Simple reading of RAI: How does reflection bond wash away the volatility of ETH?
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)
Blue Fox Notes found that Defi has begun to enter a period of fission, and the experience formed in practice by different project teams around the world inspires each other. The creation speed in 2020 is significantly faster than that in 2019. So far, Ethereum is creating an ecosystem far richer than Bitcoin and any other blockchain. Blue Fox Notes will introduce progress in this area in the coming time.
One of the latest developments concerns "reflective bonds," which can be difficult for people to understand when they hear "reflective bonds."
First of all what is a bond? It is a certificate, a certificate of creditor's rights. Bonds include the issuer and the purchaser, the issuer is the debtor, and the purchaser is the creditor. Issuers generally include governments, financial institutions and enterprises, and issuers rely on credit or assets. Bonds can be traded in the market, that is, the bond market is formed. However, bonds are virtual assets, which are only a certificate of real assets, and the flow of bonds does not represent the flow of capital behind them.
What is "reflection bond", English is reflex bond, reflexivity is reflexivity. A well-known theory in the financial market is the reflexive theory, which was proposed by William Thomas in the 1920s and put into practice by Soros. Reflexive theory holds that asset prices in financial markets are influenced by participants' cognitions, and participants' cognitions have self-biases, and these cognitions, in turn, will affect the rise or fall of the market, allowing it to be strengthened. The reflective bond mentioned in this article is a bond that can reduce the volatility of mortgage assets through the feedback mechanism of the market.
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What is a reflective bond RAI?
In order to understand the reflective bond RAI, a stable currency can be used as an analogy. DAI is a stable currency issued through various collaterals (such as ETH, wbtc), and USDT is a stable currency issued through USD collateral. In essence, DAI and USDT are certificates for redeeming their collateral.
DAI and USDT have their redemption price and market price. For example, the redemption price of USDT is fixed at $1, while the market price is variable. The redemption price is the debt unit price determined by the system, which is different from the market price. Hence an arbitrage opportunity arises. When the market price is higher than the redemption price, people tend to generate more USDT, and when the market price is lower than the redemption price, people will use USDT to redeem USD.
Reflective bond RAI is similar to DAI. It is also generated by mortgage assets. Currently, it is mainly ETH, and there are also redemption prices and market prices. But the main difference here is that the redemption price is variable. The purpose of this design is to promote changes through market forces, thereby reducing the volatility of collateral. Market power comes primarily from arbitrage opportunities between the market price and the redemption price.
The redemption price of the reflective bond is not fixed. Through the adjustment of the feedback mechanism, it can gradually follow the collateral, that is, its redemption price changes with time, and it is reflexive. You can get the corresponding exposure without holding all ETH . Due to the introduction of a feedback mechanism here, there is an arbitrage operation, and this feedback mechanism buffers the volatility of collateral such as ETH.First of all, it can be used as a buffer against rapid market changes. Since the essence of reflective bonds is to reduce the volatility of collateral, reflective bonds can provide other protocols (Maker, Synthetix, UMA, etc.) with lower exposure to the encrypted market. When the market is extremely volatile, buy more time for users to exit their positions, so as not to be liquidated quickly.》）
Second, for investors with a relatively low risk appetite, exposure to volatile assets such as ETH can be mitigated through reflective bonds, which may be more suitable to the tastes of traditional institutions. In addition, holding certain reflective bonds can hedge the downside risk of some markets.
RAI Protocol itself is an agreement, and RAI is the first reflection bond that it plans to launch. So, how does RAI wash away the volatility of collateral assets such as ETH? How to help other synthetic assets develop and become an important component of building DeFi? (For reflection bonds, you can also refer to Blue Fox Notes' previous article "
Reflective Bonds: Achieving Stability Without Anchors
Design and Cybernetics of RAI Reflective Bonds
The theoretical basis of RAI reflective bond comes from cybernetics. Cybernetics is the idea of Norbert Wiener, which mainly studies how dynamic systems maintain balance and stability in a changing environment. It has applications in automotive, robotics, industrial processing, and many others. It involves reference set points, controllers, outputs, deviations, inputs, etc. Bitcoin’s difficulty adjustment is also a concrete manifestation of cybernetics.
