Stablecoins are one of the most successful asset types in the crypto industry, rapidly turning into the backbone of DeFi. The purpose of these crypto assets is to track a peg (commonly the US dollar), which minimizes volatility, and provides a good digital asset for transactions.
DefiDollar is a brand-new project that aims to create a stablecoin backed by an index of other stablecoins to stay near the dollar mark.
Back to Basics- How Important Are Stablecoins?
Stablecoins are cryptocurrencies designed to minimize the volatility of the price of a determined stablecoin, relative to an asset or basket of assets considered stable such as the US dollar.
Founded back in 2015, MakerDao was the first decentralized endeavor to allow investors to lock in collateral to generate DAI stablecoin. Since then, DAI became a core currency to the DeFi ecosystem on Ethereum.
DAI is an algorithmic stablecoin, which means MakerDao uses certain incentives to follow the price of the US dollar in a decentralized fashion.
On the other hand, there are several non-algorithmic stablecoins, such as Tether (UDST), USD Coin (USDC), and Paxos (PAX). The main difference is that non-algorithmic stablecoins have a centralized company behind them to incentivize their US dollar peg.
However, since July 2020, DAI has consistently being traded above its peg on several exchanges. Although prices still around just one to three cents above the US dollar mark, a series of monetary policy changes made by MakerDao was understood as a warning for the whole community.
Following the current yield farming frenzy, the demand for DAI amid the crypto industry is reaching all-time highs. Some analysts pointed out that, in case DAI implodes, DeFi will suffer a devastating blow that will harm years of progress.
What Is DefiDollar?
DefiDollar (DUSD) is a stablecoin that is backed by a stablecoin-aggregator strategy to stay near the dollar mark. This way, DUSD can be used as a hedge against volatility, as well as a new asset for investors interested in portfolio risk diversification.
The initial idea was to back DUSD with a mechanism that involved Aave, Uniswap, Curve, and Balancer. Each DUSD unit would require an equal ratio of two different stablecoins, such as DAI and sUSD for instance, to be used as underlying reserves.
This mechanism would lock these equal parts of assets in Aave, depositing the corresponding interest-bearing Aave coins on Balancer liquidity pools. Also, these interest-bearing coins could have been traded via an AMM (Automated Market Maker) mechanism used by Uniswap and Curve.
Since DUSD is an asset made up of a changing basket of stablecoins, it is not hard to plug-in other DeFi building blocks into DefiDollar.
However, this plan changed before the project’s launch in late August 2020. Although the idea applied to the DUSD coins remains the same, the underlying protocols changed. This approach allows for a more robust and steady peg safety mechanism, as well as higher yields and yield farming techniques.
Now, DUSD is a stablecoin that is collateralized by Curve’s liquidity provider (LP) tokens. This mechanism uses Chainlink oracles to aid its stability mechanism.
The idea is to leverage Curve to handle the logic around integrating with lending protocols and token swaps, all essential factors to keep DUSD as stable as possible. For additional peg safety, a staking mechanism was introduced as well.
DefiDollar has a native staking pool to provide a volatility cushion against fluctuations in DUSD’s price. It is also backed by “peaks”, which refers to a yield generating protocol in which the underlying stablecoins are deposited.
So far, the system supports the curve sUSD pool and users can mint DUSD using DAI, USDT, USDC, and sUSD. As more peaks are added, investors will be free to choose between the supported peaks to mint or redeem DUSD. The idea is to add new peaks, such as Aave and Uniswap, gradually in the future.
Since August, DefiDollar made multiple upgrades, which included the launch of a fork on Swerve (swDUSD test) and the introduction of a yUSD integration. Hence, users can mint DUSD using yUSD & yCRV, due to an integration with the yVault (Yearn Finance).
In early October, DefiDollar announced liquidity mining and retroactive rewards for the launch of their native token, called DFD.
DFD holders will govern the protocol, being able to decide essential parameters, such as rewards, income distribution within the protocol, and other questions. Besides, the plan is to use DFD tokens as an ultimate backstop against volatility (similar to what MakerDao made with MKR).
Liquidity providers will earn protocol fees in exchange for staking DFD, plus earn actual DFD tokens via the new liquidity mining program. The total supply of 100M tokens will be distributed such as:
- 23% of tokens shared between the core team, future hires, and advisors.
- 56% of tokens to community incentives (divided into three phases)
- 11% of tokens to investors.
- 10% of tokens to Future Strategic Reserve.
The community incentives share will be divided into 3 phases, first into a retroactive distribution, second the token launch event, and then the incentivized liquidity mining program.
The retroactive distribution phase will reward users who held or staked DUSD starting on September 4 at 04:30 pm. Holders and stakers of DUSD on Swerve (in this case, swDUSD) who were active on September 22 will also be rewarded with DFD tokens.
DefiDollar (DUSD) is a stable crypto asset-backed by a stablecoin-aggregator strategy to stay near the dollar mark. DUSD is an asset made up of a changing basket of stablecoins, which includes DAI, USDT, USDC, sUSD, yUSD, and yCRV.
To uplift their performance, DefiDollar also announced liquidity mining and retroactive rewards for the launch of their DFD token, with a total supply of 10M tokens.
Focused on security, the platform engaged in two formal audits in its codebase, made by Peckshield and Quantstamp.
Nevertheless, DUSD remains an experimental software built with DeFi primitives, which carries its share of risk. This way, DefiDollar recommends users do not commit any funds that they cannot afford to lose.