A Look at DeFi
When I look at the population of blockchain technologies I see masses of people who share the same beliefs and hopes for the future as I do. People that aren’t satisfied with the status quo, especially when it comes to finance. We are people that care about our neighbors and the well-being of the human population on this planet. Across the street lives some of our neighbors who run a corrupt financial system. These are the greedy bankers whose sole mission is to gain as much control over all aspects of our human experience by refusing our right to an honest financial system.
Satoshi Nakamoto gave us the tools and the direction we should take if we are to fight back. Blockchain technology opened the door to a whole galaxy of possibilities and it’s one door that can’t be shut by anyone, not in a hundred years. Ten years after the release of the Bitcoin whitepaper, in 2018 we begun arming ourselves with more innovative solutions to help relive our current predicament. We took one step closer towards true financial freedom by developing Decentralized Finance (DeFi) applications. In other terms, making clear our intention to ‘DeFi’ corrupt authority.
The year is now 2019 and there seems to be an aggressive push towards DeFi platforms. As this space grows and positions itself to include even the 1.7 Billion unbanked people in the world, EOS is set to be at the leading forefront due to its core technology and its ability to scale. As a result, we’re seeing a spark in interest towards these platforms as more and more of them enter the EOS ecosystem. Today I’d like to direct attention to just three of these platforms. I chose only three of these platforms because they have something else in common and that is; each one has their own utility stablecoin. It’d be interesting to find out why that is.
Due to the current buzz surrounding DeFi technology I’ve investigated these projects to find out exactly how they operate, what makes them different and what backs the value of their native tokens. Hopefully we get to understand just how, or rather why decentralized finance is a threat to the traditionally centralized financial system. Can this technology “save us”, so to speak?
Let’s dig into it.
Carbon Money is a DeFi platform that offers (algorithmic-driven) market making and Initial Exchange Offering (IEO) capital market services. They also offer an API that websites can integrate so their users can buy, sell or swap fiat and cryptocurrencies using some of the popular payment methods like Visa, Mastercard, Paypal etc.
Carbon aka. Carbon D-12 Labs is a fin-tech company that develops user-friendly payment solutions for the blockchain industry. They are responsible for a stablecoin you might be familiar with; CarbonUSD (CUSD) that was widely popular on the EOS blockchain. In fact, Carbon were the first project to ever launch a stablecoin on the EOS blockchain back in Nov 2018. Since then they’ve been many other stablecoins to join the EOS ecosystem.
Carbon uses an interesting method to ensure that CarbonUSD (CUSD) maintains its stability during volatile periods in the market. Implemented on the application is a system that maintains a flexible coin supply that increases or decreases based on market demand. To achieve this two native tokens, CarbonUSD and Carbon credits, are used to function sort of like weights on a scale. When the demand is lower than the supply, then the supply is decreased by auctioning off Carbon credits to users willing to burn their CarbonUSD tokens. Transversely, when the demand is higher than the supply, then a new supply of CarbonUSD tokens are all given to holders of Carbon credits.
What an ingenious system! It rewards users for taking risk in selling their valuable CUSD tokens for credits. Holders of Carbon credits play an important role in maintaining the token’s stability thus are rewarded handsomely for their loyalty. I can see how this system would also incentivize Carbon credit holders to promote utility of the CarbonUSD tokens. The more demand there is for CUSD, the better off Carbon credit holders become.
Hopefully that made sense. If you thought that’s creative, these platforms keep surprising me at how they keep coming with more creative systems delivering greater impacts for its users.
Equilibrium Lab is the company behind the popular Equilibrium, a multichain framework for crypto-backed stablecoin and DeFi products. This framework lets the community generate assets pegged to multiple currencies against liquid crypto collateral. In-built tools enable maintaining price stability for all Equilibrium based assets.
The community can also develop thoughtful DeFi applications on top of it. Similar to Carbon, Equilibrium also utilizes its own distinct native tokens; NUT and EOSDT.
NUT (Native Utility Token) is used to cover fees, access liquidated EOS collateral and as a governance token. NUT controls the voting rights of the 4 million EOS tokens locked up in a smart contract and proxied to vote for Block Producers. With that much value you can make out why Equilibrium is currently leading the DeFi space. NUT is not a stablecoin.
