RAI: The "Ideal Type" of decentralized Stablecoin in the eyes of God V

23-03-10 16:39
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原文标题:《 RAI: V 神眼中的去中心化稳定币「理想型」 》
原文作者:Lawrence Lee,Mint Ventures


伴随着美国证券交易委员会(SEC)对 BUSD 的证券指控,以及 Binance 上线去中心化稳定币协议 Liquity 的「治理」 Token LQTY,去中心化稳定币又一次成为了市场热点。

The decentralized Stablecoin track is a track that Mint Ventures has been paying attention to for a long time. We have conducted timely and comprehensive coverage of outstanding decentralized Stablecoin projects. The published research papers includeFrax.finance from currency protocol to DeFi matrix","Liquity: A rising star in the stablecoin market","Academic Stablecoin rookie: Angle Protocol","Can Celo, Stablecoin Track's merit student, replicate Terra's rise? "And for Luna/UST, which is rising fast and falling like a meteor, we also have"Terra: Path to the Rise of the Stablecoin Army","Luna: Is Luna a Ponzi Scheme?For readers to understand the leading decentralized Stablecoin projects.

Regulatory issues have always been the sword of Damocles hanging over the head of Stablecoin projects, and also the biggest development opportunity for decentralized Stablecoin projects. We have always paid attention to regulatory trends:Regulatory storm opens window of opportunity, which decentralized stable currency to focus on?","With the regulatory thunder finally upon us, is spring coming for decentralized stablecoins?In the two articles, we analyzed the more noteworthy decentralized Stablecoin projects, as well as the opportunities and concerns for the development of decentralized Stablecoin.

In this paper, we will focus on Reflexer Finance, a decentralized stablecoin project that has done a relatively extreme job in decentralization/ditrust. Its "Stablecoin" RAI does not rely on any centralized currency, not even the Federal Reserve.

This article is written by the author based on the project information and market background. Due to the limitations of the author's cognition and information, there may be errors in the content of this article in terms of data, facts, analysis and deduction. You are welcome to exchange and correct. None of the content in this article constitutes investment advice.

I. Main points of the report

1.1 Core investment logic

RAI is one of the most decentralized stablecoins on Ethereum network, with the ultimate de-trust features of illegal currency anchoring, complete decentralization, and minimal governance. It is also called by Ethereum founder Vitalik as "the pure ideal type of mortgage automatic stablecoins only supported by ETH".

The Stablecoin circuit business is on solid footing and has grown rapidly in past crypto cycles, outpacing the industry average. In the subdivision circuit of stablecoin, along with the recent high pressure of regulation on stablecoin, the decentralized stablecoin circuit that RAI is in has a broader development prospect because it is more in line with the mainstream narrative of anti-censorship and de-trust crypto world, and at the same time has a lower level of development. In addition, RAI also has the rare feature of not anchoring fiat coins in the current stablecoin market, which makes it immune not only from U.S. regulation, but also from Federal Reserve monetary policy.

1.2 Main Risks

RAI's risks include:

PMF 风险:非法币锚定的稳定币在用户端的接受度低市场推广阻力因素较多:仅以 ETH 为抵押物会影响 RAI 在用户端的推广最小化治理的理念使得团队运营抓手更少治理 Token FLX 流通量已经超过 67%,后续用于用例推广的激励可能不足团队风险:在联合创始人 Stefan 出走之后的近一年时间,团队在用例扩展和市场推广方面的进展都较为一般 RAI 的风险包括:代码风险:RAI 机制新颖且基于 PID(Proportional–Integral–Derivative Controller,比例-积分-微分控制器,广泛用于工业设计中的反馈控制)理念的链上控制系统并无先例,虽然经历了 2 年的安全运行以及代码审计机构的审计,但仍有潜在风险尚未暴露的可能性

1.3 Valuation

From a P/S perspective, Reflexer has a lower valuation than Liquity, which is also a fully decentralized stablecoin on the Ethereum network; In terms of stablecoin size, Reflexer is overvalued.

See 4.2 Valuation Levels for details.

Ii. Basic information of the project

2.1 Business scope of the project

Reflexer Finance's sole business is "Stablecoin", developed and operated by Reflexer Labs.

其核心业务流程比较简单:用户超额抵押 ETH 生成稳定币 RAI,用户付出 2% 的年利息即可持续使用 RAI。用户偿还 RAI,并支付借贷利息,就可以赎回 ETH。系统治理目前由治理 Token FLX 的持币者进行,长期他们希望实现「无治理」。

Unlike DAI and the vast majority of other stablecoins, RAI does not anchor any fiat or physical currency, but rather has its target price automatically adjusted by market supply and demand to achieve its goal of "low volatility asset based on ETH". The details will be discussed in section 2.3 Business Details.

2.2 Project history and roadmap

The history of Reflexer Finance is as follows:

In terms of roadmap, in addition to minimal governance, which will be discussed in more detail below, RAI is also considering whether to extend collateral to decentralized assets such as stETH, and Vitalik has also brought up a discussion on Reflexer Governance forum on how RAI systems can support LSD.

