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The essence of finance is actually the combination of asset supply and demand. If we analyze DeFi ecological projects built around stablecoins from this perspective, in addition to “stability”, price accuracy and liquidity are also inseparable from the Oracle oracle. And AMM market maker.
Written by: Zoe Zhang
In the past year, DeFi (decentralized finance) has developed rapidly.
The essence of finance is actually the combination of asset supply and demand. If we analyze all DeFi ecological projects built around stablecoins from this perspective, in addition to ensuring the stability of stablecoins, their essence is inseparable from two points: price and Liquidity, in other words, is the two modules of Oracle oracle and AMM market maker.
As we all know, Oracle Oracle can provide DeFi with a highly accurate source of market information, and AMM market makers can solve the problem of insufficient market liquidity to a certain extent. However, on the road of rapid development of DeFi, the performance of these two important modules is not perfect: oracle attacks and giant manipulation of the liquidation auction phenomenon have revealed their drawbacks, big players have become vested interests, and ordinary users’ arbitrage opportunities have plummeted.
In the ever-changing industry of blockchain, there are always people who are looking for new technologies and new ideas in the face of the ever-changing market thinking, and the first hybrid mortgage flexible supply stablecoin Standard Protocol based on the Polkadot ecosystem is aimed at Oracle oracles and AMM The two modules of market maker propose their own innovative solutions.
More stable: Hybrid mortgage flexible supply stablecoin
Standard has three different usage tokens, namely stable currency MTR, liquidity provider token LTR and governance token STND.
The current algorithmic stablecoins generally do not have mortgage assets as price support, which leads to the instability of prices and even amplifies the situation of market volatility. Based on this, the Standard Protocol proposes a collateralized algorithmic stable currency and a digital asset index solution based on the fund pool.
On the one hand, Standard supports cross-chain digital assets as a guarantee, hoping to avoid the price instability caused by the lack of collateral for algorithmic stablecoins.
On the other hand, the stable currency Meter (MTR) issued by Standard adopts a hybrid collateral flexible supply mechanism:
The MTR token issuance ratio (the inverse of the mortgage rate) is completely governed by voting by MTR holders within the range of ε (epsilon).
STND is a Standard protocol governance token. STND holders can vote to adjust the stablecoin MTR pricing, total supply, and issuable volume during each issuance cycle, so that MTR can be linked to the value of the U.S. dollar while achieving decentralized governance.
However, when the MTR price exceeds the ε range, an emergency shutdown is triggered, and no MTR will be issued for the remainder of the issuance cycle. Starting from the next cycle, the agreement will adjust the MTR issuance ratio.
In short: when the asset price in the Standard agreement rises, the token price rises, and the token price can be maintained at 1 USD by issuing additional tokens. When the asset price in the Standard agreement falls, the token price will also fall. Bonds can be issued to reduce the amount of tokens in circulation and stabilize the token price at $1.
MTR total supply formula
Through the adjustment of the algorithmic stable token supply, the cash provided by the Standard agreement can be used as the base price. MTR can be used to estimate the price of digital assets pegged to the U.S. dollar.
More accurate: built-in decentralized oracle machine to feed prices
We know that the characteristics of blockchain technology such as traceability and tamper resistance can make data more credible, but the blockchain cannot actively obtain real-world data. If the original data has a problem, then the blockchain cannot do anything.
Therefore, the blockchain needs a reliable third-party information source to ensure the correct execution of the smart contract. This information source is the oracle.
In the DeFi world, oracles provide a source of highly accurate market information. Therefore, an oracle capable of providing non-tamperable and reliable data is an important cornerstone of the development of DeFi.
But this cornerstone is not solid:
Most oracle price data sources are centralized and single, while centralized sources can easily be forged, tampered with, modified or hidden information, which may bring huge disasters to downstream users.
Another drawback is that the off-chain data reacts slowly to price fluctuations. If the verifier or project party pushing the on-chain data commits evil, we can only wait and die in the face of such attacks. At this stage, the oracle is not smart enough and it is difficult. Respond and resist in time.
