The Ultimate Seigniorage Ecosystem — Dollar Protocol
With the explosion of $ESD, $DSD, $BAC, and now $MITH, it is understandable some might think $SHARE is “just another Seigniorage” project capitalizing on a trend — which is fine, but not accurate. On the contrary, Dollar Protocol is conceptually earlier than all the above. It is based on a 2014 WP written by Robert Sams. The second oldest Seigniorage project (conceptually) is Basis Cash (WP written in 2017). The dev of DP is anon, but his handle is simply “Robert”. Is it *the* Robert Sams? Nobody knows. Even if it were, it would be unwise of Robert to doxx himself for regulatory reasons. After all, the sudden interest in Seignorage projects is largely on account of the genuine regulatory risks centralized stablecoins like $USDT & $USDC et al. face in the light of regulators aiming at them via proposed legislation like the STABLE Act:
This is not a meme. There is a genuine need for a truly decentralized stablecoin market. All of the projects mentioned above (and ones not mentioned like $AMPL) are trying varied approaches to accomplish the same goal.
Those who have been in DP awhile noticed some exciting things in its earlier days that certainly raised some interesting questions that feed the mythology. For example, there appeared to be some anon accounts associated with Clearmatics (a company Robert Sams is associated with) entering the TG (those accounts are now deleted) and so on. Mythology aside, I wanted to swing back to these Seigniorage projects’ chronology — not based solely on WP’s conception but actual commits on Git, when the project(s) launched, etc. A cursory look around reveals that $SHARE, $BAC, and $ESD all have first commits around the same time (ESD/BAC show first commits as Aug 23, DP first commits Aug 30). As far as project launch dates, according to Coin Gecko DP launched Sept 1, ESD Sept 11, and BAC Nov 30. I find it interesting DP launched within 2 days of the first commit. It’s almost like “Robert” had everything ready to roll already (admittedly conjecture on my part). Whatever the case, the primary purpose for my exploration into the origins was to dispel rumor or idea that DP is simply a “Johnny come lately” fork (which isn’t necessarily an indictment in and of itself). As you can see from the data, this is simply not the case.
The Token Ecosystem:
Dollar Protocol is *currently* comprised of 3 tokens; $SHARE — a fixed supply (21m) $YFI-esque governance token, $USD(x) — the seigniorage/stablecoin token, and $xBond — a fungible token that acts a bit like a high yield earning savings account with a bonding curve.
$SHARE offers the most immediate benefits to new entrants into the DP ecosystem. Holding $SHARE gives you exposure to the price volatility of the protocol as it grows. $SHARE offers multiple benefits in the ecosystem: it is unaffected by rebase, you get to participate in governance, and you earn future cash-flows from the protocol; you are rewarded 20% pro-rata seignorage (“pro-rata” means proportional; i.e., Of the 20% reward you will receive a % of that based on how many SHAREs you hold) twice daily. What exactly is the seigniorage reward? $USDx. Up until today, the system was designed such that you would get airdropped your % of the daily rewards for doing nothing more than passively holding $SHARE. However, the community voted last week to move to a staking model for $SHARE for several reasons. The reasons were: Reward active participants instead of passive holders who oftentimes just day traders (ie. No vested interest in the growth of the protocol), reduce float and sell pressure (It should be noted there is a 60 hr “cool off” period when unstaking $SHARE. AFAIK during that 60 hours you can not trade $SHARE and will not receive $SHARE rewards), and most importantly *composability*.
In order for DP to grow, we need our tokens to be composable, particularly $SHARE. Put simply, to be a “money lego” that can easily integrate with future partners/protocols (think about, say… lending protocols); we need to standardize. This is an essential path to growth for DP. It is worth noting that $SHARE rewards were 10% until just a few days ago. That was another community proposal that passed that was part of a set of proposals many of us are excited about. It’s worth noting the first community proposal passed when the governance arm of DP went live about a week ago was lowering quorum from 50% of $SHARE supply needed for a vote to pass down to 25%. This was a big win for DP IMO as it more easily allows the community to get things up for a vote and ultimately passed or declined. I have found DAO based projects and projects with a DAO arm like DP to be mostly larp/meme in my experience. Notable exceptions being $YFI, $AAVE, and a few others.