2.3 Service Details

For Stablecoin, the first thing we need to look at is its core product mechanics. A set of self-consistent core product mechanism, including supply control mechanism, clearing mechanism and bad debt disposal mechanism, is the cornerstone of the long-term development of Stablecoin project. The reason for the rapid demise of algorithmic stablecoins such as ESD/BAC and the epic spiral collapse of UST is that the core product mechanism is not sustainable in the long run.

2.3.1 Supply control mechanism

For stablecoins, and for any currency, the supply control mechanism is the most important part of its design. Since market demand as a whole is not measurable (although it can be stimulated by various means, the demand side stimulus is indirect to the goal of price control, and the demand side stimulus is derived more from incentives than from mechanisms), So the core mechanism for stablecoin to keep its price stable is mainly supply control. A supply control mechanism that is flexible and responsive to the market while maintaining underlying stability at all times is what every stablecoin project wants to build.

The Reflexer system allows the user to generate RAI at any time at the redemption price (i.e., the target price, which is referred to as the redemption price for the purpose of understanding below), and at any time allows the user to repay the RAI and retrieve the pledged ETH at the redemption price of the system.

The core of supply control of Reflexer system is that when market supply and demand are out of balance, Reflexer will take the initiative to adjust the redemption price of RAI and guide the market price close to the redemption price by encouraging users' arbitrage behavior, so as to achieve a new supply and demand balance. The redemption price of RAI was initially set at 3.14 (pi) and then adjusted by the code based on the market price.

There are two types of roles in Reflexer's system: net debtors to RAI (borrowers to RAI systems) and net holders of RAI assets (lenders to RAI systems). RAI system borrowers are generally those users who mortgage ETH to generate RAI and use RAI for other purposes. They have a net liability to RAI and need to purchase RAI from the market to make repayments.

The Reflexer system influences the marginal behavior of the above two groups by controlling the redemption price, so as to realize the active control of the supply of RAI. To be specific:

When the market demand for RAI is strong and the market price of RAI rises, the system will automatically reduce the redemption price, making the redemption price of RAI more significantly lower than the market price, so that participants in the system tend to increase loans, that is, obtain new RAI by pledging ETH and sell it to the market for profit. Thus, the supply of RAI increases and the market price decreases. The whole process is shown below:

Photo source:RAI White Paper in Chinese

0 is the initial state;

At 10 points, the market price of RAI increases (green line), and the market price is higher than the redemption price (red line). At this time, arbitrageurs have started to mint new RAI for sale to the market arbitrage, and the redemption rate of the system (blue line) is negative (net casting).

20 points, the system further reduces the redemption price of RAI, increases the arbitrage space, and further increases the casting rate;

At 40 minutes, the system returns to a stable state.

The adjustment of the system is also relative when the market demand for RAI is low, causing the market price of RAI to fall. The system will automatically increase the redemption price, making the redemption price of RAI more significantly higher than the market price, so that the borrowers in the system are more inclined to repay the loan, that is, buy RAI from the market to repay the system, thus reducing the supply of RAI and increasing the market price. The whole process is shown below:

Photo source:RAI White Paper in Chinese

0 is the initial state;

At 10 points, the market price of RAI decreases (green line), and the market price is lower than the redemption price (red line). The net borrower of RAI can buy RAI from the market to repay the system for arbitrage, and other players in the market can also buy RAI in anticipation, thus increasing the redemption rate of the system (blue line).

20 points, the system further increases the redemption price of RAI, increases the arbitrage space, and further increases the redemption rate.

At 40 minutes, the system returns to a stable state.

RAI system adopts a set of mechanism based on PID control (Proportional Integral Derivative controller, proportional Integral-derivative controller, widely used in industrial design feedback control). A series of parameters are used to adjust the above control process. To be specific:

The proportional parameter (P parameter) is mainly used to adjust the deviation of the system. Its adjustment is based on the "proportion" of the deviation. In other words, the larger the proportion of the deviation, the larger the adjustment range. In the example of RAI, when the market price is inconsistent with the redemption price, the proportion parameter mainly drives the change of the redemption price: when the market price increases, the redemption price decreases; If the market price continues to rise, the redemption price continues to fall; The P parameter exists from the time RAI comes online and is the foundation of the whole system. It is this parameter that gives the RAI system what founder Ameen Soleimani calls its "springy" nature: "The further the market price of the RAI is from the redemption price, the greater the incentive to bring the RAI back into equilibrium".

The adjustment of the integral parameter (I parameter) is based on the "integral" term of the deviation, which takes into account the factor of time. The larger the integral term of the deviation, the larger the adjustment range. In the case of RAI, when there is a continuous gap between the market price and the redemption price, the integral parameter will gradually rise, driving the redemption price to change more dramatically. Within the RAI system, the I parameter went live in February 2022. The adjustment of the differential parameter (d-parameter) is based on the "differential" term of the deviation, and the larger the differential term of the deviation (the more drastic the deviation), the greater the adjustment. Parameter D is not online in RAI system at present.

Readers interested in RAI's theory and practice of PID control are welcomeReflexer official documentation,Reflexer official forumandFounder Ameen's articleFor more details.

It is also worth mentioning that the initial price of RAI is not important. The initial price of 3.14 was decided based on the votes of early participants on Twitter. RAI could have started the whole system with 4.2 or 6.9 or any other target price. The PID mechanism is used to maintain the normal operation of the whole protocol.