EOSDT is Equilibrium’s stablecoin pegged to the US dollar that leverages on the underlying EOS collateral. It is the most liquidated token on the EOS market out of all of the existing DeFi platforms. The EOSDT stablecoin is generated through the Equilibrium Gateway which is a platform that allows for a user to lend themselves EOSDT by using EOS as collateral to the loan. Loans are repayable using EOSDT along with a 1% APR fee paid in NUT tokens. Collateralizing EOS cryptocurrency is the only way to put EOSDT into circulation therefore supply is based on demand.
There’s currently a total supply of 5.4 Million EOSDT with 1.8 Million of which are in circulation. You might be wondering why so many people collateralized their beloved EOS to generate a stablecoin. This is a good way to long EOS. Basically you get to safely store your EOS and get EOSDT to use as you please. This generated EOSDT tokens can be traded for fiat and spent in the real world while your EOS rises in value over time. When the time comes to repay your loan it’s still for the same EOSDT amount you withdrew, along with the 1% APR fee payable in NUT but your EOS is now worth more.
The genius of the Equilibrium Gateway is that it locks up EOS thus creating a scarcity in the market which can result in a rise of its price. At the same time, it creates demand for its Native Utility Token (NUT) and the EOSDT tokens. Since the NUT token’s value is dependent on demand this means its price goes up, creating yet more monetary value for its users. EOSDT on the other hand is able to leverage best during the times when everything is falling in price since it is a stablecoin. Talk about mastering game theory.
It’s a win-win-win situation for everyone! No?
Vigor is the new kid on the block (pun intended). It has created a buzz in the community and its curious seeing so many of EOS’ influencers being part of this new project. This is the project that finally led me to writing this DeFi article. Like any new project, it’s aim is to become the leading DeFi application on the EOS blockchain. Having uncovered the innovation behind the aforementioned projects I couldn’t wait to learn just how Vigor plans on being the leader on such a competitive DeFi space.
Everyone loves the underdog but what exactly is behind all the hype?
Vigor is a dynamic Decentralized Autonomous Community (DAC) within the DeFi space. The DAC is in a genesis state and it’s community is tasked to build and deploy the stablecoin platform according to its whitepaper. In genesis the project is run by its community of builders but when the end product is built and deployed it will be run by its community of users. In genesis state each of the individual members of the DAC are voted in by its platform’s stakeholders with votes recalculated everyday. This ensures that all of the voting stakeholders continue to remain active. The DAC resembles EOS Block Producers in that there’s 21 custodians that are voted upon to form the DAC. Members of the DAC all have unique qualities and contribute to the ecosystem in many different ways. Anyone who feels they have something to offer can become a candidate, claim VIG daily based on vote count, and possibly be voted in as a custodian of the DAC. Which makes sense as to why some of our favorite EOS influencers are involved with this project – they sure have a lot to offer.
Once voted upon this group of individuals then gain control of the total Vigor token supply and the smart contract that administers the token’s functions. Custodians within the DAC can vote to make changes to the smart contracts either to upgrade it or change its specifications. The DAC will also own the keys to stablecoin contracts once finished and deployed. Any vote that takes place needs to have a total of 11/21 consigning votes in order for changes to proceed, configurable for example to be the same as with EOS Block Producers.
Vigor is the name of the DeFi project with its own crypto-backed stablecoin VIGOR and utility token VIG. So as to avoid confusion we’ll divide and analyze the platform with its utility token separately and then see how they interact with each other.
VIGOR stablecoin platform
Vigor’s main thing is to bring together components from institutional finance, put it on chain, to create VIGOR the most advanced crypto-backed decentralized stable unit of account run by its users. Without giving it all away at once, this includes on-chain risk management and compliance to Solvency II insurance regs, derivative pricing to simplify user experience dealing with products that involve jump and volatility risk, structured product specification, market based price discovery, frictionless bailouts (no auctions), and a well planned and partially executed legal and regulatory framework.
Vigor is a mulit-collateral platform which will allow usage of a portfolio of whitelisted EOS native tokens (alts) as collateral for borrowing a loan in the form of VIGOR stablecoin. A great move I believe as alts are more speculative than EOS.
Borrowers lock-up EOS native tokens as collateral for VIGOR stablecoin loans. They then pay premiums on these loans using the VIG utility token.
Insurers also lock-up EOS native tokens but as insurance assets to back the stablecoin loans. Insurers earn premiums from borrowers’ fee payments based on contribution to solvency.
