Author: Bai Ding & Vicent Zhao, Geek Web3; Editor: Faust, Geek Web3; Original link: Interpreting Stable++: The First Stablecoin Protocol of RGB++ Layer Officially Launches
Camus once said in "The Plague": "To inquire about a city, one must look at how its people work, how they love, and how they die." If we want to examine the ecology of a public chain, the first thing people will look at is how many DeFi protocols there are, how high the TVL is, and how many application scenarios exist. It can be said that DeFi data directly reflects the rise and fall of public chains. Although this set of evaluation criteria has many shortcomings, similar to GDP, it is still regarded by observers as the primary reference framework today.
In terms of business models, modern DeFi relies on the most basic four components: DEX, lending, stablecoins, and oracles. On this basis, there are also LSTs, derivatives, etc. These components are commonplace in the EVM ecosystem but are extremely scarce in the BTC ecosystem, leading to the emergence of countless projects claiming to be BTCFi and BTC Layer 2.
However, to this day, the many flaws of BTCFi and BTC Layer 2 have been fully exposed, with most projects merely building an EVM Chain on the Bitcoin ecosystem, and dApps basically migrated from Ethereum, resembling a colonial approach to Bitcoin. These EVM Chains, while engaging in homogenous competition, have not introduced anything refreshing and have not told any interesting stories.
In contrast, UTXO public chains like CKB and Cardano may be more attractive than EVM Chains. Previously, RGB++ Layer founder Cipher proposed the "Isomorphic Binding" and "Leap Cross-Chain Without Bridges" solutions based on the characteristics of the UTXO model, attracting countless people's attention; the UTXOSwap, which is friendly to order books and combines Intent, ccBTC, based on equivalent collateral, and JoyID wallet, which supports multi-chain Passkey technology, are also noteworthy.
However, for the CKB and RGB++ Layer ecosystem, a major focus is its stablecoin system. As a hub in various DeFi scenarios, the existence of a robust and reliable stablecoin issuance protocol will directly impact the ecological landscape. Additionally, providing a suitable circulation environment for stablecoins is also very important. For example, USDT was initially issued using Bitcoin's Omni Layer protocol, but due to the poor smart contract environment provided by Omni Layer, USDT ultimately abandoned it. This indicates that stablecoins are best circulated in a well-developed smart contract environment.
(Source: Wikipedia)
In this regard, the RGB++ Layer based on CKB, with its Turing-complete smart contract environment and native AA and other peripheral facilities, can create an excellent circulation environment for stablecoins in the BTCFi ecosystem. Furthermore, since many large holders prefer to hold BTC long-term rather than interact with it frequently, if stablecoins can be issued using BTC as collateral while ensuring security, it could stimulate the willingness of large holders to interact with BTCFi, improve the capital utilization of BTC, and reduce reliance on centralized stablecoins.
In the following text, we will interpret the stablecoin protocol Stable++ within the RGB++ Layer ecosystem, which generates the RUSD stablecoin using BTC and CKB as collateral, and, combined with the Stability Pool insurance pool and bad debt redistribution mechanism, can provide reliable stablecoin minting scenarios for BTC and CKB holders. Coupled with CKB's unique issuance method, Stable++ can construct an underdamped system within the RGB++ ecosystem, providing a moderate buffering effect during significant market fluctuations.
Stable++ Product Functions and Mechanism Design#
From a functional perspective, common stablecoins can be categorized into four types:
- Pure centralized stablecoins represented by USDT/USDC;
- Collateralized stablecoins represented by MakerDAO and Undo (which can be either purely centralized or decentralized, but with similar mechanisms);
- CeDefi stablecoins represented by USDe (anchoring value through derivative contracts in CEX);
- Pure algorithmic stablecoins represented by AMPL;
(Source: The Block)
Among them, MakerDAO is the representative of CDP model stablecoin protocols. The so-called CDP refers to Collateralized Debt Position, which means over-collateralizing blue-chip assets like ETH and BTC to mint stablecoins. Due to the strong consensus and relatively low price volatility of blue-chip assets, the stablecoins issued based on them are more resistant to risks. The lending protocol under the CDP model is similar to the AMM's "point-to-pool," where all user actions interact with the liquidity pool.
Here, we take MakerDAO as an example. The borrower first opens a position on Maker, specifying the amount of DAI they wish to generate from the CDP, then over-collateralizes and borrows DAI. When the borrower repays, they return the borrowed DAI to the Maker platform, redeeming the collateral while paying interest based on the amount and duration of the borrowed DAI. The interest on the loan can only be paid in MKR, which is one of MakerDAO's sources of income.