Figure: Reflexer's Twitter vote to determine initial price target

The RAI system is exactly what Nobel Prize-winning economist Milton Friedman, the founder of monetarism, ideally had in mind for the Fed. Friedman argued that the Fed's work was enough to use a computer instead:

Abolish the FED, replace it with a computer.

Get rid of the Federal Reserve and replace it with computers.

- & have spentMilton Friedman

(It's also an important Meme in the Reflexer community.)

2.3.2 Clearing mechanism

RAI is an over-pledged stablecoin. Like other stablecoin agreements or loan agreements that adopt the over-pledged mode, liquidation will be triggered when the ratio of someone's collateral value to the value of the loan is below a certain threshold, in order to ensure the safety and health of the agreement. In this case, the liquidator obtains the liquidee's collateral (ETH) in the form of a fixed discount auction and pays the liquidee's debt (RAI). This process, known as "collateral clearing", is the first guarantor of the security of the agreement;

The stabilization fee (interest) usually collected by the agreement is accounted into the "surplus buffer". When the collateral liquidation cannot handle all the bad debts, the agreement will first use the funds in the surplus buffer to settle the bad debts, which is the second safeguard of the security of the agreement (the amount accumulated in the surplus buffer exceeds a certain amount or a period of time, Will be voted by DAO to repurchase FLX and destroy);

若盈余缓冲也无法处理坏账时,协议会进入「债务拍卖」。债务拍卖是系统增发出更多的 FLX Token,从而在市场上换取 RAI 完成债务处理。这是协议安全的第三重保障,也对应来 FLX  Token 中的「最后贷款人」职能。

From the whole clearing system, we can see that "collateral clearing" is the permanent defense of the system. The fixed discount for collateral clearing can also effectively improve the clearing efficiency and avoid systemic risks caused by low clearing efficiency under extreme market conditions (such as MakerDAO's experience in 312 in 2020). There are also "surplus buffers" and "debt auctions" to keep the system safe if market conditions are so extreme that the collateral clearing mechanism temporarily fails. In fact, the liquidation that has taken place since the launch of RAI has been collateral liquidation, without the use of surplus buffers and debt auctions.

2.3.3 Actual Operating status of the system

RAI market price, redemption price (red line) and circulation data source  https://dune.com/HggqX/Reflexer-RAI

As can be seen from the figure above, since the redemption price went online in February 2021 at 3.14, the market price and redemption price of RAI have been in a better fitting state. After the initial market volatility, the redemption price of RAI has traded in a tight range of $3.01 to $3.04 until May 2022, during which time RAI's underlying asset ETH has fluctuated considerably, at $4000. $1,750 -> $4,800 -> $1,800, the same RAI in circulation fluctuates wildly, with 50 million in circulation. 6.5 million pieces -> 30 million pieces. 16 million pieces. With such volatility, RAI is well on its way to achieving its goal of a "low volatility ETH based asset".

In the following months from May 2022 to July 2022, since Luna, 3AC, Celsius and Voyager have crashed successively. ETH of the lending platform has hit the large amount clearing line successively, and at the same time, the entire market has experienced liquidity crisis and narrative impact on the decentralized Stablecoin circuit. For RAI holders, Their collateral ETH is also depreciating and facing liquidation risk. Against this backdrop, RAI borrowers rushed to repay, and the number of RaIs in circulation dropped from 17 million on May 6 to 5.2 million on June 20. The borrowers' strong demand for repayment of RAI increases the price of RAI. At the time, there were not enough players in the market to do the "mint RAI, sell RAI to market" arbitrage, which kept the market price of RAI about $0.08 (about 3%) above the redemption price for more than a month. Under the mechanism of parameter I described above, the redemption price of RAI continues to decrease, finally dropping to about $2.70.

In general, RAI has been online for 2 years, which coincides with the sharp price fluctuations of Ethereum. During this period, the price of RAI fluctuated between 2.75 and 3.05 for most of the time, and there were no liquidation accidents or other security risks. Its core product mechanism has been verified.

There are currently $26 million in ETH deposited with RAI and a total of 150 active borrowers. The amount of RAI in circulation under the agreement is 2.35 million.

Data source:   https://stats.reflexer.finance/

RAI has also achieved some success in use case development:

Credit market: RAI has obtained the integration of Aave, Euler, Rari and Cream;

In terms of centralized trading platform: RAI successfully launched Coinbase;

In addition, RAI has completed the integration with Uphold, Eidoo and Mover, the payment platforms.

Among them, the integration of Aave and Coinbase shows their excellent bd capability. However, due to the small scale of RAI, these two use cases of RAI have not formed a scale.

2.4 Financing and team situation

2.4.1 Financing situation

Reflexer Finance has raised 3 rounds in total:

In April 2020, MetaCartel Ventures announced Reflexer Finance as its first investment for an undisclosed amount. MetaCartel is a Venture DAO with incubation nature, and its members are basically all over the Ethereum community active project and VC.

In August 2020, Reflexer announced the completion of a $1.68 million seed round led by Paradigm (around $400 at ETH), Participants included Standard Crypto, Compound founder Robert, and Variant Fund.

