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Interpreting Stable++: The first stablecoin protocol, RGB++ Layer, officially sets sail
Authored by: Bai Ding, Vicent Zhao, Geek web3
Editor: Faust, Geek Web3
"Camus once said in "The Plague": 'To inquire about a city, all you have to do is observe how people work there, how they love each other, and how they die.' When examining the ecosystem of a public blockchain, the first thing people look at is undoubtedly the number of Decentralized Finance protocols, the total value locked (TVL), and the number of use cases. It can be said that DeFi data directly reflects the rise and fall of a public blockchain. Although this trap assessment criterion has many shortcomings, it is still regarded by observers as the primary reference framework, just like GDP."
In terms of business models, modern Decentralized Finance cannot do without the four basic components: DEX, lending, stablecoins, Oracle Machine. On top of that, there are LST, derivatives, etc. These things are common in the EVM ecosystem, but extremely scarce in the BTC ecosystem. As a result, numerous project parties have emerged claiming to be BTCFi or BTC Layer 2.
But to this day, the many flaws in BTCFi and BTC's second-layer are exposed, and most projects are just building an EVM Chain in the BTC ecosystem, and DAPPs are essentially migrated from the ETH network, giving the impression of treating BTC as a colony of the ETH network. These EVM Chains, while homogenizing, basically have nothing new and interesting, nor do they tell any interesting stories.
In contrast, UTXO-based public chains such as CKB and Cardano may be more attractive than EVM Chain. Previously, Cipher, the founder of RGB++ Layer, proposed the solutions of 'isomorphic binding' and 'Leap bridgeless cross-chain interaction' based on the characteristics of the UTXO model, which once attracted the attention of countless people; UTXOSwap, which combines Intent and is friendly to order books, ccBTC based on equal mortgage, and JoyID Wallet, which supports multi-chain adaptation and Passkey technology, are also remarkable.
However, for the CKB and RGB++ Layer ecosystems, a major focus is on its stablecoin system, which serves as a hub in various Defi scenarios. Whether there is a robust and reliable stablecoin issuance protocol directly affects the ecological layout. In addition, it is also very important to provide a suitable circulation environment for stablecoins. For example, USDT originally relied on the Omni Layer protocol of Bitcoin for issuance, but due to the poor Smart Contract environment provided by Omni Layer, USDT eventually abandoned Omni Layer. This indicates that stablecoins are most suitable for circulation only in a complete Smart Contract environment.
（Image source: Wikipedia）
In this regard, based on CKB's RGB++ Layer, with its Turing Complete Smart Contract environment and native AA and other merch facilities, it can create an excellent circulation environment for the Stable Coin of the BTCFi ecosystem. In addition, as many Large Investors are accustomed to holding BTC for the long term rather than using it for frequent interactions, if it is possible to use BTC as collateral to issue Stable Coin while ensuring security, it can leverage the enthusiasm of Large Investors to interact with BTCFi, increase the capital utilization of BTC, and reduce people's reliance on centralized Stable Coin.
In the following section, we will interpret the stable coin protocol Stable++ in the RGB++ Layer ecosystem. This protocol generates the RUSD stable coin by using BTC and CKB as collateral, and combines the Stability Pool insurance pool and bad debt redistribution mechanism to provide reliable stable coin minting scenarios for BTC and CKB holders. By combining CKB's unique issuance method, Stable++ can build an under-damped system within the RGB++ ecosystem, which serves as a moderate buffer during market fluctuations.
Stable++ Product Features and Mechanism Design
From the perspective of working principle, there are basically four common types of Stable Coins:
（Image Source: The Block）
MakerDAO is the representative of the CDP mode Stable Coin protocol, which refers to the debt collateral position, that is, over-collateralization of blue-chip assets such as ETH, BTC, etc., to mint Stable Coin. Due to the strong price volatility of blue-chip assets and relatively low Consensus, Stable Coins based on its issuance are more resistant to risks. The lending protocol under the CDP mode is similar to AMM's 'pool-to-pool' interaction, where users interact with the fund pool for all actions.
Here we take MakerDAO as an example. The borrower first opens a position on Maker, specifying the amount of DAI to be generated from the CDP, and then over-collateralizes and borrows DAI. When the borrower repays, they return the borrowed DAI to the Maker platform, redeem the collateral, and pay interest based on the amount and time of DAI borrowed. The interest on borrowing can only be paid with MKR and is one of MakerDAO's sources of income.