(CDP point-to-pool lending illustration)
The price anchoring mechanism of DAI relies on "Keepers." We can simply view the total amount of DAI as constant, composed of two parts: DAI in the MakerDAO liquidity pool and DAI circulating in the external market. Keepers will arbitrage between these two liquidity pools to maintain DAI's price stability. As shown in the diagram below:
(DAI anchoring mechanism illustration)
The protagonist of this article, Stable++, also adopts the CDP mechanism in its design and inherits the security of Bitcoin through the technology of RGB++ isomorphic binding. From the perspective of product functionality, Stable++ can be divided into several parts:
- In Stable++, users can over-collateralize BTC or CKB to borrow the stablecoin RUSD, and redeem their BTC or CKB using RUSD. The collateralization and redemption operations will incur fees.
- Users can re-stake the borrowed RUSD back into Stable++ to earn the governance token STB as a reward, while also gaining the right to participate in asset liquidation. This is the main deflationary scenario for RUSD, and those familiar with Ethena (USDe) will surely recognize this gameplay. Additionally, you can also stake the governance token STB back into Stable++. If you do so, you can earn a share of the fees from the collateralization and redemption operations based on the weight of your staked STB.
- RUSD supports isomorphic binding and Leap functions, allowing RUSD controlled under a BTC account name to be transferred to another person's Cardano account name without the need for traditional cross-chain bridges, ensuring low security risks and a simple process.
- Stable++ has an LSD section where Nervos DAO users can stake CKB on Stable++ to exchange for wstCKB. To explain, Nervos DAO is an important part of the CKB ecosystem, incentivizing people to stake CKB long-term with certain rewards. Now, through the combination with Stable++, Nervos DAO users can stake CKB to earn rewards while maintaining asset liquidity.
(Stable++ product function illustration)
These functions are easy to understand and need not be elaborated further. However, we must recognize that the success of a CDP stablecoin protocol hinges on several key aspects:
- Reliability of collateral
- High-efficiency liquidation mechanism
- Ability to empower the ecosystem
Next, we will focus on the liquidation mechanism and analyze the specific design of Stable++.
Rationality and Efficiency of the Liquidation Mechanism#
It can be said that the liquidation component is the key gate for maintaining the normal operation of lending protocols. Stable++ has made certain innovations in the design of its liquidation mechanism, avoiding issues present in traditional liquidation mechanisms. In the Stable++ system, after users over-collateralize their assets into the CDP component to borrow stablecoins, if the value of the collateral declines and the collateralization ratio falls below the threshold, users will be liquidated if they do not promptly top up.
Liquidation aims to ensure that every RUSD in the system has sufficient collateral backing, avoiding systemic risks. During the liquidation process, the lending platform needs to recover some RUSD from the market to reduce the circulating supply of RUSD, ultimately ensuring that the RUSD issued by the platform has enough collateral support.
Most lending protocols conduct liquidations in a Dutch auction format, where the platform sells the collateral to the highest bidder (i.e., the liquidator). For example, suppose the price of ETH is $4000, and the collateralization ratio for minting DAI is 2:1. The system allows you to mint up to $2000 of DAI with 1 ETH, but you actually minted 1000 DAI. After some time, if the price of ETH drops below $2000, the collateralization ratio for the 1000 DAI you minted is insufficient, triggering liquidation, and your 1 ETH collateral will be automatically auctioned off.
A Dutch auction starts at the highest price and gradually lowers the price until a buyer is willing to take it. Suppose these collateral assets start at $1500 and are ultimately sold to the liquidator for $1200. The liquidator pays 1200 DAI to obtain 1 ETH of collateral and can earn a profit. Subsequently, the MakerDAO protocol will either destroy or lock the 1200 DAI received, thereby reducing the circulating supply of DAI.
This entire process can be executed automatically under smart contract control, ensuring that the supply of stablecoins in the system is always backed by sufficient collateral, eliminating excessively leveraged positions. However, in practice, MakerDAO's liquidation mechanism has two issues:
- The auction process takes time, and during significant market downturns, there may be instances where bad debts cannot be cleared. The original intention of automatic liquidation is to attract liquidators by selling collateral at a discount, but if the value of the collateral continues to decline, the willingness of liquidators will significantly decrease, and the platform may struggle to find suitable liquidators.
- If the network is extremely congested, the numerous operations of individual liquidators may not be timely recorded on-chain, affecting the liquidation process. This was evidenced during the 5.19 incident in 2021, when due to severe market fluctuations, the chain became extremely congested, and many individual liquidators and liquidated parties could not timely record their operations on-chain.
These issues are evident in mainstream lending protocols like MakerDAO and Aave, where low liquidation efficiency ultimately results in losses for both the platform and users. To address this issue, Stable++ has designed its liquidation mechanism to ensure high efficiency in the liquidation process, thus introducing the dual insurance mechanisms of "Stability Pool" and "Redistribution," which is also the biggest highlight of Stable++'s mechanism design.