On the eve of the February 2021 product mainnet launch, Reflexer announced a $4.14 million funding round led by Pantera and Lemniscap, MetaCartel, TheLAO, Aave founder Stani, Synthetix founder Kain and others followed.

Overall, Reflexer's funding is not large, but its backers are generally active VCS, DAOs, and project parties in the Ethereum community, demonstrating the Ethereum community's support for Reflexer.

2.4.2 Team Situation

Reflexer Finance was founded by Ameen Soleimani and Stefan Ionescu.

Ameen Soleimani is also the founder of Moloch DAO, a DAO set up to fund Ethereum infrastructure, and SpankChain, which was funded by Vitalik and Joseph Lubin, co-founders of Ethereum, Consensys founder and CEO, and formed the mainstream framework for DAO Venture with its "Rage Quitting" mechanism (allowing DAO members to get their money back before investing); Spankchain is an Ethereum-based micropayment platform for the adult industry. He also worked at Consensys for a year.

Photo: Ameen Soleimani

Stefan Ionescu 原本的角色更加类似创始人兼 CTO,不过他已于 22 年 3 月 25 日宣布退出 Reflexer 的大部分事务,仅在技术领域为 DAO 提供顾问服务,同时将自己的 Token 锁仓 4 年。除了两位创始人之外,在 2021 年 1 月主网上线前夕,Ameen 曾在 Twitter 披露过 Reflexer 团队共有 7 位开发工程师(包括两位创始人在内)。

In May 2022, after a self-referral and community vote, Bacon became the new DAO leader and 0x-Kingfish became the integration leader, responsible for RAI's integration with other protocols. In August, Bacon left and Reza joined the DAO as a community leader.

0x-Kingfish and Reza are currently two of the more active Reflexer daily employees besides Ameen. The two remain anonymous. 0x-Kingfish mentions in his campaign proposal that he has 10 years of experience investing in financial secondary markets and entered the cryptocurrency industry in 2020; Reza has been in the industry since '17, working on marketing and community work at crypto project akoin, publishing his own NFT series, and currently BD at Crypto Media Decrypt.

In addition, in the MetaCartel investment, they disclose Reflexer's adviser as Nikolai Mushegian. Nikolai was an early and active developer in the Ethereum community as the co-founder and architect of MakerDAO, as well as the co-founder of Balancer. Nikolai passed away in November 2022.

In general, Reflexer's team is relatively small, especially after the departure of one of its founders, Stefan Ionescu, and the team has become more Buddhist, which is also related to Reflexer's pursuit of "minimal governance".

Iii. Business analysis

3.1 Industry space and potential

Stablecoin has far outperformed the crypto market average in the past cycle. Even after the 1-year crypto bear market and the collapse of UST, an important project, there are still more than 135 billion stablecoin in circulation at present, and compared with the peak of more than 180 billion, the decrease is only about 27%, much lower than the price decline of BTC or ETH.

The reason, I believe, is that in the process of the gradual development and expansion of the crypto market, participants gradually discovered that stablecoin is indeed a more consistent first-principles settlement currency for the cryptocurrency base than BTC or ETH. Specifically, we can see that Stablecoin has replaced BTC/ETH as:

The currency of settlement of new derivatives such as perpetual contracts, which are very popular in the market. The currency of settlement for investment and financing activities of most project parties and venture capital institutions

In the last cycle, the money-making effect brought by the rapid price rise in the context of the global currency oversupply and the endless stream of new projects at the top of the chain attracted more compliance institutions and a wider range of participants with its high yield or novel mechanism. Stablecoin's position as the settlement currency of cryptocurrency foundation has been very stable in the hearts of all market participants. Its market size will at least keep pace with the overall scale of cryptocurrency development, there is still a huge room for development.

With Stablecoin issuers holding more than 2% of the market in short-term Treasury securities (as of May 2022), even more than Warren Buffett's Berkshire Hathaway investment company, and the far-reaching impact of the UST collapse of the algorithm Stablecoin, regulatory oversight of the crypto market, especially stablecoin, is gradually increasing.

In the last half year, there have been endless regulatory discussions on crypto market and stablecoin by different regulatory authorities in various countries, and actual regulatory measures have also occurred from time to time. Two of the most controversial ones are:

In August 2022, the U.S. Treasury's Office of Foreign Assets Control,  OFAC decided to sanction Tornado Cash, the Ethereum network's coin mixer. In the wake of the incident, USDC issuer Circle promptly froze USdcs at addresses on the OFAC list, all of which interact with Tornado Cash contracts. The incident caused a huge stir in the Ethereum community, with perpetrators going so far as to send ETH to the on-chain addresses of crypto celebrities via Tornado Cash. In February 2023, the New York Financial Services Department (NYDFS), the regulator of stable coin issuer Paxos, required it to stop the issuance of BUSDs. Paxos also received a "Wells Notice" from the United States Securities and Exchange Commission (SEC) for BusD-related issues, and may face charges of illegal issuance of securities by the SEC.

The two events have a long-term and far-reaching impact on stablecoin holders and even the entire industry.

For the average person in the crypto world, the fear of having their USDC on their chain frozen if one of the DeFi projects they've interacted with has offended the US Treasury is a huge impact on confidence in holding crypto assets. It's also the exact opposite of the censor-resistant, permissionless, decentralized world of cryptography. In the three months following this incident, USDC issuance fell by 10 billion, while USDT issuance, which did not cooperate with OFAC sanctions, rose by 5 billion (as mentioned above, MakerDAO began discussing the possibility of DAI decoupling the dollar after this incident).