Control systems are embedded in the processes of the entire business through algorithms, which are controlled by inputs and adjusted based on outputs and set points. One of the currently commonly used algorithm controller types is the PID controller. Its output is determined by three parts: Proportional Term+Integral Term+Derivative Term, that is, proportional term+integral term+derivative term, involving deviation range, deviation duration and speed of departure. The PID controller should consider the deviation amplitude, duration and speed, and realize the management of the smooth operation of the system through the mechanism design.
Among them, the RAI reflective bond is also based on the idea of cybernetics, and its redemption price is adjusted by PID.
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Redemption Rate Feedback Mechanism of RAI Reflective Bonds
RAI refers to the MCD code and makes some changes, including adding an automated interest rate setter, oracle median processor, minimizing governance settings, etc. The core includes the improvement of the redemption rate and governance.
The redemption rate of RAI is a variable interest rate designed based on the idea of cybernetics. It is used to adjust the redemption price of reflective bonds and the market price, thereby affecting people's economic behavior and maintaining the relative stability of the RAI bond system. Because it is based on the idea of cybernetics, it reduces human participation and is more designed from the perspective of automatic adjustment.
The core here is to design an appropriate redemption rate to prevent excessive deviation between the market price and the redemption price. Specifically, if the market price of the bond RAI is higher than its redemption price, the mechanism of RAI calculates a negative interest rate, which starts to reduce the redemption price, causing the system's debt to become cheap.
Suppose the bond price is $100 and the redemption price is $100, there is no deviation between the two. However, if the demand for bonds increases, the bond price rises, for example, to 110 US dollars, while the redemption price is only 90 US dollars. There is a large deviation between the two, and the redemption price rate decreases, which is a negative number. As the redemption price continues to fall, the price deviation is getting bigger and bigger, that is, the debt is getting cheaper and cheaper. In this case, people tend not to hold bonds; and for CDP holders who generate bonds, they are more willing to generate more bonds and then sell them in the market.
If the market price of its bond is $90, the call price is $100. The redemption rate becomes positive and the debt becomes more expensive. The collateralization ratio of CDPs began to drop, and the creators of CDPs were willing to repay their debts. As for ordinary bondholders, they will buy bonds, hoping that the bond will appreciate in value.
The important point here is to calculate the redemption rate. According to the design of its white paper, the RAI protocol uses the following algorithm:
1. Reflective bonds determine the initial redemption price 'rand', which can be any price.
3. After completing the calculation of the proportional term p, the next step is to determine the integral term, which will add all past deviations from the last deviation interval seconds to determine the integral term i.
4. The mechanism will sum the proportional term and the integral term, and calculate the redemption rate r per second, which will gradually reduce the redemption price. Because CDP generators realize they can generate more debt, they will flood the market, generating more bonds.
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Governance is minimized
Global Clearing Mechanism
Similar to Maker, the RAI protocol also has a global liquidation mechanism. Global liquidation is the last response mechanism of the system, which can ensure that the bonds of the reflective bondholders can be repaid, and the bondholders and CDP generators can exchange the collateral of the system according to the latest redemption price. The global liquidation is divided into three stages, the first is to trigger the liquidation, users can no longer create CDP, freeze and record the feed price and redemption price of the collateral; process the outstanding auction; finally, each reflective bond holder and CDP producers can claim back the corresponding collateral based on the last recorded redemption price.
Governance is minimized
The minimal governance of the RAI protocol is one of the main differences between it and Maker. It attempts to influence the price of bonds through an automated mechanism, limiting the influence of token holders on the system through smart contracts. Most of the parameters are immutable, and the internal smart contract mechanism cannot be upgraded. If the holders of the governance tokens agree, new systems can be deployed. This model limits people's ability to influence existing systems, increasing their relative stability.
Even so, however, it cannot be completely free of governance. RAI also has a governance module that enables changes to a few parameters. To ensure proper governance, it will employ time and behavioral constraints, as well as measures to manage ice ages. The time limit is to ensure that there is a time buffer to ensure that governance will not be used incorrectly. The behavior limit is mainly because the adjustment of governance parameters has a limited range. For example, the size of parameter values is not unlimited adjustments. Governance ice ages keep the system safe by freezing it for a certain period of time.
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The oracle's solution
There is also the median method using the oracle network. It is a smart contract that reads prices from multiple sources and then medianizes the price data stream. The contract needs to keep track of the oracle network in its whitelist, request price data, and also need to pay a specific token as a fee.
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epilogue
Risks of the RAI Agreement