Seeing the importance of oracles, the Standard Protocol builds a decentralized oracle module and establishes a reward mechanism for oracle providers to avoid the problems of existing oracles.
On the one hand, the oracle on the Standard protocol system is randomly selected by community members and verified by the verifier to ensure that the data source is decentralized. Therefore, in the Standard protocol, the price information comes from different oracle clients (such as Binance, Coinbase, HydraDX, etc.), so that prices cannot be manipulated by a single entity.
On the other hand, the Standard protocol uses block rewards to incentivize accurate price feedback behavior, that is, oracle providers share block rewards. Therefore, in the Standard protocol, price information comes from different oracle clients (such as Binance, Coinbase, HydraDX, etc.), so that the price cannot be manipulated by a single entity.
In each cycle, the reward between the validator and the data provider maintains a ratio of 8:2. The total amount of block rewards in each cycle is 10% of the total amount of STND generated in the era (determined by governance). The phragmen algorithm is used to select the oracle provider, so there is no cost to select the oracle provider. A block can only record a certain number of oracle transactions. This is to prevent too many oracle transactions from occupying a block. The stablecoin MTR generates synthetic assets through oracles. Standard regards the oracle as a verification program in order to operate in the entire DeFi ecosystem.
Decentralization + perfect reward mechanism further ensures that prices cannot be manipulated by a single entity.
At present, Standard has implemented a decentralized oracle mechanism and will build a decentralized financial ecosystem, and the oracle provider will become the network verifier.
More efficient: AMM that abandons the traditional auction mechanism
Although it has been more than a year, I believe everyone is still vividly remembering the epic plunge on March 12 last year.
Starting at 18:00 on March 12, 2020, Bitcoin dropped from US$7,300 to US$5,500 for a short time. At 7 AM on the 13th, Bitcoin went down again and once fell to US$3,800. This is down 62% from this year’s high of $10,000. Mainstream digital assets such as Ethereum and EOS also recorded their biggest decline since 2020.
Following the plunge, the DeFi market has entered a wave of liquidation.
The Ethereum network bears the brunt of severe congestion. From 8 pm to 9 pm on the 12th, the network handling fee within 1 hour was 355 ETH, compared to only 24.19 ETH in the same period of the previous day.
Network congestion has brought a chain reaction, some decentralized trading platforms have experienced delays in matching, and some decentralized mortgage platforms have appeared on the spotlight. On March 13, when MakerDAO, a mortgage lending platform built on Ethereum, was auctioning the ETH collateral of its stable currency Dai, due to network delays and the absence of a large number of bidders, the liquidator used the “zero bidding” auction method to With 0Dai, 8.32 million USD was withdrawn.
In addition, because usually only the holders of governance tokens can participate in the auction, groups that hold these tokens have a greater chance of winning, leading to the emergence of giant whales, which largely prevents new members from participating in arbitrage opportunities.
In response to this problem, Standard proposes the following optimization solutions:
When the price drops and the pledge rate is insufficient, the system will liquidate; but Standard does not conduct on-chain auctions, but smart contracts directly transfer the liquidation collateral to the AMM asset liquidation pool and list it for trading;
AMM DEX is open at all times, and the trading pair has and only METER. Users do not need to wait, they can purchase liquidated discounted collateral in real time and freely, which reduces the space for whale manipulation and allows ordinary users to obtain greater arbitrage opportunities. In this way, Standard liquidation is more efficient, protects the rights and interests of ordinary users, and effectively guarantees market liquidity.
Take an example of a collapse in collateral:
If 1 ETH = 1500 USDT, with a mortgage rate of 150% and a liquidation line of 120%, A mortgages 1 ETH to generate 1000 MTR stablecoins.
When ETH falls to 1200 USDT, the liquidation is triggered, and the 1 ETH pledged by A enters the AMM DEXETH-METER liquidation pool. Users can purchase this part of ETH at a price of 1200 METER or even lower to achieve arbitrage. As long as the user’s purchase price exceeds 1000 METER to cover the amount of METER generated by the earliest user’s mortgage of ETH, it is equivalent to the completion of the liquidation.