(Stable++ liquidation mechanism illustration)
In Stable++, users can deposit stablecoins into the Stability Pool (hereafter referred to as the insurance pool) as a "standing army" ready to liquidate bad positions at any time. When a liquidation event occurs, the first thing the protocol does is to liquidate bad positions through the insurance pool and then distribute the collateral to the LPs of the insurance pool as rewards. The Stability Pool transforms the role of liquidators from "temporary finders" to "standing armies," effectively adding a high-efficiency buffer to the protocol, eliminating the need to find liquidators at the time of liquidation.
However, there are two points to note:
1. The Stability Pool currently accepts RUSD itself as the stablecoin injected. Some may worry: if the reserve assets in the insurance pool are RUSD issued by the platform itself, it seems to involve self-raising (lifting oneself up). Is this reasonable?
Regarding this, it is important to emphasize that the RUSD in the insurance pool will be directly destroyed during the liquidation process. For example, suppose the collateralization ratio for RUSD is 110%, and there are 100 RUSD in the Stability Pool from an LP. If there is a position that minted 100 RUSD with collateral valued at $109, it triggers the liquidation condition.
When this position is liquidated, 100 RUSD from the insurance pool will be directly destroyed, meaning the LP will lose 100 RUSD and receive $109 worth of collateral from the liquidated position, yielding a profit of $9. Afterward, the liquidated party no longer needs to repay the 100 RUSD debt.
Clearly, the 100 RUSD destroyed in circulation means that the platform has also lost $109 worth of collateral, and the bad position that touched the 110% collateralization ratio red line has directly disappeared, while the collateralization ratios of other positions on the platform remain healthy. We can summarize the design of Stable++'s insurance pool as follows:
Essentially, it allows some borrowers to lock up their RUSD, and when a position is liquidated, the platform needs to destroy some RUSD and remove bad collateral to maintain health. In MakerDAO's liquidation model, the destroyed DAI is provided by random liquidators in the market, while Stable++ directly provides the DAI to be destroyed from the insurance pool. Therefore, for the Stability Pool model, it can use only the stablecoins issued by Stable++ as reserves without worrying about self-raising issues.
The above example also explains how the discount rate for collateral received by LPs in the Stability Pool is calculated, which is related to the system's set CR. If we consider the 110% collateralization ratio in the above case, the participating LP in the liquidation essentially obtains $109 worth of collateral for $100, resulting in a discount rate of about 9%, which is similar to conventional liquidation discounts (this is just a simple example and does not represent the actual parameters of Stable++).
However, because Stable++ uses a standing insurance pool, it significantly improves the speed and efficiency of liquidation, eliminating the need to search for liquidators in the market temporarily. Conversely, how to maintain sufficient liquidity in the Stability Pool to respond to liquidations is also a critical consideration.
- If the Stability Pool does not have enough stablecoins to participate in the liquidation, then Redistribution will be triggered, and the debts and collateral involved in the liquidated position will be redistributed proportionally among all current positions. For example, when the insurance pool cannot handle the bad debts, the bad debt portion will become global debt, distributed among all borrowers. For instance:
If there are 100 borrowers and a position awaiting liquidation has 100 RUSD of bad debt, Redistribution will cause each borrower to take on an additional 1 RUSD of debt, but they will also receive a corresponding share of collateral as a return. This is different from the redistribution mechanism of established DeFi platforms like Synthetix. Synthetix only distributes the bad debt portion to existing borrowers, turning the debt into global debt, where each borrower only takes on additional debt without receiving corresponding returns.
Through these two layers of insurance, Stable++ ensures that whenever a liquidation event occurs, it can be swiftly digested in a timely manner. This efficient liquidation can effectively resolve the bad debt issues present in traditional lending protocols. Furthermore, this dual-pronged efficient liquidation approach allows Stable++ to enable users to borrow at a lower collateralization ratio (e.g., within 110%), significantly improving capital utilization.
In summary, CDP is essentially a form of lending, and because it involves a lending relationship, bad debts will inevitably occur, meaning situations where the value of collateral declines lead to "insolvency," necessitating liquidation. In the two liquidation methods discussed below, each has its advantages and disadvantages:
The traditional auction liquidation method exemplified by MakerDAO and Aave has been well-tested, requiring no maintenance of a large "insurance mechanism." Typically, as long as the liquidity of the collateral assets is sufficient and the market acceptance is high, large-scale liquidations can be achieved. However, the downside, as previously mentioned, is that during extreme market conditions, efficiency is low, and aside from specific assets like ETH, the liquidity of other collateral is not high enough, leading to a lack of sufficient liquidators to quickly assist the protocol in returning to normal debt levels.
