The working principle of RAI is a bit like a spring: the farther the market price of RAI is from the target price, the stronger the interest rate and the greater the incentive for RAI to return to balance.
Original title: “V God, 0x_b1 is optimistic about the new stable currency RAI launched, and its price is not linked to the value of legal currency”
Written by: The Defiant
Translation: Stablecoin Research and Analysis
At present, most DeFi lending agreements are based on over-collateralization operations. Therefore, it is particularly important to ensure that the price of mortgage assets will not fluctuate sharply, and to protect users from asset liquidation.
The stable asset RAI developed by Reflexer Labs and supported by ETH is a solution to reduce or delay the volatility of assets in order to provide such low-volatility assets as the underlying underlying assets for other DeFi protocols. The Ethereum main network has just been launched recently. . The block explorer records show that V God and 0x b1 also purchased RAI tokens worth millions of dollars on Uniswap.
Recently, The Defiant columnist Owen Fernau wrote an article to analyze the RAI project and its working principle in detail. The following is the original translation:
RAI, a stablecoin suitable for pure decentralization, is now online on the Ethereum mainnet. It is not linked to legal currency, nor is it supported by legal currency. Its design is completely run by a computer program. If RAI has a physical banknote, it will display: “Code We Trust”.
RAI is a stable asset supported only by ETH. Unlike other stablecoins issued by the central bank, RAI relies on algorithms to maintain price stability without being linked to external prices such as the US dollar. Its main feature is minimized governance . Work with as little human intervention as possible, which is why the founding team Reflexer Labs calls RAI the god of money .
In the DeFi world, although the community does not trust the stable currency anchored by the US dollar and other legal currencies, the stable currency supported by the legal currency has become the backbone of the emerging financial system. RAI solves this contradiction. DAI initially mortgaged Ethereum’s native asset ETH, and then minted a stable currency anchored to the value of the U.S. dollar. However, after November 2019, other mortgage assets containing legal currency were added, and RAI hopes to become a real Decentralized, non-censorship alternative.
Global reserve assets
The initial goal of RAI is to become a substitute for fixed currencies and be used as collateral and stable reserve assets in DeFi. Over time, its builders hope that RAI will also become the “Ethereum standard, the native account unit of the Ethereum ecosystem,” Reflexer Labs member Ammen Soleimani wrote in an article called “Money God RAIses”. But RAI’s long-term ambitions are greater.
“If RAI achieves its purpose in DeFi and begins to be adopted globally, it can bring credible neutrality to the management of stable global reserve assets,” Soleimani wrote.
According to the statistics of stats.reflexer.finance, RAI is a fork of Maker’s multi-currency DAI. At the time of writing, more than 28k of ETH were locked, resulting in an outstanding RAI of 7.4M. The current market price is US$3.42 (the redemption price is US$3.14), and the total market value of the asset is US$16 million.
However, according to RAI’s mechanism, its dollar-based price is not important. The redemption price of RAI will be adjusted with low volatility based on the value of the collateral, so 1 RAI = 1 RAI.
Reflexer Labs plans to announce the liquidity mining plan for the RAI/ETH Uniswap v2 pool and the Reflexer non-government token FLX in the next few weeks.
The official blog also stated: For the initial batch of RAI/ETH LP, it has not been determined whether mining rewards will be provided.
Work like a spring
In order to achieve relative stability, RAI has an arbitrary initial target price, which is its redemption price. When the market price of RAI deviates from the target price, its algorithm controller will automatically set an interest rate, proportionally resist price changes, and encourage people to return RAI to its target price.
“It works like a spring: the farther the RAI market price is from the target price, the stronger the interest rate, and the greater the incentive for RAI to return to equilibrium,” Soleimani wrote.
This protocol uses something called a PID controller to stabilize assets. PID controller is a control loop mechanism, which is widely used in industrial processes, combining three functions to maintain a certain value. For example, the cruise control function of a car is a control loop mechanism in which the engine must output different powers to keep the car at a constant speed when going up and downhill.
Although the interest rate is an approximate value, the protocol uses something called the “redemption rate” as a variable for its PID controller.
RAI has both an open market price and a redemption price. The latter refers to the ratio at which RAI can be exchanged for locked ETH in the RAI protocol. If the two prices are the same, the system is in equilibrium.
When the market price is greater than the redemption price, the control mechanism is activated to continuously increase the redemption rate of RAI.
The increase in the redemption rate will incentivize those who have locked up ETH (RAI borrowers) to buy RAI now because their closing costs have become higher. In theory, this will make the market price of RAI consistent with the redemption price.
This balancing effect is also in the opposite direction. If the market price of RAI is higher than the redemption price, the redemption rate will become negative. The agreement has already motivated RAI holders to sell, because the reduction in the redemption price has played a de facto negative interest rate. At this point, the market price should match the newly reduced redemption price.
A semi-stable encrypted asset that is not restricted by any country’s monetary policy can be a solution to the macroeconomic problems of Triffin’s dilemma.
The Triffin Dilemma involves potentially conflicting incentives. When an asset, such as the U.S. dollar, serves as both a national currency and an international reserve, such conflicting incentives will appear. Currency controllers must not only curb domestic inflation, but also respond to the demand for international liquidity. The monetary policy required to achieve these goals is often misplaced.
RAI’s goal is to consolidate its position as the “god of money” controlled by algorithms, which will free any country’s currency from this dilemma.
Reflexer Labs announced its $4.1 million financing last week, led by Pantera Capital and Lemniscap. Other investors include MetaCartel Ventures, The LAO and at least two former MakerDAO team members. This round of financing is another round of financing after raising US$1.68 million in August. The last round of financing was led by Paradigm, a new crypto venture capital firm Variant Fund founded by Standard Crypto, Compound founder Robert Leshner, and a16z former partner Jesse Walden.
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