This article explores the fundamental problems of the decentralized stablecoin protocol and the solution of the Mars Ecosystem
In 2020, the market capitalization of decentralized stablecoins has increased by 20 times. The minting volume of the stablecoin DAI of Maker, a leading decentralized stablecoin protocol, has grown from 100 million to 4 billion within a year. Although the increase is huge, the current market share of decentralized stablecoins in stablecoins is less than 10%, and the growth rate in the future will be even more astonishing.
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In 2020, the market capitalization of decentralized stablecoins has increased by 20 times. The minting volume of the stablecoin DAI of Maker, a leading decentralized stablecoin protocol, has grown from 100 million to 4 billion within a year. Although the increase is huge, the current market share of decentralized stablecoins in stablecoins is less than 10%, and the growth rate in the future will be even more astonishing.
The current mainstream mechanism design in the market ignores the fundamental issues common to decentralized stablecoin protocols. Without solving these fundamental problems, it is impossible for a decentralized stablecoin to grow into a trading medium and store of value with the same volume as the currency in the real economy, giving up the broadest market space.
This paper analyzes the fundamental problems of decentralized stablecoin protocols and proposes a new stablecoin paradigm, Mars Ecosystem, to address them.
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The products of most DeFi protocols such as DEX and lending agreement are a financial market realized by smart contracts to meet user-specific transaction needs. The financial market includes the supply and demand sides of capital, such as LPs and traders in AMM DEX, depositors and lenders in lending agreements. The capital supplier provides capital for the financial market, and he deposits Token in the DeFi protocol. The demand side of capital obtains capital according to the rules of a specific financial market. He uses Token to interact with DeFi protocols. The supply side and the demand side of capital complete matching and transactions in the financial market provided by the DeFi agreement, that is to say, the transaction takes place in the DeFi agreement. Therefore, the DeFi protocol can capture the value generated by the transaction, such as the transaction fee in the DEX, and the deposit and loan interest difference in the lending agreement. The specific value captured by the DeFi protocol depends on factors such as the efficiency improvement brought about by the financial market created by the DeFi protocol and the degree of market competition.
Unlike most DeFi protocols, the product of the stablecoin protocol is a Token, that is, some kind of stablecoin. The purpose of this Toke is to realize the functions that currencies such as transaction medium and value store can realize. However, the realization of these functions does not occur in the stablecoin protocol, but in the financial market created by other DeFi protocols. For example, if a stablecoin wants to function as a trading medium, it needs to have a large number of trading pairs composed of the stablecoin on the DEX, and users are willing to use the stablecoin for transactions.
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Value Capture for Decentralized Stablecoin Protocols
The product of the decentralized stablecoin protocol is not a market, but a Token, which determines that the value capture method of the decentralized stablecoin protocol is different from other DeFi protocols. The value capture methods of decentralized stablecoin protocols that currently exist in the market can be divided into the following categories:
1. Charge stablecoin transfer fees. Stablecoins will be transferred when they function as a medium of exchange, and the value of the medium of exchange of stablecoins can be captured by charging a handling fee to the holder of the protocol governance currency for each transfer. For example, Terra, which is a PoS public chain, miners pledge LUNA tokens to obtain transaction fees when Terra stablecoins are transferred.
2. Seigniorage. When the demand for stable coins grows so that the agreement can issue additional stable coins, the stable coins will be given priority to the holders of the protocol tokens. Specifically, there are the following models:
a) Rebase model. Issue new stablecoins, such as AMPL, to all stablecoin holders.
b) Lock-up stablecoin model. Issue new stablecoins, such as ESD, to stablecoin lockers.
c) Share Token model. Issue new stablecoins, such as Basis, to ShareToken holders of the stablecoin protocol.
3. Governance coins are destroyed when coins are minted. When users mint new stablecoins, they must use the governance currency of the protocol, which directly stimulates the demand for the governance currency of the protocol. Specifically, there are the following models:
a) Partially use protocol governance coins to mint. Part of the assets required to mint stablecoins is the governance currency of the stablecoin protocol, and the other part is other mainstream assets. For example, the protocol governance currency FXS and the stablecoin USDC are used when the Frax protocol mints the stablecoin FRAX.
b) Fully use the protocol governance currency to mint. The assets required to mint stablecoins are all the governance coins of the stablecoin protocol. For example, the Terra protocol uses LUNA when minting stablecoins.
4. Vault Control Value. Holders of protocol governance coins can control the treasury through protocol governance. The greater the control, the greater the value of protocol governance coins, such as Frax and Fei.
5. Capturing financial market value. The Maker protocol creates stablecoins in the lending protocol, and its products include a lending market and a stablecoin. Therefore, although the value generated by the DAI generated by the Maker protocol when it is circulated in other DeFi protocols cannot be captured by the Maker protocol, the Maker protocol can capture the difference between deposit and loan interest like other lending protocols.
The first value capture method to charge stablecoin transfer fees is very difficult in practice. In reality, it is more common to see its opposite, that is, to provide subsidies for stablecoin transfers. Stablecoin protocols that focus on the payment market, such as Terra and Celo, will provide users with subsidies. This kind of subsidy is not just a short-term expansion behavior. It reflects the characteristics of the stablecoin market with low friction and high competition. In the long run, it is difficult to establish a business model that charges stablecoin transfer fees.