And the price anchoring mechanism of DAI depends on the "Keeper". We can simply regard the total amount of DAI as constant, consisting of two parts: DAI in the MakerDAO fund pool and DAI circulating in the external market. The Keeper will perform Arbitrage between the two fund pools to maintain the stability of the DAI price. As shown in the following figure:
（DAI Anchor Mechanism Diagram）
The protagonist Stable++ in this article also uses CDP in the mechanism design, and partially inherits the security of BTC by borrowing the technology of RGB++ homomorphic binding. From the perspective of product functionality, the functions of Stable++ can be divided into several parts:
2 Users can stake the borrowed RUSD back to Stable++ to receive governance Token STB as a reward and the right to participate in asset liquidation. This is the main deflationary scenario for RUSD, and those who have encountered the trap gameplay of Ethena (USDe) will be familiar with it. In addition, you can also stake governance Token STB back to Stable++. If you do so, you can receive a certain share of the transaction fees from people's collateralization and redemption based on the weight of staked STB.
3 RUSD supports isomorphic binding and Leap function. With Leap, RUSD controlled by the BTC account can be transferred to another person's Cardano account without the involvement of traditional cross-chain bridges, with very low security risks and a simple process;
These functions are easy to understand, no need to elaborate. However, we need to know that the success of a CDP Stable Coin protocol depends on the following aspects:
Next, we will focus on the clearing mechanism and analyze the specific design of Stable++.
The rationality and efficiency of the clearing mechanism
It can be said that the liquidation component is a key gatekeeper for the normal operation of the borrowing and lending protocol. Stable++ has made certain innovations in the design of the liquidation mechanism, avoiding problems in traditional liquidation mechanisms. In the Stable++ system, users over-collateralize their assets to borrow stablecoins in the CDP component. If the value of the collateral drops and the collateral ratio falls below the threshold, the user will be liquidated if they do not perform Margin Replenishment in a timely manner.
The purpose of liquidation is to ensure that every RUSD in the system is supported by sufficient collateral to avoid systemic risks. During the liquidation process, the lending platform needs to retrieve some RUSD from the market, reduce the circulating amount of RUSD, and ultimately provide sufficient collateral support for the RUSD issued by the platform.
Most of the liquidation of the borrowing and lending protocol is conducted in the form of a Dutch auction, where the platform sells the Collateral to the highest bidder (i.e. the liquidator). For example, assuming the price of ETH is $4000, the collateralization ratio for minting DAI is 2:1, the system allows you to mint a maximum of $2000 DAI with 1 ETH, but you actually minted 1000 DAI. After a period of time, if the price of ETH falls below $2000, the 1000 DAI you minted will not meet the 2:1 collateralization ratio, triggering liquidation, and your 1 ETH collateral will be automatically auctioned off.
Dutch auctions start at the highest price and drop gradually until a buyer is willing to make a dumb buying. Assuming these Collaterals start at $1500 in auction and ultimately sold to the liquidator for $1200, the liquidator will receive 1200 DAI to obtain 1 ETH collateral and make a profit. MakerDAO protocol will then destroy or lock up the received 1200 DAI, reducing the circulating supply of DAI.
The above process can be automatically executed under the control of Smart Contracts, ensuring that there is always enough Collateral support for Stable Coin supply in the system, and removing over-leveraged positions. However, in practice, the MakerDAO liquidation mechanism has two problems:
1. The auction process takes time, and it is possible that the bad debts cannot be cleared when the market sharply drops. The original intention of automatic liquidation is to attract liquidators by selling collateral at a discount and giving up certain benefits. If the value of the collateral continues to drop, the willingness of the liquidators will significantly drop, and the platform may not be able to find suitable liquidators all along.
2. If the network is extremely congested, the large number of operations by individual liquidators are not timely on-chain, it will also affect the liquidation process, as evidenced in the 5.19 incident in 2021, when the market was severely volatile, on-chain congestion was extreme, and many individual liquidators and those being liquidated were unable to get their operations on-chain in a timely manner.
The above issues are reflected in mainstream lending protocols such as MakerDAO and AAVE, and are ultimately causing losses to the platforms and users due to the inefficiency of liquidation. In response to this issue, Stable++ tends to ensure the efficiency of the liquidation process in the design of the liquidation mechanism, so it has added a dual insurance mechanism of 'Stability Pool' and 'Redistribution', which is also the biggest highlight of Stable++ in mechanism design.
（Stable++ Liquidation Mechanism Diagram）
In Stable++, users can deposit stablecoins into the Stability Pool (hereafter referred to as the Stability Pool), which acts as a "standing army" ready to liquidate distressed positions. When a liquidation event occurs, the first thing the protocol does is liquidate the bad positions through the insurance pool, and then allocate the collateral to the LPs of the insurance pool as a reward. **The Stability Pool changes the role of the liquidator from a "temporary search" to a "standing army", which is equivalent to adding an efficient buffer to the protocol, so that there is no need to wait for the liquidator to be found temporarily when the liquidation occurs. **
But there are two points to note here:
1. The Stability Pool currently accepts RUSD as the injected stablecoin. Some may have concerns: if the reserve assets in the insurance pool are RUSD issued by the platform itself, it seems like a self-boosting situation. Is this reasonable?