In contrast, the "liquidation pool" approach exemplified by Stable++ and crvUSD essentially uses a protocol-controlled asset pool as the liquidator, quickly executing liquidations through reverse orders to ensure that the overall debt level of the protocol reaches a healthy value. However, each has its unique methods. Interestingly, Aave's latest Safety module — umbrella also adopts a non-sale approach for insurance pool assets, instead using a burning mechanism to reduce bad debts.
Stable++ employs a burning mechanism, where assets in the liquidation pool are directly destroyed, and the resulting collateral is directly distributed to the LPs of the insurance pool. In contrast, crvUSD follows a fully trading approach, using crvUSD to purchase collateral during liquidation, selling the collateral after its price rises, and then repurchasing crvUSD, with the ownership of the collateral remaining with Curve itself.
Can an Underdamped System Be Built Within the Ecosystem?#
First, we need to discuss what a healthy economic system looks like. One of its necessary conditions is: there must be an "underdamped mechanism" to counteract price fluctuations. Underdamping (force) borrows from the concept in physics, referring to a force that "hinders" but is insufficient to "stop" the motion of an object, causing the object's change to slow down. In token economics, it refers to a buffering mechanism that hinders but cannot stop changes in the economic system, regardless of whether the token price rises or falls. Such an economic system can maintain development without excessive leverage, providing conditions for a soft landing.
The transaction fees of Bitcoin and the gas fee pricing model of Ethereum dynamically adjust according to real-time activity, representing an "underdamped mechanism." Conversely, if an asset rapidly rises or falls and the system lacks effective solutions to mitigate its changing trends, it indicates an unhealthy economic system, which will ultimately collapse due to excessive leverage. This is also the reason why many Ethereum LSD and Restaking projects have been criticized.
Since the collateral supported by Stable++ primarily consists of BTC and CKB, and it is deployed on the RGB++ Layer, we need to examine whether the relationship formed between Stable++ and the CKB token is beneficial for the overall ecosystem.
Apart from the genesis block, there are two ways to issue CKB. The first is through PoW mining, with a cap of 3.36 billion tokens, and the newly issued CKB halves every four years, with the last halving occurring in 2023, reducing the annual issuance from 4.2 billion to 2.1 billion. This method is called "base issuance."
Additionally, CKB has a unique mechanism where users must lock up some CKB to store data on-chain (if you hold assets on the CKB chain, there will be corresponding data to store, and you need to pay a certain storage fee). However, the network does not directly charge those who lock up CKB for storage rent; instead, it dilutes the value of the tokens held by users through the issuance of CKB, effectively collecting rent through inflation, known as "secondary issuance." The total amount of secondary issuance is fixed at 1.344 billion tokens per year, and the distribution of these tokens is as follows:
- Miners: The secondary issuance CKB allocated to miners is proportional to the storage space occupied by users on-chain.
- Nervos DAO
- Treasury: The secondary issuance CKB allocated to the treasury is proportional to the ratio of circulating CKB to total issuance, and this portion will be directly destroyed.
Stable++ allows users to stake CKB to generate wstCKB or use CKB to borrow RUSD at a lower collateralization ratio. When the price of CKB rises, more people will use CKB as collateral to mint RUSD, which can lock up many CKB; the minted RUSD will increase the activity of the on-chain DeFi system. Overall, this indirectly reduces the inflation rate of CKB while increasing on-chain activity, and it can also allow miners to gain more benefits, motivating them to enhance the economic security of the entire network.
Thus, unlike other asset-collateralized stablecoins, Stable++ and CKB's issuance mechanism form a relatively healthy token economic system that can create an "underdamped mechanism" rather than simply increasing leverage. Coupled with the existing CKB LST, its composability and liquidity will further improve.
Conclusion: 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, the current stablecoins in the crypto market, USDT and USDC, account for nearly 90% of the market value, but their centralized risks cannot be ignored. As mentioned earlier, BTCFi users prioritize security, and the emergence of a decentralized stablecoin that meets the comprehensive needs of large holders for trading and security is a necessary condition to attract these individuals to participate in BTCFi.
(Current top ten stablecoins by market value)
Second, the total market value of stablecoins is around $80 billion, which is only a fraction of Bitcoin's total market value. From this perspective, there is still a lot of BTC that can be used as collateral to generate stablecoins, and stablecoins based on BTC have significant development potential.
(Comparison of Bitcoin and Ethereum market values)
However, previous stablecoins in the Bitcoin ecosystem did not generate significant market reactions. The reason is that they emerged too early, lacking sufficient technological support at the time. Now, with the growing prosperity of the RGB++ Layer ecosystem and the gradual improvement of projects like UTXOSwap, Stable++, and JoyID, the foundational infrastructure of BTCFi on CKB has just begun, and stablecoin protocols based on Bitcoin will undoubtedly bring new imaginative space to the BTCFi ecosystem. The value-rich land of CKB will become fertile ground for entrepreneurs, and all visions are promising for the future.