SEC 指控 Paxos 事件发生之后,处在暴风眼中对币安随即开始在全球广泛的寻找潜在的法币抵押稳定币发行合作伙伴,同时也关注去中心化稳定币项目,与 2 月 28 日上线了去中心化稳定币 Liquity 的 Token LQTY。

Paxos announced on February 21st that it would stop issuing new BusDs, and BusDs market value dropped from over $16 billion on February 13th to $10.5 billion as of March 1st. Once among the top ten cryptocurrencies by market capitalization, BUSD may be "zero" within a year under regulatory pressure. Messari founder Ryan Selkis had some strong words about the SEC's charges against Paxos: "My new purpose in life is to end the political career of [SEC Chairman] Gary Gensler and make him the reason Joe Biden lost re-election... I will spend every ounce of energy, money and political capital I have to fight the morally corrupt and corrupt enemies of cryptocurrencies."

If BusDs were to be deemed securities by the SEC, though logically unlikely, it would be a huge blow to the crypto industry.

Both events have driven the market's interest in decentralized stablecoins. However, compared with the prosperity and development of centralized stablecoin, decentralized stablecoin is more bumpy in this cycle. Although it once reached the peak, it fell into the "valley of despair" along with the collapse of UST. The overall development situation is far worse than that of centralized stablecoin. A detailed comparison of RAI and other decentralized stablecoins.

To sum up, we believe that stablecoin business has a solid foundation, broad space and still has good potential. In the subdivision circuit of stablecoin, along with the recent high pressure of regulation on stablecoin, the decentralized stablecoin circuit that RAI is in has a broader development prospect because it is more in line with the mainstream narrative of anti-censorship and de-trust crypto world, and at the same time has a lower level of development.

3.2 Project competitive advantage

RAI belongs to decentralized stablecoins. In this section, we will focus on analyzing the competitive landscape of decentralized stablecoins.

Below is Coingecko's current list of decentralized stablecoins in circulation of $30 million or more.

The circulating market value of RAI is less than 10 million dollars, and the important indicators to measure the development of stablecoin, such as the number of currency holders, TVL and transfer times, are far less than the above projects. Although the business data lags behind in all aspects, the author still believes that RAI has good competitive advantages, which are reflected in:

Complete decentralization of illegal currency anchoring

3.2.1 Illegal currency anchoring

In section 2.31. "Supply Control Mechanism", we can find that unlike most stablecoins, the price of RAI is not anchored in fiat coins or some kind of physical currency, but in a roundabout way anchors the market demand for RAI.

This is very unusual in the stablecoin market, and to my memory, the only Float Protocol that came online around the same time as RAI has a similar design (Olympus and its Fork are not defined as stablecoins in my opinion). I believe that this unanchored fiat design is very valuable to the crypto market as a whole.

To understand the importance of this design, we might want to recall a concept from international economics.

Mundell's trinity paradox has always existed in international economics, that is to say, except for the rule-maker (the United States), the independence of a country's monetary policy, the stability of the exchange rate, and the free flow of capital cannot exist at the same time, but only two of them can be chosen. To have all three at the same time would lead to crises, such as the Asian financial crisis of 1997, the Mexican peso crisis of 1994-95, and the Argentine financial crisis of 2001-02.

Source: https://en.wikipedia.org/wiki/Impossible_trinity

In practice, Hong Kong, for example, has opted for a stable exchange rate pegged to the US dollar and free flow of capital, giving up its own monetary policy altogether. North Korea, for example, has opted for an independent monetary policy and a stable exchange rate, with complete capital controls. Most other countries, of course, choose to split the difference between the three.

If we think of the current crypto world in this light, with the current union of all stablecoin as the "currency" in the crypto ecosystem, we find that the crypto world is very similar to Hong Kong: completely free outflows of capital, a stable exchange rate policy with an almost perfect 1:1 peg to the US dollar, and a complete abandonment of its own monetary policy.

In fact, in the above impossible triangle, the free flow of capital is the natural choice of the whole crypto market. If the exchange rate stability relative to the US dollar is chosen, although it can be promoted and facilitated in many aspects, the independence of monetary policy in the crypto world will be lost. At present, stablecoin, the operating cornerstone of the crypto world, has become the "puppet" of the US dollar. From this perspective, cryptocurrency is not a super sovereign currency, but a sub-sovereign currency. This is the antithesis of the inflation-fighting, distrustful philosophy that created cryptocurrencies. The crypto world could also be plagued by inflation if the Fed goes on an uncontrolled monetary overprint. And that's a big worry in the crypto world right now: Beneath the towering heights, there's still the shadow of Fed inflation.

If we believe that becoming Hong Kong is not the goal of the crypto world, if we accept the super-sovereign nature of cryptocurrencies, then the universal currency of the crypto world should have its own independent monetary policy, superimposed on the natural free flow of capital attributes of the crypto market, then the currency should avoid being pegged to any real world fiat currency (giving up fixed exchange rates), Otherwise, they will be subordinated to fiat money.

