UXD Protocol: A Decentralized Stablecoin

11 min readFeb 10, 2022

A leap towards enabling DeFi using Decentralized Stablecoin!

Jack: Hey Neil, I got to know you started investing in crypto. Great thing, how is it going?
Neil: Great man, it has been months since I started, pretty exciting. Though I am not familiar with stablecoins, can you help me?
Jack: Well, Stablecoins are digital assets with a stable price, maintaining the peg via different references. There exist many such in the market, which is backed by, let’s say, a US Dollar or Gold or Derivatives.
Neil: Okay, but when you say backed by a US Dollar, how does that dollar asset make its presence in the blockchain network?
Jack: Well, as of now, many significant market shares of stablecoins are centralized, fiat-backed coins.
Neil: Wait, Isn’t it scary? How would it help in enabling DeFi, when the stable coin is itself centralized and poses a risk to regulations by various financial bodies.
Jack: Yeah, well, that’s where Decentralized Stablecoins like UXD comes into the picture.
Neil: Go on; you have my time & ears.

Introduction

The Crypto ecosystem has been considered a volatile investment, and for years it kept a significant proportion of the audience away from investing but not now. Stablecoin came into existence for the very reason. With these coins’ growth, the ecosystem has also grown, as it offers a stable reference bar to the people in the crypto ecosystem. When dealing with a centralized exchange, you have fiat currency as a reference level to understand where you stand with the currency you hold. Stable coins are fulfilling a similar purpose in crypto ecosystems. These play a significant role in bringing people to the crypto ecosystem who once stayed back by offering people a coin with stable value and lower volatility.

Quick Gist of Stablecoin market: $1Billion in 2018 to $177Billion in 2022

Insurance, lending & borrowing, exchange setup, all these financial services are emerging in decentralized finance. With smart contracts, we are moving towards a system working on its own, removing the use of centralized entities. Thus with technology pacing up, it is necessary to have a stablecoin that is trustless, which in a crypto ecosystem means, you don’t have to trust a third party like a bank, a single person, or a centralized authority.

But still, the largest market share of stablecoin is centralized, which is a worrisome state.

Why Decentralized Stablecoin?

Centralized Stablecoin, because of its structure, has faced and would be exposed to meeting scrutinization by various regulatory bodies. Here are a few reasons to worry:

Centralized operations, not trustless.
Exposed to regulatory bodies around the world.
Low Transparency regarding the Fiat Backing has a lot of dependency upon a single entity.

Having a decentralized stablecoin would make the decentralized finance bodies more empowered. It would be free from any possible regulations from centralized bodies. Working on its own, thus providing better Transparency and lower dependency on any entity to back it with fiat in the centralized banks.

Solana network has stablecoins present on its network. A few of them are, Tether (USDT) & USD Coin (USDC), who have captured a significant market share. That being said, these both are fiat-backed coins, that is, Centralized. Now, this is interesting. The very reason these coins gained a significant market share has been the failure of various other currencies in coming up with an ideal decentralized stablecoin, solving the stablecoin trilemma.

The Stablecoin trilemma demands a cryptocurrency to be:

Capital Efficient: When the collateral backed to keep the coin stable is 100% or less, no over-collateralization.
Stable: Price stability
Decentralized: No involvement of any centralized/single entity.

There have been trying to make one in the past. Still, none have been able to construct, often achieving only 2/3 above demands. This is where UXD Protocol comes in with the currency that holds true with the trilemma.

Let’s quickly look into types of stablecoin in the ecosystem and further proceed to understand how UXD is the one that is able to check all boxes in the stablecoin trilemma.

Fiat-Backed: Backed 1:1 to the fiat base currency (Eg: USDT, USDC).
Crypto-Backed: Backed by collateralized crypto (Eg: MIM, DAI). Capital Inefficiency is present in the structure.
Commodity-Backed: Backed 1:1 to a commodity (Eg: XAUT). Yet again, highly centralized.
Algorithmic: Uses algorithms to maintain the Peg by controlling the burning and minting. (Eg. UXP, UST)

With several worries arising around centralized stablecoin, the year 2021 saw a massive increase in the adoption of algorithm stablecoins, thus showing the people’s sentiments towards these coins. Algorithm stablecoin grew by 260% in Q4 of 2021, with all cumulative stablecoin markets growing by 29%.