Here is another example of MTR plummeting:
If the MTR price plummets to 0.95USDT or below, the first threshold is triggered. We adjust the amount of METER generated by adjusting the mortgage rate of the newly added ETH collateral;
If the price of MTR continues to fall, such as 0.9USDT, we trigger the second threshold, that is, the entire mortgage asset sector will be closed, and the DEX sector will still operate.
However, due to the existence of AMM DEX, the probability of a collapse in MTR prices is extremely low:
If the price of METER drops, even if it is only to 0.99USDT, users can use METER to buy ETH at a low price, which is equivalent to 1500 USDT. You can buy it with 1500 METER, which is 1500*0.99USDT, and then you bring up the ETH Selling it into USDT and buying METER arbitrage can effectively ensure that the price of METER returns to normal.
In the Standard system, holders of MTR and LTR jointly form an ecosystem, and everyone can participate in arbitrage to push the ecosystem into a virtuous circle: holders can achieve greater fixed income by using asset mortgages and participating in arbitrage opportunities. With the growth of this community, STND holders will also benefit, because more transactions equal more pledge rewards and fees.
Polkadot DeFi is even more highly anticipated
As the first public chain to develop DeFi infrastructure, many people regard ETH as the birthplace of DeFi. Since the outbreak more than a year, ETH DeFi has developed in an all-round way, whether it is stable currency, lending, DEX, derivatives, insurance, Aggregators are still well-founded in all aspects such as wallets, DAOs, and oracles, and have even developed new trends such as DeFi+NFT.
However, due to the high cost, low throughput, and slow speed, ETH DeFi has been repeatedly questioned as “not a high-quality fertile ground for DeFi development”. Under the bottleneck, Polkadot DeFi is on the rise. Attracted more people’s attention.
As a new generation of blockchain protocol, Polkadot aims to break the barrier between blockchains and connect all valuable blockchain networks. From the cross-chain concept to the official launch, the market value drops to TOP5. And many projects under the ecology are also blooming everywhere. From a performance point of view, Polkadot is not only superior to ETH, but once the parachain slot comes out, Polkadot can quickly form a small closed loop and a relatively complete closed loop ecology within one or two months; in market vitality On the one hand, Polkadot DeFi does not have the first-mover advantage of ETH DeFi, but it also has stablecoins, oracles, DEX, lending, derivatives, insurance and other projects, and its development momentum is strong.
Moreover, Polkadot attaches great importance to ecological construction. The Web3 Foundation was established by the founder of Polkadot, Dr. Gavin Wood, to provide financial support for outstanding software development, research, technical education, and community activities of Polkadot and Substrate in the ecosystem. The Standard protocol is Korea’s first Polkadot Substrate ecological project favored by the Web3 Foundation, and enjoys a high reputation in the Korean encryption industry.
Building a project based on Polkadot is equivalent to taking advantage of Polkadot ecology’s high performance, traffic, ecological resources, and cross-chain asset integration advantages, coupled with its own deep thinking about the stablecoin ecology, the Standard protocol strives to bring the industry more satisfying the market A developed, standard stablecoin.
It is reported that Standard Protocol is about to conduct IDO on Polkastarter, a crowdfunding platform for Polkadot, releasing 1.3% of its 100 million governance token Standard (STND) in total supply (currently open whitelist applications) to start its new generation The journey of flexible supply of stablecoins with hybrid mortgages.
In addition to completing the IDO, Standard Protocol plans to release the first version of the product in the second quarter of this year, participate in the Kusama parachain auction, test and run the ecological transfer bridge on Kusama, start revenue mining, and participate in the Polkadot parachain auction in the third quarter. In the fourth quarter, we promoted the application of Standard Protocol to other ecosystems such as Ethereum and Cosmos.
The future is multi-chain. Under the trend of multi-chain, cross-chain asset integration is further accelerated, and DeFi will also face more complex challenges. Standard Protocol has made improvements such as decentralized oracles and AMM DEX on the basis of algorithmic stablecoins, demonstrating the innovative vitality of the industry and the ability to solve problems. We have reason to believe that the DeFi boom is really coming.
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