$USDx (USD) is the seigniorage/algorithmic “rebase” stablecoin token of the DP ecosystem. I have found many new participants are often confused by the term “rebase” as it pertains to USDx (and $SHARE for that matter). The rebase function within DP does not function like that of $AMPL or $BASE. Those projects explore a different approach towards elastic supply stablecoins (which isn’t any less or more valid, just different). Whereas with the former coins at the time of rebase price force adjusts to the peg price and creates these massive expansion and contraction candles that confuse participants who don’t understand how those tokens work, with USDx all that occurs is rewards are either issued (positive rebase), not issued (neutral), or not issued+contraction of outstanding USDx supply (ie. Non-bonded USDx is burned based on delta). As such, you will not see crazy candle movement during rebases. You’ll just see the USDx total supply expand, be steady, or contract. I think this is better for investors personally and easier to understand. So how often do rebases occur and how does DP determine a positive, neutral, or negative rebase? Rebases occur twice per day based on a TWAP formula (time-weighted average price). The rebase function must be called by one of us users (there is a button on the website’s dashboard). Theirs a $.05c spread based on USDx’s $1 price peg. That means if at the time of rebase if the price of $USDx is $1.06 it will be a positive rebase, if it’s $.94c it will be harmful, and anything in-between $.95c-1.05 is neutral. Now that we have the mechanics of $USDx out of the way, it’s time to talk about what we can *do* with it besides hold it/earn it via rewards. Remember the big picture here for DP to succeed is for the $USDx supply to expand — the main goal is to create a decentralized stablecoin that theoretically will be used by many the same way people use $DAI today, right? That happens by positive rebases. The more positive rebase cycles we have the more the supply expands via reward distribution to $SHARE holders, LPs, and $xBond holders. Speaking of LPs and $xBond, these are the two other primary use cases for $USDx at this time. You can LP (will expand more on LPing later) in the $USDC-USD(x) stable pool or you can bond your $USDx for $xBond.
$xBond is most easily explained IMO as a fungible high yield generating savings account based on a bonding curve. I realize that’s a mouthful so I’ll do my best to break it down in simple terms. $xBond in its present form is designed for long term holders (I’ll explain why in a moment). It’s essentially a “savings account” designed to speculate on the future growth of the protocol. As such, it offers the greatest seigniorage reward amount, which is presently 40% pro-rata. The reason for that is because in order to bond your $USDx you must redeem your $USDx for $xBond. To do that you simply put in how much USDx you wish to bond under the bond tab on the DP website and “mint” $xBond. Minting $xBond then locks up your $USDx, and you begin earning rewards based on the rebase periods (remember rewards are earned twice daily during positive rebase cycles). Aside from offering the most significant reward by %, another benefit of xBond is that it *protects* your $USDx from rebase burns during negative rebase cycles. So much like how $SHARE is unaffected by negative rebases (as it’s a governance token), so, too, is $xBond protected $USDx. The “catch” (if you will) is that you can’t redeem all your xBond at once. There is a formula for how much xBond you can redeem per positive rebase and there is also a limitation of total claimable USD per day in the $xBOnd “pool”. This is why I said earlier $xBond is better suited for investors with a longer-term interest in DP. Indeed, it’s not solely for long-term holders, but you can clearly see the mechanics are designed to benefit “plan trusters” more than those who wish to move in/out on short time frames. It’s worth noting there is an active proposal up right now proposed by the dev, Robert, to perhaps offer a “tiered” solution for $xBond to appeal to all different types of investors with varying time preferences. I think that’s a great idea and is one reason I’m a massive fan of DP; the community is full of gigabrains and is really active. If you see a way to help the DP build and make sense, propose it, it gets discussed, and we go from there.