UXD’s Functioning

UXD is an algorithmic stablecoin, backed 100% by delta neutral position using perpetual swaps.

Confused?
Let’s go step by step, first learning about derivative, delta neutral position, perpetual swaps, and then understanding how UXD’s algorithm establishes this in their structure.

A derivative is a financial contract wherein the value of the same is based on how the underlying asset is performing. The primary use of such products is done to manage and mitigate the risks.

When you buy one bitcoin, you are exposed to the change in the value of 1 bitcoin. But when you buy a derivative backed by bitcoin, which has exposure of 5 times time change in the price of bitcoin, it’s equivalent to having exposure of 5 bitcoin.

Understand delta as the exposure you take when you buy something. Delta neutral position refers to the state wherein the price of a derivative does not change by the change in the price of the underlying asset.

Now, Perpetual swaps are the type of derivatives with these key features:

It has no expiry date/settlement date. Thus, you can hold the position indefinitely.
Asset backed is not involved; hence there is no need to keep the asset to gain exposure.
Price is closely pegged to the spot underlying price of the asset.

To successfully fulfill the 3rd key, the concept of Funding Rate comes into play. Say you own a perpetual swap of price ‘X’ and the underlying price being ‘Y.’

Case 1: X>Y, In this case, the funding rate will be positive. The ones who have taken a long position would compensate the short traders, which directly pushes the selling and brings the buying activity down until the X reaches Y.
Case 2: Y>X, In this case, the funding rate will be negative. The ones who have taken a short position would compensate the long traders, which directly pushes the buying and brings the selling activity down until the X reaches Y.

Now, to summarize all this, what UXD does is:

You give collateral to UXD Protocol, currently accepting SOL, BTC, ETH.
You receive a similar dollar value of UXD in return for the collateral provided.
The collateral goes to the perpetual exchange protocol.
A short position is taken of the same amount as that of collateral.

If the SOL(given as collateral) price falls by -5%, the collateral deposited as long spot would take -5% loss. But simultaneously, on the other hand, the short position taken would gain +5%. Hence making the equation delta neutral with a 0% move. Thus, when such arbitrage opportunities occur in the market, the funding rates change accordingly to peg the asset’s price to 1$.

Capital efficiency is one of the three demands of stablecoin trilemma that often algorithmic stablecoins fail to fulfill. The $UXD’s algorithm construct does not need any over-collateralization, hence becoming the capital-efficient stablecoin currently present in the ecosystem with 100% collateralization.

In this perpetual swap setup, funding rate plays an important role in maintaining the peg. UXD takes up the earnings from the funding rate. A part of the share received when the funding rate is positive goes to the Insurance Fund, and a portion to the UXP governance token holder.

Key Feature of UXD

Insurance Fund
- There is the potential risk & states wherein the funding rate may go negative. For the same situation, the Insurance Fund is set up by UXD Protocol which benefits the UXD holders.
- When the need is, the insurance fund will pay the negative funding rate. Once the fund is exploited, an auction of UXP tokens would take place to refill the insurance fund.
- Funding rates historically have been positive for a prolonged time, and it has not been seen that a negative funding rate stays for long. But still, the insurance fund can withstand throughout the year at the breakeven funding rate of -11.4% on $500 million.

Governance Token UXP:
- UXP is required for the governance of UXD Protocol. Token holders will be in the governing body of UXD DAO.
- The token holders earn a share of the revenue from the funding rates.
- They will also be able to control decisions, vote on various proposals such as deciding on asset management strategies for the fund, adding other crypto assets to be accepted as collateral for minting, voting on multiple improvements/growth strategies, and many more.
Trustless, Decentralized, and Censorship Resistant
Mint and Redemption process is Instant.

Thus as told, UXD Protocol can solve the stablecoin trilemma by being:

Decentralized: No involvement of centralized entity. Users can transact freely without any censorship.
Stable: 100% backed by delta neutral position, thus allowing the user to redeem 1 UXD for any asset worth $1USD.
Capital Efficient: No over-collateralization required, users can issue 1 UXD with 1 USD worth of assets.

How to Mint & Redeem UXD?

Go to UXD Protocol & click on LAUNCH APP.

2. If you receive the following message, then you are under restricted jurisdiction.

Else, you will see the following page

The top left, 8.5M shows the supply cap of the UXD token, which is to increase depending upon the plan laid out.