From this perspective, Reflexer is running a pure central banking business, whereas Circle/Tether or MakerDAO is running a commercial bank within the Federal Reserve (ECB) system. The difference between MakerDAO and Circle is simply that, MakerDAO supports ETH or other encrypted native assets as collateral for loans.

This is increasingly being recognized by stablecoin programs. In the wake of the Tornado Cash sanctions,MakerDAO is also considering moving DAI away from the dollar", which prompted Ethereum founder Vitalik to weigh in. But with more than 60% of DAI currently backed by a centralized stablecoin anchored to the dollar, the probability of MakerDAO achieving this decoupling is very small, and even if it could be achieved, the process would be bumpy and lengthy.

To sum up, since the vast majority of users have never encountered the concept of illegal coins anchoring stablecoins, this of course poses many obstacles to the promotion of RAI use cases. However, anchoring the dollar is easy; building a stable system that does not anchor it is difficult. Dropping the anchoring of the dollar allows Reflexer to be completely detached from U.S. regulation and insulates the impact of U.S. monetary policy on its stablecoin RAI. This feature is also a rare fault-tolerant mechanism for stablecoins throughout the crypto world.

3.2.2 Complete decentralization

RAI is fully decentralized and the only collateral supported by the system is ETH. Decentralization comes at a cost.

In the crypto world, similar to Mundell's triad, there have also been suggestions aboutThe crypto stablecoin TrinityThat is, the capital efficiency, price stability and decentralization of stablecoin cannot exist at the same time. The author believes that there is some truth in this classification. ESD/BAC/UST that tried to obtain all three at the same time eventually went to the end.

And the development process of DAI, the oldest decentralized stablecoin, can also well reflect this point:

DAI has been decentralized (with only ETH as collateral) until November 2019, but the price of DAI is unstable due to the lack of an effective mechanism to bring DAI back to $1, and due to the high price volatility of ETH itself (figure below), When users use ETH mortgage, to prevent them from being liquidated, the margin of safety remains. As a result, the excess mortgage rate of the whole system is very high, and the capital utilization efficiency is correspondingly lower.

DAI historical price action data from Coingecko

To address these problems, MakerDAO began proposing to expand the source of collateral (though not the USDC initially). And in the 20-year 312 incident, MakerDAO's clearing system failed to function properly due to high gas and low liquidity on the chain, ultimately leaving the agreement with a loss of more than $6 million. It is against this background that the Stablecoin Vaults that support USDC pledge generation DAI are online.

The launch of USDC Vault soon brought the price of DAI back to 1. Later, although DAI's price was once higher than 1.03 due to the high demand caused by DeFi summer and the inability to adjust Vault ceiling in time, However, after the Stable Vaults were upgraded to PSM (Peg Stability Module) at the end of the 20th century, the price of DAI has fluctuated within a very narrow range since USdcs can be converted to DAI via Swap at any time. Since then, the proportion of DAI generated by centralized stablecoins in circulation of DAI has gradually increased. At present, DAI supported by centralized stablecoins (USDC, GUSD, USDP, and USDC in USDC-DAI LP) exceeds 60% of DAI circulation proportion. The overall excess mortgage rate is also below 200 per cent.

Source of DAI: https://daistats.com/#/

From the example of DAI, we can see that the introduction of other stablecoins that have been widely circulated as collateral for stablecoins will effectively improve the liquidity of stablecoins in this agreement, thus achieving good price stability. At the same time, since both the collateral and the loan are stablecoins, the excess mortgage rate of the system will also be reduced, thus improving the overall fund utilization efficiency of the agreement. In addition, the introduction of other stablecoin as collateral can also more effectively help the decentralized Stablecoin protocol cold start and subsequent expansion. Among the stablecoins in our picture above, there are many stablecoins that adopt this mechanism. For example:

FRAX has a decentralized coin assets ratio of over 75% (based on Frax's Decentraliazition ratio) as collateral, as well as significant capital efficiency and price stability in combination with an innovative and proactive AMO regime as part of its Stablecoin protocol; For decentralized stablecoins such as MIM, alUSD, DOLA and agEUR, more than half of their collateral consists of other stablecoins (USDT, USDC, DAI) or stablecoins' income vouchers in other DeFi agreements. Thus, their business scale grows rapidly. Stablecoin prices are usually stable. OUSD and FEI (the latest version) are generated entirely from other stablecoins;

However, since the stablecoins in wide circulation are all centralized stablecoins (DAI is also 60% dependent on centralized stablecoins), choosing to introduce them is actually giving up the insistence on decentralization. If USDC decides to block the accounts of some of the above protocols, or DAI's accounts, it will be a serious blow to the above stablecoin protocols.

UST and many other stable companies that have collapsed have chosen the ultimate capital efficiency. They allow users to use decentralized assets to generate stable coins without full mortgage. In the bull market cycle, this method is easier to promote business progress, but the cost is that in the bear market cycle, the price of stable coins cannot be stabilized, which leads to the collapse of the whole system. Another old-line decentralised stable coin, Synthetix's sUSD, has opted for price stability, fluctuating within 1% of the dollar most of the time, but at the expense of extremely low capital efficiency (mortgage rates consistently exceed 500%). LUSD, which launched in April, 21, uses a novel mechanic (see Liquity for details)Liquity: A rising star in the stablecoin market) made new trade-offs. They allow LUSD prices to fluctuate between 1 and 1.1, while allowing mortgage ratios as low as 110% for a single user to improve efficiency. According to the actual operation results, LUSD's price fluctuates within 1 ~ 1.03 most of the time, and becomes stable in a relatively wide range. In terms of capital utilization efficiency, Liquity's agreed collateral rate, which usually fluctuates between 200% and 250%, currently stands at 260%.