The fourth value capture method The value of the treasury control right captures the value of the stablecoin stock. Compared with the second and third value capture methods to capture the increment of stable coins, the business model of capturing the stock value has two advantages: one is to reduce the short-term fluctuation of the governance currency price, and the other is to provide long-term governance currency value support. This business model is very similar to the value capture methods of centralized stablecoin protocols such as USDT and USDC.
The fifth value capture method requires the stablecoin protocol to subordinate the stablecoin product to a certain financial market, and then capture the value of the financial market to the governance currency. This type of value capture is not universally applicable. Subordination of stablecoin products to a certain financial market will limit the supply of stablecoins. For example, the supply of DAI in the Maker agreement is limited by the demand for loans.
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positive externality problem
The value capture method of the decentralized stablecoin protocol is significantly different from that of the central bank in the real world: the central bank in the real world implements monetary policy not to create profits by printing money or earning interest through asset reserves, but to promote economic growth and stay employed. Once a high economic growth rate can be maintained, the governments of various countries can obtain income through taxation and other means.
In essence, the realization of the functions of stablecoins, the product of the stablecoin protocol, occurs in other DeFi protocols outside the stablecoin protocol, and the value creation of stablecoins also occurs in other DeFi protocols. This makes all stablecoin protocols face a fundamental problem: the problem of positive externalities.
Specifically, the positive externality problem of the stablecoin protocol means that the cost of the stablecoin protocol to produce stablecoins and maintain stable currency prices is borne by the stablecoin protocol and users of the stablecoin protocol (including minters, share token holders, bond token holders, etc.), but the realization of the value of the stablecoin created by the stablecoin protocol occurs in and is captured by other DeFi protocols, and the stablecoin protocol cannot capture its creation like other DeFi protocols. Therefore, the supply of stablecoins by the stablecoin protocol is always less than the real demand for it by the cryptocurrency economy.
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integration issues
The product of most DeFi protocols is a financial market, while the product of the stablecoin protocol is a stablecoin, which determines the difference in the operating logic of the two parties.
The operation of the stablecoin protocol not only includes attracting capital to the stablecoin protocol to create stablecoins, but also promotes the acceptance of stablecoins by other DeFi protocols. This leaves all stablecoin protocols facing another fundamental problem: integration.
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Mars Ecosystem's Solution to Positive Externality and Integration Problems
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The Mars Ecosystem is an innovative decentralized stablecoin paradigm that solves the positive externalities and integration issues that make current decentralized stablecoin protocols difficult to sustain. The Mars Ecosystem consists of three parts: the Mars treasury, the Mars stablecoin and the Mars DeFi protocol. It integrates the creation and use of stablecoins into the same system, which together form a positive feedback loop. Mars stable currency has the characteristics of stable price, high capital utilization efficiency, strong scalability and decentralization. The Mars vault has the potential to become the central bank of the DeFi world.
The Mars Ecosystem maintains the stability of the Mars stablecoin (USDM) by using the mechanism of minting/redeeming stablecoins with assets equivalent to US$1. This mechanism has been proven to be one of the most stable stablecoin mechanisms: the stablecoins of protocols such as Terra and Frax are generated using this mechanism. However, unlike protocols such as Terra and Frax, the Mars Ecosystem uses an asset grading mechanism when casting stablecoins to incorporate multiple assets into the Mars vault.
When users mint USDM in the Mars Ecosystem, they need to hand over the whitelist assets accepted by the Mars Vault worth $1 to the Mars Vault, and the Mars Vault will give the user a USDM. The whitelist assets accepted by the Mars vault are divided into the following levels: 1) Stable coins, 2) BTC, 3) Leading Layer 1 tokens such as ETH and BNB, 4) Leading DeFi tokens such as UNI and AAVE, 5) Mars Ecosystem Governance currency (XMS). The volatility of assets from level 1 to level 5 increases gradually. The Mars vault determines the maximum acceptable ratio of various assets in the vault according to their volatility. The greater the volatility of the asset, the lower the maximum acceptable ratio in the vault.
The design of the Mars vault to accept multiple assets is a solution to the integration problem of the stablecoin protocol. By accepting the tokens of mainstream DeFi protocols into the treasury to mint USDM, the Mars treasury can accumulate governance tokens of mainstream DeFi protocols. Mars Ecosystem achieves the purpose of cooperating with and participating in the governance of mainstream DeFi protocols by holding mainstream DeFi protocol governance tokens, especially in the corresponding DeFi protocols through proposals that facilitate the integration of USDM into these DeFi protocols.
Compared with other stablecoin protocols, Mars Ecosystem also includes a variety of DeFi protocols in addition to the stablecoin module. The transaction fees generated by USDM's circulation on these MarsDeFi protocols can be captured by the Mars ecosystem and provide value support for the Mars Ecosystem governance currency XMS. Take Mars Swap as an example, it is an AMM DEX similar to Uniswap. Mars Swap will provide mining incentives for USDM LPs and transactions, thereby incentivizing users to use USDM on Mars Swap. This design is conducive to providing early usage scenarios and requirements for stablecoins, and alleviating the integration problems of stablecoin protocols. On the other hand, users can pledge XMS in Mars Swap to obtain MarsSwap transaction fees. This design is a solution to the externality problem of the stablecoin protocol.
Twitter: https://twitter.com/MarsEcosystem
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