depending on the type of collateral chosen for the bond, governance can set many parameters at once (stability fees, liquidation ratios, etc.) and then remove most control of the system. Additionally, multiple reflective bonds could be launched, each with its own collateral asset type and level of governance, which would provide the market with more options.
The difficulty comes when designing the oracle and redemption rate setter. One option is to build an aggregator based on price feeds from different oracle networks, store the results from each network in a sorted array, and choose the median. The exchange of bonds and fee-specific tokens for each oracle network is enabled through Uniswap v2, and a portion of the stability fee can be used to pay for oracle request fees. The bond price feed can be obtained from the BOND/COL Uniswap v2 pool, where COL is a collateral type backing the bond, or it can be priced by a governance whitelisted oracle until the BOND price feed is provided by the oracle network .
For rate setters, a simple implementation is a PI controller, where the smart contract automatically scales and governance only sets the integral term. A more complex implementation uses a PID controller, where the integral and deviation terms are calculated by a contract using a market price deviation accumulator.
After launching the system, anyone can automatically deposit ETH, create reflective bonds, and then deposit reflective bonded ETH on another protocol to lend or create other crypto assets such as synthetic gold, oil, stocks or even current Popular synthetic assets such as the synthetic dollar.
epilogue
Bonds act as middleware between the initial crypto asset and the final agreement. The main benefit of using bonds as collateral is that they mitigate some of the volatility of the assets backing them.
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epilogue
DAI is pegged, meaning it must maintain its market price close to a single fixed price. Regardless, its original goal was not that, more akin to reflective bonds.