3. Click on CONNECT in top right to connect your crypto wallet to the application, you would be prompted with the Terms & Condition, kindly go through the same and click CONFIRM, and then connect your wallet from the given options.

4. Select MINT, enter SOL/BTC/ETH amount that you want to exchange or enter the amount of UXD you want to mint to get equivalent price, select slippage, press MINT.

5. On successful mint, you will see the following message.

Similarly to redeem UXD follow the same process till point 3, select REDEEM, enter the amount of UXD you want to redeem, select slippage, select the asset type you want from dropdown option, and press REDEEM.

On successful Redeem, you will see the following message.

Tokenomics

Total Supply: 10,000,000,000 UXP

As can be seen, currently 3% from the total supply of token are dispensed for sale to capitalize the insurance fund, for the benefit of UXD holders.

UXP token went into Public IDO, raising a told of $57 million from 3676 investors, allocating the entire amount to the Insurance Fund.

Apart from the IDO, UXD has also raised $3Million seed round led by the following noteworthy investors.

Risk Associated

UXD Protocol has indeed fulfilled the demands of the stablecoin trilemma, but that being said, there are scenarios wherein the UXD holders will go under collateralized. Here the same listed below:

Smart Contract Risk: Smart contracts and decentralized stablecoin go side-by-side. If a contract contains a bug, UXD full collateralization may be affected.
Negative Funding Rates: Though UXD has done an excellent job setting the insurance fund, prolonged negative funding rates might cause depletion of the fund; furthermore, If there are no redemptions of $UXD for the same period, holders of $UXD can become under-collateralized.
Insurance Fund Asset Management Risk: The fund collected would be further invested over multiple assets, which would then be exposed to unforeseen risk in asset management strategies. Hence leading to UXD holders becoming undercollateralized.

Future Ahead & Roadmap Planned

UXD Protocol has been growing as planned and rapidly expanding its supply cap. On January 18th, 2022, they went live as a decentralized stablecoin on Solana Mainnet.

With the plan to keep the cap at 1M UXD for the first five days, then after hitting 2M UXD, raising the cap by 250,000 UXD every day. It turns out that with the aggressive market response, they had to increase the daily cap of increment to 500,000UXD.
Below is how the supply cap is planned to be increased. UXD is keeping security first by making professional security audits at critical phases.

Q1 2022, Liquidity Mining Program Launch:
- Release details about UXP rewards and later roll out prizes to the partnership platforms.
Q1-Q2 2022, Enable Functionality of UXP token and Begin Transition to DAO Management:
- Development of DAO’s interface is undergoing, and the goal is to transit to the same by the given time frame.
Q3-Q4 2022, Cross-chain development:
- Stablecoins would be the essential requirement of various DeFi applications; thus, it would be imperative to go across the crypto ecosystem, developing UXD and increasing the network.
Q3-Q4 2022, Mint other stablecoins for fiat such as JPY, EURO, GBP:
- It’s the delta-neutral strategy and the algorithm that makes UXD what it is and does not depend on the type of currency. Thus at this stage, UXD Protocol would be looking to add new currency which has their perpetual futures on the exchange

UXD Community

UXD has made a community over discord to discuss everything from new ideas to feedback. Often you will also find them having fun in the community section on the discord. If you have any doubts about this stablecoin, head over to their server; they would be happy to help you out.

Link to Discord: UXD Protocol | Discord

Apart from discord, UXD has also released well-documented docs and regularly writes articles on medium to give people better insights about their functioning and regular updates.

Link to Medium: UXD Protocol | Medium
Link to UXD Docs: UXD Docs
Link to Website: UXD Website
Link to Twitter: UXD Protocol | Twitter

Conclusion

Stablecoin plays a significant role in setting up decentralized finance. With the continuously increasing demand for a decentralized stablecoin,
UXD, with a censorship-resistant, trustless and user-first structure, has the best potential to grab a significant market share. With currently being the most capital efficient decentralized stablecoin, the future looks promising for UXD Protocol. It’s essential to have a stable ruler in the crypto ecosystem, and I believe UXD to be that decentralized coin, thus helping in increasing the market share of the crypto ecosystem.

Thank you, folks! Do message me on Twitter if you have anything to say on this article, or discuss anything related to everything :)