DeFi Dollar is built as a stablecoin that uses the primitives of DeFi to stay close to the Dollar, protecting users from counterparty risk, holdings seizure risk, bank run risk, etc.
While it is no news that the decentralized finance (DeFi) subsector has grown tremendously in recent months, the same can be said of stablecoin markets (which is still part of DeFi) that have also grown at breakneck speed.
However, even with the rate of growth associated with stablecoins, users have shown some level of restraints when dealing in the market. One of the reasons for this restraint is because of the risks that come with centralization. Some stablecoins in the market are centralized, being backed by fiat currencies under a custodian. Furthermore, stablecoins also have cases with governance.
All of these issues play a role in dissuading some investors from dabbling with stablecoins.
This is where a platform like DeFi Dollar (DUSD) comes to the rescue. Where every other stablecoin could be subject to the issues highlighted above, DeFi Dollar seeks to offer a stablecoin that is even more stable than its peers in the market. Below, we would try to understand what DeFi Dollar is and how it would operate differently from its competitors.
DeFi Dollar was developed during the ETHGlobal HackMoney hackathon in May 2020. The team of developers Arpit Agarwal, Deep Joshi, Manthankumar Satani, and Siddhartha Jain have vast experience in building notable products for users in the crypto world.
The developers had stated that its goal for starting the DeFi token was to make the industry safer and more secure for users. This, they believe, would lead to a massive adoption of cryptocurrency by the general public.
Siddhartha Jain basically said that DeFi Dollar is an insurance layer over existing avenues in DeFi.
What is DeFi Dollar?
DeFi Dollar is built as a stablecoin that uses the primitives of DeFi to stay close to the Dollar. What this means is that stablecoin tries to protect users from situations where other Stablecoins like Tether (USDT) or DAI stray away from what they were pegged at.
DUSD offers investors an opportunity to index varying stablecoins in its single token. This invariably protects such users from any underlying risks that may be attached with such tokens.
The stablecoin is collateralized by the Curve Finance liquidity provider (LP) tokens and whil also using Chainlink oracles to stabilize itself. Accordingly, Curve is used to integrate the lending protocols and also swap tokens too. This plays a major role in the stabilization of the token.
To ensure maximum safety, the token also has a staking mechanism which adds an additional layer of protection to the token. This is superior centralized stablecoin platforms that are associated with counterparty risk, holdings seizure risk, bank run risk, etc.
The Four Components of DeFi Dollar
DeFi Dollar has four major components that play a role in how the stablecoin operates. Each component plays a role in how users can hedge their tokens to protect themselves better. They are discussed below:
This deals with how the prices of the different stable coins are known. Usually, the data is taken from Chainlink oracles.
This component refers to a protocol under which other stablecoins are deposited. Initially, users can expect the DUSD system to begin by supporting 2 peaks. These peaks are Curve susdV2 and y pools.
By this, users can be able to “mint” their DeFi Dollar tokens with other Stablecoins like DAI, USDT, USDC TUSD, sUSD. However, this is not the sole focus as the system is built to support peaks like Aave, Uniswap in the future.
Each supported peak would only hold tokens from the protocol it supports. It should be noted that users can still decide to add or remove peaks from the protocol. This is subject to the decisions of the community.
Users should also note that each peak would have a separate contract. This is so because the founders are of the opinion that a separate contract would help to keep the level of gas usage low.
This is where the operations take place. With this component, users can mint and redeem their DUSD. They also can check for different oracle prices and at the same time. Moreover, this component helps to spread the earnings of the protocol to those who stake in DUSD.
We spoke of staking earlier. This component is in charge of it.
The Valley component operates in a way that when other stablecoins fall below the $1 peg, it tries to remove the underlying risks that may be attached. In essence, when these other coins fall below $1, it means that DUSD becomes under-collateralized. And to avoid the pitfalls of any risks, the native staking mechanism of DUSD helps to remove any attached risks.
Users can also stake their DUSD tokens with the system. This additional staking acts as a layer of protection for other DUSD coins that may not have been staked. Thus, in situations where there is a peg failure of these other stablecoins, DUSD acts as buyers’ last resort for the token.
Earning Yield Rewards with DeFi Dollar
One of the peculiarities of DUSD is that users can also be sure of earning rewards through yield farming.
When you stake in peaks, they would invariably yield farming rewards over time since they would be holding LP tokens that belong to different protocols. Presently, there is no available information on how these rewards would be shared. However, a co-founder, Arpit Agartala, said the following was being discussed as per the yield rewards:
- An admin shares the reward tokens to holders of DUSD based on the criteria of how long they have held the asset. This would be done by the admin every week or every fortnight. The admin could also be running an off-chain script.
- Another option is to make these reward tokens to be collected instantly. The downside to this is that it would require a higher gas level to mint or redeem or even stake.
- The tokens could be used to either create an income earning stream for the DeFi Dollar team or create an additional cushion for the stablecoin. The developers may not be looking at this option because it denies DUSD holders an opportunity to lose farming rewards.
- The last option would be to share the farm yield rewards to stakers only. This would deny holders of DUSD from earning.
Advantages of Using DeFi Dollars
- Investing in DUSD gives users an opportunity to invest in a stablecoin that is backed by other stablecoins. It acts as a meta asset for all other stablecoins.
- DUSD staking mechanism gives users of the coin a layer of protection against other Stablecoins when they veer off course against their pegs.
- The token is built with the intention of driving the integration of its smart contract with a wider audience. Hence, the DeFi Dollar Protocol is set up for mass adoption.
- Users can also be sure of earning yield farming rewards either by holding the stablecoin or by staking it.
DeFi Dollar acts as a sort of insurance for other Stablecoins as it seeks to protect users from risks that might be attached to them especially when they go off their peg. This single factor makes DUSD a very interesting token to invest in.
Not just that, the stablecoin offers its holders and stakers an enviable opportunity to earn rewards through its yield farming process. And at the same time, it looks to provide an avenue where different Stablecoins can be minted with the token to achieve maximum protection in the market.