It should be emphasized that RUSD in the insurance pool will be directly destroyed when participating in liquidation. For example, suppose the collateralization ratio of RUSD is 110%, and there are a total of 100 RUSD in the Stability Pool from an LP. There is a position with 100 minted RUSD and collateral worth 109 US dollars that has triggered the liquidation condition.
When the position is liquidated, 100 RUSD in the insurance pool will be directly destroyed, which means that the LP will lose 100 RUSD and obtain Collateral worth 109 US dollars in the liquidation position, with a profit of 9 US dollars. After that, the liquidated party no longer needs to repay the debt of 100 RUSD.
Obviously, there are 100 RUSD tokens destroyed in circulation in the market, and the platform is also short of 109 USD Collateral. Any bad positions that reach the 110% collateral threshold have disappeared immediately, while the collateral ratio of other positions on the platform remains healthy. In summary, we can summarize the insurance pool design of Stable++ as follows:
The essence is to allow some borrowers to lock up their RUSD Lock-up Position. When a certain position is liquidated, the platform needs to destroy part of the RUSD and remove bad Collateral to maintain health. Under the liquidation mode of MakerDAO, the destroyed DAI is provided by randomly selected liquidators in the market, while Stable++ directly provides DAI to be destroyed from the insurance pool. Therefore, for the Stability Pool model, it can use Stable++'s own issuance of Stable Coin as reserves without worrying about the bootstrap problem.
The above example also explains how the Collateral discount rate obtained by LP as the Stability Pool is calculated, which is related to the system-set CR. If we look at the liquidation rate of 110% in the above case, the LPs participating in liquidation are equivalent to obtaining 109U Collateral with 100U, and the discount rate is about 9%, which is similar to the conventional liquidation discount (this is just a simple example and does not represent the real parameters of Stable++).
However, because Stable++ uses a standby insurance pool, it is much faster and more efficient in liquidation and does not need to temporarily find liquidators in the market. On the other hand, how to maintain sufficient liquidity in the Stability Pool to cope with liquidation is also a matter that needs to be considered.
2. If the Stability Pool does not have enough stablecoins to participate in liquidation, Redistribution will be activated, and the debt and Collateral involved in the liquidated position will be redistributed among all current positions in proportion. For example, when the insurance pool is unable to handle bad debts, the debt portion of the bad debts will become global debt and be dispersed among all borrowers, such as:
There are currently 100 borrowers, and a bad debt of 100 RUSD in a pending liquidation position. Redistribution will make each borrower bear an additional debt of 1 RUSD, but at the same time, they will also receive a corresponding share of Collateral as profit. This is different from the redistribution mechanism of old-fashioned Defi platforms like Synthetix. Synthetix only distributes the debt portion of the bad debt to existing borrowers, turning the borrowings into global debt. Each borrower bears only additional debt without corresponding profit.
With the above two insurances, Stable++ guarantees that as long as a liquidation event occurs, it can be quickly absorbed in the first time, and this efficient liquidation can effectively solve the bad debt problem in traditional lending protocols. Moreover, this efficient dual liquidation method represents that Stable++ can allow users to borrow with a lower collateral ratio (such as within 110%), greatly improving the utilization of funds.
In summary, CDP is essentially a form of lending, and because it is a lending relationship, bad debts will definitely occur, that is, the situation of insolvency caused by the decline in Collateral value, which requires liquidation. In the two liquidation methods discussed below, each has its own advantages and disadvantages:
The traditional auction liquidation method, such as MakerDAO and Aave, has stood the test of time, without the need to maintain a large 'insurance mechanism'. Usually, as long as the liquidity of the collateral assets is good and the market acceptance is high, large-scale liquidation can be achieved. However, as mentioned earlier, the drawback is that it is not efficient in extreme market conditions. In addition, except for specific assets such as ETH, the liquidity of other collaterals is not high, and there are not enough liquidators to quickly help the protocol return to normal debt levels.
The 'liquidation pools' such as Stable++ and crvUSD are essentially asset pools controlled by protocols, which act as liquidators and quickly conduct liquidations by placing reverse orders, ensuring the overall debt level of the protocol reaches a healthy value. However, each platform has its own unique approach. Interestingly, AAVE's latest Safety module 'umbrella' also reduces bad debts through burning instead of selling assets from the insurance pool.