Circling back to where I said, “per positive rebase”… It’s important to note that you *cannot* withdraw from $xBond during neutral and negative rebase periods. You can only withdraw during positive rebases. The good news is that your $USDx is not getting burnt during those negative and neutral cycles and is gaining interest. Finally, $xBond is fungible. While a good secondary market does not yet exist (there is a low liquidity pool someone opened on #Uniswap), the idea is that in the future, it will. Specifically, a marketplace where $xBond can be freely traded, which opens up yet another different set of opportunities. Oh, and one more important thing (probably *the* most important thing actually). During negative rebases you can mint $USDx for $xBond 1:1 (more on that later!).
Earlier I mentioned DP is *currently* compromised of a 3 token ecosystem. Why the emphasis on currently? Well… alfa leak… Robert has informed us that there are plans to launch a $EURx stablecoin next, and I believe a $YUANx stable sometime after that. This obviously significantly differentiates DP from the other seigniorage protocols (among other things) at this time. Your heads probably spinning reading that right now, but wait, theirs more! $SHARE holders will receive seignorage rewards from all future stables! Oh my! By staking your $SHARE, you’re getting exposure to $SHARE’s price action and will be earning 20% pro-rata rewards across multiple stables in the future. Crazy…
Liquidity Providers:
Presently there are 3 pools. ETH-USD(x), USDC-USD(x), and ETH-SHARE. A recent proposal passed that I think was outstanding and super bullish for LPs, which was to merge the ETH-USD(x)/USDC-USD(x) pools. The reason for this was simple. With $ETH ripping, the IL risk was kind of high. As such, the community felt it would be better to combine the two pools’ rewards into one, taking the USDC-USD(x) pool from 13.33% to 30% pro-rata rewards. While this is, of course, great for the rewards perspective, the other huge/attractive upside for LPs is that the pool is a high-reward (sustainably high, not degenerate high) stable pool. As such, IL is very low. I think someone did some math and found that even if $USDx fell 75%~ in price your IL risk is around 11%~. This should be very attractive to would-be LPs, especially stablecoin whales.
Strategies:
The following paragraph is not intended to be a comprehensive breakdown of strategies. Just some simple observations to help you get started. With $SHARE you can just swing trade it based on daily price action. That’s the simplest way to play it. Buy low, sell high. No rewards (because you’re not staked), and while you can vote on proposals you probably won’t because you likely don’t care. Next is to stake your $SHARE so you a. Have exposure to the underlying assets price action, b. earn that sweet 20% reward as well as gaining access to additional future cash-flows from any other stables launched, and c. voting rights.
With LPing you have two routes: Provide liquidity for $USDx and earn 30% rewards (remember rewards are distributed twice daily during positive rebases) with low IL risk, or mine $SHARE and earn 10% rewards + earn $SHARE which you can then stake and earn 20% rewards. The $SHARE-$ETH is especially good if you think DP is undervalued right now and will continue to grow. Remember $SHARE has a fixed supply of 21m. Based on current projections, all $SHARE in existence should be mined sometime around March~. After that, all the supply will be in circulation, which is a beautiful thing. Also, naturally, people initially gravitate towards the dual-stablecoin pool. However, theirs also more TVL there. Consider that theirs less TVL to contend within the $SHARE-$ETH pool, which means you get a bigger slice of the reward.
With $xBond you get the most significant rewards by percentage (40%), but that also requires you to lock up your $USDx for more extended periods (at least as $xBond is *currently* structured; that could change at any time via proposals). So consider your time preferences. Also, remember I mentioned $xBond having a “bonding curve”? There is a formula based on how far over peg $USDx is and how much $USDx is bonded, determining the value of a single $xBond. Generally, $xBond has a ratio of 2–4:1 to $USDx during positive rebase cycles. That means the purchasing power of your $USDx is lower or less valuable. Now, if you’re planning to hold for a while anyway, you might be able to escape dilution (more on that shortly) that will surely come during a negative rebase cycle because of the fat rewards. However, the best time to buy $xBond is during negative rebases. Why? Aside from protecting your $USDx from rebase burn, you also can mint $xBond at a 1:1 ratio with $USDx! So even if you bought some at less ideal ratios, when we get a negative rebase, just bought more as a form DCAing your $xBond (plus more $xBond just means your going to have more of the $xBond supply, which means compounding your $USDx rewards even more). It’s this dynamic that plays a key role in the expansion of DP $SHARE. You will find if you hang around long enough, it’s actually hard to get negative rebases! Lol. All the gigabrains pray for negative rebases because they can load up on $USDx under peg for LPing and $xBond(ing) — or you could just swing trade $USDx when the price is higher than you bought.
