xBond Deprecation: A Post-Mortem
By: Dollar Protocol
Tags: Seigniorage, Coupons, Xbond, Algorithmic, Dollar

Note: xBonds will expire along with USDx staking on 2/12/2021 at 1pm UTC meaning USDx locked in these contracts will be debased. Please act accordingly.

Why Coupons Fail

It’s pretty clear that coupon systems, without a sufficient guarantee of returns, are a failed system. The reason why is that coupon-like instruments simply delay the inevitable, which is selling to re-coup back an initial principal + extra.

The reason why the US Dollar can afford bond-like instruments is that as an M1 money supply, the US Dollar has reached a sufficient global demand that there is always someone or some entity willing to buy it as a reserve currency (although this may change in the future).

Any protocol system that attempts to use coupons is in for a reckoning as more and more debt is accrued, it becomes less and less attractive to buy coupons, or in Dollar Protocol’s case, xBond.

xBond

In Dollar Protocol specifically, using xBond diverted a large amount of seigniorage rewards to xBond (50%), which means that with every positive rebase, 50% of the rewards are essentially market sold to recoup back previous debt. This works for a few positive cycles if there is enough demand but ultimately the party ends when new demand dries up and xBond users are left holding IOU notes that don’t resolve to anything of value.

This is ultimately why users in DP voted to allow 1–1 redemption of xBond in positive cycles, but this also doesn’t absolve the debt as now there is even more sell pressure during positive cycles.

The solution here, while painful in the short term, is to deprecate xBond entirely. One can read a little more about governance vote to make this happen with xBond RFC 1.

Hyperinflation & Hyperdeflation

With any algorithmic stablecoin, stability can only be achieved at scale. However, without hyperdeflation to counteract hyperinflation in the early growth cycles, any algorithmic stablecoin will face death-spiral like situations.

Another way to rephrase this more colloquially is that old forests must be burned for new pastures to grow. Similarly, much of algorithmic stablecoin’s growth will come in cycles of extreme growth and extreme deflation. But in the long run, these cycles will be much less volatile and will begin to encourage non-speculators to start using the currency as a real form of currency.

Thankfully, Dollar Protocol already has measures to whitelist partners to help grow utility-driven demand of Dollar Protocol stablecoins as well as potentially turning off debase one day in the future.

There is also a plan for a CDP based synthetic exchange that leverages Dollar Protocol stablecoins. This will provide external driven demand to USDx and add to the useability.

Outlook

The outlook for Dollar Protocol’s updated incentive structure is something we’re very excited by. Now 85% of seigniorage will be given to liquidity providers. This now correctly aligns incentives to protocol users as only users who provide real risk and real liquidity will deserve rewards, along with 15% of staked Share holders.

Most notably, we believe this incentive structure to be an improvement on AMPL’s initial structure, which distributes rewards to every user, regardless of if they are providing liquidity or not.

The plan here is to launch CNYx and relinquish governance admin keys to the Seigniorage Governor Alpha contract.

Be on the lookout for some news soon on CNYx and how you can get involved.