    LUSD price data from Coingecko
Liquity system's source of mortgage rate changes  https://dune.com/bstraza/Liquity-Protocol

The RAI we focus on in this paper is similar to LUSD. With excellent mechanism, the price of RAI has achieved relative stability in a wide range. Its excess mortgage rate is also floating in 300% ~ 400% all year round.

For decentralized stablecoins, choosing to introduce more centralized assets is easy, but building a stablecoin system on a fully decentralized basis is difficult. Giving up greater capital efficiency and more stable prices is the price Reflexer pays for its decentralized and cension-resistant features.

3.2.3 Minimal governance

The most essential feature of RAI is decentralization/de-trust.

而目前在 DeFi 协议 Token 普遍的「治理」功能,本质上仍然是一种「人治」。从这些拥有治理 Token 项目的实际治理过程来看,除了持币人极低的治理参与度之外,治理不可避免的寡头化也是目前治理模式的一大问题(这一点在 Uniswap 社区关于跨链到 BNB Chain 应该选择哪个跨链桥的治理讨论中体现的淋漓尽致)。

RAI does not trust the Fed or any "people" in his institutional design, and one of his core guiding principles is the idea of minimal governance. RAI believes that it should be as automated, self-sufficient, and free of external dependencies as possible. The ultimate goal is to go ungoverned like Liquity, another stablecoin project.

Reflexer protocols are detailed for each moduleMinimal governance roadmapIn the next few years, RAI will be automated and governance-free. RAI ultimately wants to reach a point where the governance layer does not control or upgrade most of RAI's core contracts.

In August last year, RAI's minimal governance had been achievedThe second phase of its goal。RAI 的治理 Token FLX 将会随着时间的推移逐步降低其自身的权力,直到其主要功能变成:在破产事件中充当系统的最后贷款人(即维持「债务拍卖」的正常进行)。

Minimal or no governance will of course affect the ability to adapt and adjust to the complex and volatile environment of the agreement. For example, Reflexer cannot increase the agreement revenue by increasing the stabilization rate when market sentiment is high. Reflexer with minimal governance goals and Liquity without governance are also far less effective in use-case expansion than other Stablecoin protocols that are more pro-governance. However, it is easy to have governance and difficult to minimize governance/no governance. Relinquishing governance of the protocol is the price Reflexer pays for its decentralized and cension-resistant features.


To sum up, we believe that although RAI is far behind DAI and FRAX, the heads of decentralized stablecoins, in terms of indicators to measure the development level of stablecoins business, such as market value scale, number of currencies and trading volume, it is still far behind RAI. However, based on the anchoring characteristics of illegal coins and the concept of complete decentralization and minimal governance, RAI has some unique advantages over these head stablecoin projects.

As Ethereum founder Vitalik put it, "RAI better embodies the pure 'ideal type' of pledged autostablecoins that are only supported by ETH.

RAI better exemplifies the pure "ideal type" of a collateralized automated stablecoin, backed by ETH only.

RAI better embodies the "ideal type" of over-pledged autostablecoins supported only by ETH

-Vitalik Buterin

The future RAI hopes to achieve is "a peer-to-peer electronic money system, without trusting any third party", the biggest narrative of the entire crypto market.

3.3 Analysis of token model

3.3.1 & have spent Token function

Reflexer 的治理 Token 为 FLX,其主要用例有二:

RAI buffer: Like MakerDAO, the RAI system will conduct surplus and debt auctions. If the system loses money, the system will automatically mint and auction FLX in the interest of RAI holders. When the system is in surplus, the surplus RAI can also be auctioned off by FLX, and the FLX consumed by auction will be destroyed. The cumulative number of FLXS destroyed so far stands at 25,057. Governance: While Reflexer Finance envisions minimal governance as the goal of RAI, there are still many issues that require human involvement in the development of the agreement, especially in the early stages, and FLX holders will assume the governance function.

3.3.2 rainfall distribution on 10-12 & have spent Token Allocation and unlocking

The total number of FLX is 1 million and its distribution is as follows:

35% of FLX is allocated to the foundation, whose FLX will mainly be used for protocol development, such as liquidity incentive and security of RAI liquidity mining awards, to carry out various Grants, among which 0.687% of the total amount of FLX is allocated to the address that interacts with Proto RAI in the early stage.

对早期 RAI 铸造者以及 RAI-ETH LP 的空投也将从这部分 Token 里支出。

总计 35.69% 的 FLX 分配给投资人/早期支持者:21% 的 FLX 将分配给早期支持者。 Token 锁仓 1 年,在随后 1 年内线性释放。

11.3% 的 FLX 分配给 Reflexer Labs 的投资者, Token 锁仓 1 年,在随后 1 年内线性释放。

3.39% 的 FLX 将分配给孵化 Reflexer 的 DAO, Token 锁仓 1 年,在随后 1 年内线性释放。

总计 29.31% 的 Token 分配给团队:20% 的 FLX 分配给团队及顾问, Token 锁仓 1 年,在随后 1 年内线性释放。

9.31% of FLX is distributed directly to Reflexer Labs, Inc. with no lock-up restrictions.