Hopefully, the above will serve as a useful primer to get you started on different ways to think about trading/playing @dollarprotocol. There is, of course all sorts of ‘gameability’ to be discovered as interact and observe. I highly recommend people join the Telegram. There is a lot of high-level discussions that go on in there all day long, most days.
Valuation:
As you can see DP $SHARE is the real deal. It’s not a corny clone/fork that’s here today, gone tomorrow. Obviously, theirs no way to determine yet which of these seigniorage projects will be “the one” or “ones,” and all are trying different approaches to bootstrap a decentralized stablecoin (it’s actually a very complex problem to solve). In order for a stablecoin to be any good, it needs deep, deep liquidity. Trying to incentivize market participants in such a way that you get to that part without collapsing is a complex but unique and rewarding challenge if pulled off. In a sense, you can say these projects are trying to pull off being decentralized central banks. What’s that worth? $10m? $100m? $1b+? While people often compare DP $SHARE to $ESD & $DSD they are functionally pretty different (2 token system, the primary token is governance/stable in one, coupons that have expiry dates, etc). That said, the mcap of those 2 tokens at present is $364m and $91m, respectively. The other big seigniorage player is $BAC. Their system is closest to DP $SHARE though there are some significant differences (I won’t get into that here, however). You could call $BAC our nearest “competitor” due to the similarities in structure. Their mcap is currently $75–90m~) with a massive FDV of $300m+. @dollarprotocol’s $SHARE valuation is $13m~ with a FDV of $19m.
As you can see, DP is *significantly* undervalued compared to similar/competing projects. This is a no-brainer from a value-investor standpoint. Why would a highly active quality project that’s been out as long or longer be worth 10–30x less than the competition?
Side note : It should be noted that part of the reason is likely due to a sort of “zero-day” event (bug) that hit DP back in late October. DP was well on its way when a bug in the vaults contract bricked the vaults and sent DP basically to zero. That’s why when you look at the price charts, you see this big run-up, then a huge crash, it goes flat, then it wakes back up again in late Nov. I won’t get into the specifics of the bug but it was related to something innocuous (a gas error). That period of DP is now referred to as V1. The current project is V2. In the wake of that bug, before launching V2, Robert had @certik_io and @slowmist_team audit the contracts, which pretty much kicked off the relaunch and subsequent run of $SHARE. The protocol is now better than before (with governance live and so much more now) *and* it allowed DP to kind of go under the radar for gem hunters to pick up a *really* solid project near the “floor”. You can see by recent price action however that more and more people are discovering/re-discovering DP. When you consider what already exists, what it offers different from its competitors, future plans, and so on… it’s kind of crazy to think it’s only a $13m~ mcap coin right now. It’s undoubtedly one of my leading 2021 picks.
Finally, it’s worth noting that stablecoins had an explosive year in 2020 despite everything. They grew in size from like $1b~ to $25b~ market share. More and more coins/tokens offer stablecoin pairs, $DeFi is mainly responsible for this as lending and yield farming stables are enormous right now. Many people I consider more intelligent than me are predicting 2021 will be even more significant for stables. There is little doubt that the total addressable market is in the $100b+ range. In my opinion, that makes all of these projects significantly undervalued. I imagine once $BTC and $ETH chill a bit (and even if they don’t), seigniorage projects, in particular, are going to rip. That said, I’ve clearly bet on DP as my horse in that “race”.
I hope this will serve as a relatively complete overview of @dollarprotocol and help people decide if DP $SHARE is something they are interested in exploring further. If you haven’t already, join their TG and check out @itsmeohheymatty’s DP YouTube review/tutorial here:
https://www.youtube.com/watch?v=jZnqs7Pmxq8
If you want to read more about Dollar Protocol:
Website: https://dollarprotocol.com
Telegram: https://t.me/dollarprotocol
