DeFi and Stablecoins: Is It A Match?

Decentralized finance (DeFi) plays an increasingly important role in the Ethereum ecosystem with the adoption of classic financial operations such as borrowing, lending, and various derivative issuance, as well as instruments with stable value(stablecoins) creation.

DeFi is in the early stages of existence, and the overall efficiency and variety of decentralized services are low compared to the fiat financial world. However, the programmable and decentralized nature of such services provides the potential for massive growth in the coming years.

Decentralized financial services have different purposes and functionality, but their token economic models are mostly weak(such as simple governance token economic models) and do not allow long-term value capture. The majority of their token value is based on speculation without sustainable organic drivers.

Stablecoins are an important driver in DeFi adoption and development. The rise of stablecoins can be explained by the long downtrend in the market. During the time crypto assets holders were looking for the ability to keep the value of their crypto without touching fiat currencies and later simplify their ability to move the value back from stability to volatile coins.

Centralized stablecoin platforms contain a risk of censorship, reducing their long-term viability. Some services also face problems related to questionable asset management practices and the possibility of off-chain assets being frozen or taken by governments. More “compliant” centralized services can blacklist addresses and freeze accounts, increasing transaction censorship risk.

The Unit protocol allows users to obtain liquidity from a large variety of decentralized assets. The protocol increases borrowing efficiency by expanding the number of crypto assets available for collateralization, and asset holders can use the value contained in a diverse set of token holdings to mint the stablecoin $USDP.

The liquidation mechanism stabilizes the entire system and provides economic incentives to liquidity providers. A stable borrowing rate with no issuance fees increases user confidence. An organic token economic model connects the growth of the protocol to token value flows. A flexible approach to oracles gives users the option to select their preferred data provider. These solutions can significantly increase the capacity of a borrowing protocol and provide higher utility for users.

USDP

USDP is a decentralized stablecoin currently live on the Ethereum network. The Unit Protocol incentivizes users to increase or decrease the USDP token supply based on supply and demand and ensures its value stays pegged to 1 USD.

The token contract conforms to the ERC20 token standard which allows wallets, exchanges, and other applications to easily integrate with minimal effort.

In Unit protocol, every USDP is fully backed by provided collateral. If the debt/collateral ratio exceeds a Liquidation Ratio(LR) for a Collateralized Debt Position(CDP), it will be subject to liquidation. Anyone can trigger liquidation by sending a trigger transaction. There are liquidation bots that consistently monitor CDPs and trigger liquidations if the stated condition is met.

After a CDP is triggered for liquidation, a Dutch auction starts for underlying collateral with a linear decrease in price. (the price decremental step can be different for various assets, but for the most amount of assets it is ~0.09% decrease per block).

Every participant can buyout the part of the collateral for the current price by paying the USDP debt for a liquidated CDP. USDP debt is equal to borrowed USDP amount plus the liquidation fee in % from this amount.

After collateral realization, the remaining part is returned to the borrower's address. His USDP debt is burned, and the liquidation fee is sent to the governance pool address for fee distribution.

DUCK

The DUCK token is the governance token and core token of the Unit Protocol economy.

Unit protocol collects stability fees when users repay their USDP and liquidation fees if CDPs were liquidated. The governance pool plays a significant role in Unit Protocol decision-making system and add stability to the system, so it is essential to incentivize DUCK stakers and help them be involved in the voting process.

Unit Protocol needs price data for system contracts to know the current price of provided collaterals. It is necessary to count borrowing parameters and manage collateralized debt positions (CDPs) in the protocol.

Vision

Many crypto holders own a diversified portfolio of assets, including a variety of capitalized and under-capitalized tokens. Popular liquid assets are easily sold on exchanges and holders can access instant liquidity without the need to borrow. However, less liquid assets are difficult to sell quickly, yet they represent a significant measure of value in the crypto asset world. Right now there is no way to borrow liquidity for such assets. This limits DeFi applications, funding, and usability.

Funding is critical for any financial ecosystem. In the classic financial system loans may be backed with a mix of assets, including assets with low liquidity that cannot be sold instantly. In the crypto financial system, there is an existing market with acceptable liquidity for most medium/low cap projects, but holders are unable to use these tokens as collateral. Unit protocol addresses this issue.

To manage possible risks and create a robust system, it is critical that the protocol can face extreme scenarios and still function as expected. To ensure functionality and resilience, we implement different architectural features that are described below, as well as a flexible approach for each token setting, such as collateral rate requirements, liquidation fees, and interest rates. Additional limitations are implemented to manage the token risks and reduce the impacts of a possible black swan event on the protocol.

We have the long-term vision and plan for continued protocol development after the initial targeted implementation and will address protocol scalability. Quack!

Docs:

https://github.com/unitprotocol/protocol_docs