Stabl++ adopts a burning mechanism, where assets in the liquidation pool are directly destroyed, and the received Collateral is distributed directly to the LP of the insurance pool. On the other hand, crvUSD follows a completely transactional approach, where crvUSD is used to purchase Collateral during liquidation. When the price of Collateral rises, these Collateral are sold, and crvUSD is repurchased. The ownership of the entire Collateral is held by Curve itself.
Can an underdamped system be constructed within the ecosystem?
First of all, let's discuss what a healthy economic system looks like. One of its necessary conditions is: there must be an 'underdamped mechanism' to resist the trend of currency price changes. 'Underdamped (force)' borrows the concept from physics, referring to a force that 'hinders' but is not enough to 'prevent' the trend of object's motion, which will slow down the change trend of the object. In tokenomics, it means that regardless of the rise or fall of currency price, there is a buffering mechanism in the economic system that hinders but cannot completely stop its change. Such an economic system can maintain development without becoming excessively leveraged and possesses the conditions for a soft landing.
The transaction fees for BTC and the gas fee pricing model for ETH will be dynamically adjusted with the real-time popularity, which is a kind of 'under-damped mechanism'. Conversely, if an asset pumps or falls rapidly and the system lacks effective solutions to mitigate its trend, it is an unhealthy economic system that will eventually collapse due to excessive leverage. This is also the reason why many ETH-based LSD and Restaking projects are criticized.
Since the collateral supported by Stable++ mainly consists of BTC and CKB, and it is deployed on the RGB++ Layer, we need to examine the relationship between Stable++ and CKB Token to determine if it is beneficial for the overall ecosystem.
Apart from the Genesis Block, CKB has two ways of issuance. The first is generated by PoW Mining, with a limit of 33.6 billion, and the newly added CKB halving once every 4 years. The last halving was in 2023, and the annual issuance decreased from 4.2 billion to 2.1 billion. This method is called 'basic issuance'.
In addition, CKB has a unique mechanism that requires users to lock some CKB to store data on-chain (when you hold assets on CKB on-chain, there will be corresponding data to be stored, and you need to pay a certain storage fee). However, the network does not directly charge storage rent from those who lock CKB, but indirectly collects rent by issuing CKB through inflation and diluting the value of users' tokens. This is called 'secondary issuance'. The total amount of secondary issuance is fixed at 1.344 billion per year, and the distribution of these tokens is as follows:
**1. Miner：**The secondary issuance of CKB allocated to Miner is proportional to the storage space occupied by users on-chain
2. NervosDAO
3. Treasury: The secondary issuance CKB allocated to the treasury is directly proportional to the total issuance of circulating CKB, and this part will be directly destroyed.
Stable++ allows users to stake CKB to generate wstCKB, or borrow RUSD at a lower collateralization ratio using CKB. When the CKB price pumps, more people will use CKB to collateralize and mint RUSD, which can lock up a lot of CKB; while the minted RUSD will increase the activity of the on-chain Defi system. Overall, it indirectly drops the CKB inflation rate, increases on-chain activity, and enables Miners to earn more profits, mobilizing their enthusiasm to improve the economic security of the entire network.
So unlike other asset-backed stablecoins, Stable++ and CKB's issuance mechanism form a more robust token economic system that can create an 'underdamped mechanism' rather than simply adding leverage. When combined with existing CKB LST, its composability and liquidity will be further enhanced.
Summary: The necessity of Stable++ from a market perspective
From a market perspective, the BTCfi ecosystem also needs a large-scale decentralized stablecoin to emerge.
First, in the current encryption market, the stable coins USDT and USDC occupy almost 90% of the Market Cap, but the centralization risk of them is hard to ignore. As mentioned above, what BTCfi users care most about is security. A decentralized stable coin that can meet the comprehensive needs of Large Investors for trading and security is a necessary condition to leverage the participation of these people in BTCFi.
(Top ten stablecoins by current Market Cap)
Second, the total market capitalization of stablecoins is approximately over 80 billion US dollars, only a fraction of the total market capitalization of BTC. From this perspective, there is still a lot of BTC that can be used as collateral to generate stablecoins, and there is great potential for the development of stablecoins based on BTC.
（Comparison of BTC and ETH market capitalization）
However, some stablecoins appeared in the BTC ecosystem before, but they did not cause a significant market reaction. The reason was that they appeared too early and did not have enough technology to support them. Now, with the increasingly prosperous RGB++ Layer ecosystem, as well as the gradual improvement of projects such as UTXOSwap, Stable++, and JoyID, the large-scale infrastructure of BTCFi on CKB has just begun. The stablecoin protocol based on BTC will surely bring new imagination space to the BTCFi ecosystem, and CKB, this value oasis, will become a fertile ground for entrepreneurs, and all visions are promising.