(Note: All the above lock-in periods start from April 15, 2021)

So far, according to Coingecko, there are 653,309 FLXS in circulation, 67% of which are in circulation; The cumulative number of FLXS destroyed was 25,057.

3.4 Risks

RAI's risks include:

PMF 风险:非法币锚定的稳定币在用户端的接受度低市场推广阻力因素较多:仅以 ETH 为抵押物会影响 RAI 在用户端的推广最小化治理的理念使得团队运营抓手更少预留用于协议激励的 FLX Token 数量只有 16 万枚,按照现在价格不足 200 万美元,后续用于用例推广的激励可能不足团队风险:在联合创始人 Stefan 出走之后的近一年时间,团队在用例扩展和市场推广方面的进展都较为一般代码风险:RAI 机制新颖且基于 PID 理念的链上控制系统并无先例,虽然经历了 2 年的安全运行以及代码审计机构的审计,但该风险无法消除

Iv. Preliminary value assessment

4.1 Five Core issues

Where is the project in the operating cycle? Is it the maturity stage or the early and middle stages of development?

After 2 years of development, the main product functions of the project have been realized, and the product has been in a relatively mature stage. But judging from the actual promotion of its product, Stablecoin RAI, its business is still in the early stage of development.

Does the project have a solid competitive advantage? Where does this competitive advantage come from?

The project does not have a solid competitive advantage, and its business data also lags behind that of Liquity, the leading decentralized Stablecoin project within the track.

However, Reflexer, as a rare stablecoin project completely inherent in the cryptocurrency market and independent of any legal currency in the entire crypto ecosystem, has increasingly highlighted the disaster recovery value of the value reserve assets in the Ethereum ecosystem after a series of stablecoin supervision activities. In addition, Vitalik's own interest and support for Reflexer could be a potential competitive advantage for Reflexer.

Is the long-term investment logic of the project clear? Is it in line with industry trends?

The long-term investment logic of the project is clear. The decentralized stablecoin is the most consistent with first-principles stablecoin in the crypto world. It has the disaster recovery value for the entire crypto industry and is consistent with the general trend of the industry.

What are the main operational variables of the project? Is it easy to quantify and measure?

The main variable in the operation of the project is the use-case expansion of RAI, which can be easily tracked by observing the circulation and distribution of RAI as well as the external cooperation trends of Reflexer team.

How is the project managed and governed? How good is the DAO?

Project management and governance mainly rely on DAO, in the long run hope to achieve minimal governance. From the actual business development situation, DAO level is average.

4.2 Valuation level

Among the projects we listed in Section 3.2, fully decentralized stablecoins include sUSD and LUSD. However, Synthetix's sUSD is not intended to be a universal stablecoin, but to be a settlement currency within its derivatives trading system. And soon Synthetix will issue snxUSD, a new stablecoin, in its latest v3 release, deprecating sUSD, so we only chose Liqutiy as a valuation comparison for Reflexer. In addition to Liquity, we chose MakerDAO, the most influential decentralized Stablecoin protocol to date.

In fact, Liquity and Reflexer have many similarities. In addition to choosing the most widely decentralized asset ETH as collateral, both of them also believe in the concept of no governance/minimal governance, so as to reduce the impact of artificial governance on decentralization, representing the purest decentralized stablecoin on Ethereum network.

在估值比对方面,一方面我们考察「治理」 Token 与稳定币的市值关系,来衡量其「治理」 Token 所能「治理」的稳定币规模;另一方面,由于 LQTY、FLX 和 MKR 都可能捕获协议收入,我们可以比较方便的考察治理 Token 流通市值/协议收入这一类似 P/S 的概念,来比对他们在收入捕获方面的能力。比对结果如下图所示:

In terms of stablecoin size, FLX is valued higher than LQTY, and the market value of FLX is already much higher than that of RAI. In addition, both FLX and LQTY are valued much higher on this metric than MKR, which also shows the premium the market is placing on fully decentralized stablecoins.

In terms of revenue capture ability, the P/S valuation of FLX is much lower than that of LQTY and close to that of MKR.

The relative overvaluation of LQTY, in addition to the liquidity premium brought by the recent launch of Binance, is also related to LQTY's fee structure. LQTY cannot benefit from LUSD's scale, but can only benefit from LUSD's new minting and redemption.

In addition, it should be taken into account that although the MakerDAO agreement generates a lot of "revenue", its "expenses" remain high due to its high operating expenses, and the actual "profit" is negative, and its agreement revenue has not been distributed to the holders of MKR for a long time. In other words, although its P/S is low, its P/E is negative, which partly explains the low valuation of MKR from the perspective of P/S.

In summary, we conclude that Reflexer has a lower valuation from a P/S perspective than Liquity, which is also a fully decentralized stablecoin on the Ethereum network; In terms of stablecoin size, Reflexer is overvalued.

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