An epic innovative feature that Vigor is currently building will allow users to be able to borrow EOS native tokens using the VIGOR stablecoin as collateral. Yep you heard it here first! So Vigor offers access to both sides of the market, borrow stablecoin or borrow EOS native tokens. Nobody else offers that. This will provide additional opportunities for income.
VIGOR market price discovery for lending rates
Vigor believes that the practice of setting loan rates by voting is a terrible idea. So with VIGOR stablecoin the lending fee is market determined considering the supply and demand of capital and the users search for risk adjusted yield. Here’s how price discovery works in VIGOR. The system is stress tested in real time to monitor the solvency capital requirement necessary to survive a black swan event. If the system is not adequately capitalized relative to the requirement then solvency would be less than 100% and prices would adjust higher to attract more insurers and reduce further loan demand. Vigor describes this as price discovery based on risk budgeting. Every user transaction is a credit or debit to the risk budget, and prices adjust to keep the budget balanced. This leads to much more efficient pricing which is very important since in finance it is always a race to the bottom with fees and a relentless search for efficient yield. Also in VIGOR if you put up more collateral against your loan, the rate is lower. On other platforms your loan rate is constant even if you put up more collateral, just plain silly. How does Vigor do that? Simple the more collateral you put up, the less insurance you need to buy.
When the project deploys to EOS mainnet and phases out of genesis state these insurers and borrowers will become the platforms stakeholders capable of voting for the custodian of their choice. Basically, any of the users can vote to determine whom of their favorite custodians join the DAC, in other words it’s the users that decide the direction of the platform. For example, imagine users feel that not enough marketing is being carried to promote the platform (which is obviously not the case with this project). If that were the case users would then vote-in custodians whom they know have specialties in marketing on platforms like YouTube and Twitter. Again, since votes are recalculated everyday, it ensures that custodians and users are constantly active by staying in the loop about the happenings of the platform.
VIG utility token
As I alluded to earlier VIG is used to pay loan insurance fees within the platform. Borrowers pay premiums in VIG and Insurers earn those premiums paid to them in VIG tokens. Simply put the VIG token gives you access to the platform to be able to borrow and insure loans. A fraction of the VIG fees are permanently sent to a reserve pool that sits untouched to further back the loans if the stress models are incorrect or misspecified. The reserve absorbs bad debt if/when there is a shortage of Insurers to recap too many loans gone bad.
The VIG token has an initial supply of 1 Billion to be distributed according to a glide path where VIG distribution reduces over time
- 20% of supply – will be distributed to the community through a free airdrop/airgrab for wide distribution. Currently 5% was dropped to eosDAC token holders that have voted, and 2% to the Vigor core telegram community.
- 30% of supply – goes to the DAC long term fund to be managed as a permanent capital portfolio, paying out VIG to DAC candidates based on average annual total returns protecting the principal purchasing power of the corpus for multigenerational longevity. The fund covers for ongoing operations, building new features, network governance, partner support, legal, academic grants etc…
- 50% of supply – all DAC candidates are given VIG on a daily basis as they build; higher voted candidates get more VIG up to a cap where the top 21 each get the daily capped amount. This represents the developer fund for software development, research, engineering, marketing, operations, deployment, legal, integration, digital media, staking resources etc.
Vigor uses a lot of techniques to ensure value for its users and the platforms long term health. Through the use of its DAC, the platform along with its stablecoin and utility token, Vigor has created a strong unique structure that has support from the ground up. The DAC mirroring EOS’ governance a bit actually works to its advantage as it’s a proven working system. They’ve applied some tweaks which the team believes will improve involvement and performance across the board. Vigor just might create an upset in this space by bulldozing the competition to become the new leader. It’s already done the first step right which is gaining support of EOS’ influencers.
Now I understand why DeFi has been a hot topic as of late. Researching these DeFi projects left me amazed at how much creativity is behind the systems powering them. These platforms are levelling the playing field that has been rigged to favor the richer individuals in our societies. Now the average person finally has equal access to financial services that give them opportunities to further enrich themselves. Besides being transparent and trustless, Decentralized Finance applications are governed by their investors/users.
DeFi is finance the way it should’ve been all along!
I hope this article was as exciting to read as it was for me to write it. I’m still mind-blown by the solutions that these platforms have come up with. It amazing to see how far blockchain technology has come just in a few short years. Where it is headed… is so far in the right direction.
Thank you for reading.
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