USDO: An experiment in DOGE-backed hyper-collateralization
This week, the first iteration of USDO will be deployed on the Dogechain network, allowing us to test our stablecoin hyper-collateralization thesis.
(New to Dogechain? Check them out at https://dogechain.dog/ !)
Not only will we be testing the general thesis, but we’ll be doing so in the perfect testing grounds — on a chain which currently has no stablecoin available (bridged or otherwise), and very few bluechips (ETH, MATIC etc), outside of DOGE.
Read on below for our USDO primer — or skip down to the bottom if you want to check out our FAQ, in preparation for our official launch on February 16th!
Please remember that USDO is still a highly experimental token, and its deployment on Dogechain serves as a testbed for its first iteration. As code is still likely to change during these iterations, it is important to note that it is currently unaudited. As a result, USDO may suffer from any number of issues — including a total loss of underlying collateral. We do not recommend using USDO or supplying collateral save for testing purposes, with funds you are not prepared to lose. We strongly recommend exercising caution when interacting with USDO, or any other experimental crypto tokens.
Note that USDO’s website, and public Staking/Minting/Burning will launch 1–2 weeks after USDO’s deployment. Studio Nova will be privately managing this during the initial launch, in order to best ascertain the overall health and stability of USDO. This 1–2 week period is subject to change, pending the observations of our initial launch period.
Starting the Experiment
Our experiment in hyper-collateralization essentially looks to see if a USD-Pegged stablecoin can be deployed which does not rely on an algorithmic consensus (remember Luna/UST?), and similarly does not rely on real-world assets which may not be readily available for liquidation in the event of any de-peg scenario.
Instead, USDO seeks to provide a USD-pegged stablecoin with a heavily concentrated pool of an otherwise volatile token (in this case, Dogecoin) — and in having an extremely over-collateralized backing, also allows for full on-chain transparency.
While our first iteration of USDO will rely on a centralized oracle, the protocol itself can quickly be modified to instead move to using decentralizing pricing oracles — allowing for a truly decentralized dollar-pegged stablecoin.
Decentralization, Transparency, and Security has been the trilemma of stablecoins to date. The most secure are heavily centralized, and often lacking in backing transparency. The cases we’ve seen in decentralized transparency lacked underlying security. USDO’s experiment focuses towards offering a solution to all three of these pain points.
The Hyper-Collateralization Thesis
The primary backing behind USDO is hyper-collateralization. In short, this means over-collateralized; to an extreme, but necessary degree.
Crypto is inherently volatile; there’s no escaping that fact. Backing USD valuations with any crypto token in a 1:1 fashion would require either an endless up-only market, or would require a central collateral holder to possess the trading skills of a God.
As an example; consider a USD-pegged stablecoin which was backed 1:1 by Bitcoin. BTC is undoubtedly the king, and has to date had the most comparatively “stable” downsides through any bear markets.
Bitcoin’s current price at the time of writing is at $51,823 USD (we are so back). So, you could in theory back $51,800 with a single Bitcoin, and mint it on chain. If BTC proceeds to $60k, you’re over-collateralized by about $8,200. So, everyone holding your pegged token could cash out, and you wouldn’t break a sweat in handling redemptions.
However, if in the case that BTC took a pull-back to $45,000, you’ve now got $51,800 worth of tokens on the market that’s only backed by the underlying value of BTC — so, $45,000. If people look to cash out, it’s either first-come-first-serve leaving $6,800 uncounted for, or everyone agrees to take a hit and just cash out around 86c for every dollar they purchased.
Now let’s consider a far worse scenario; let’s say this Bitcoin-backed dollar launched on in November 2021, with BTC trading at $69,000. And then, people decided they wanted to cash out their dollars a year later, with BTC trading at $15,600. Now there’s only 22c available for every dollar purchased.
The Hyper-Collateralization Solution
Now instead, imagine a Bitcoin-backed dollar which instead required $5 worth of Bitcoin for every $1 it was backing.
Bitcoin’s 77% drawdown would in effect, mean nothing for those holding the Bitcoin-backed dollar. With $69,000 minted against an initial backing of $345,000, come redemption time with BTC trading at $15,600, there’d still be $78,000 to cover all withdrawals. Everyone’s covered, and there’s still $9,000 left over.
Unfortunately, there’s an obvious problem to spot in this mix; supply. If one dollar on-chain requires five dollars worth of backing, it’s very difficult to get tokens into circulation to begin with. Without enough tokens in circulation, slippage would be a common problem when it comes to DEX swaps.
When dealing with tokens such as DOGE, which faced a 94% downside in the 2022 bear market, the backing required to assure withdrawals comes closer to 2000%(!).
However, there’s another solution here — scaled liquidity backing. If we can make an educated guess (within reason) as to the lowest possible value that a token will hold, coupled with accounting for the historical parabolic moves that a token may put in during a given market cycle, we can set a sliding scale (coupled with a margin-of-error buffer) which sets the amount of collateral needed to back one dollar at any given token’s current market pricing.
As outlined in our USDO Whitepaper, this is the model that we’ve developed for a DOGE-Backed stablecoin; requiring increasingly large amounts of collateral as the valuation of DOGE increases throughout any given market cycle; and in turn, allowing for the maximum amount of token circulation while maintaining our priority towards security, transparency, and decentralization.
The very short version; assume $DOGE is trading at $0.05 per coin, but could potentially drop to $0.025 per coin. In this case, someone would need to back each dollar minted with 2 dollars worth of Dogecoin backing. But if $DOGE accelerated towards $0.50, our collateral scaling solution would request ten times more backing for every dollar minted — ensuring that the dollar value remains secure in the event of $DOGE falling all the way back down to $0.05.
Supply Woes Continued
While scaled liquidity backing greatly assists in allowing for the flow of supply, it of course can still never match what we’ve seen with algorithmic stablecoins — dollar-pegged tokens cannot be minted out of thin air in this case.
As such, we can safely expect that USDO’s supply will never catapult to the levels we’ve seen with other models of stablecoin — even in adjusting for a diminishing returns on bear market drawdowns.
This is a concession that unfortunately must be accepted with this type of pegged stablecoin. However, that’s not to say that it is without solutions in the long term.
Multi-asset collateral (i.e: holding BTC/wBTC, ETH, MATIC etc) could greatly assist in lowering overall collateral requirements in a potential future iteration. This collateral can of course include other pegged stables such as USDC/USDT, but with their own given drawbacks.
Long-term, each market cycle has seen diminishing returns on bear market downsides for most bluechip tokens; hinting towards a long-term stability in the market which may again give rise to lower collateralization requirements.
In the here and now though, and particularly for our DOGE-backed iteration, we envision USDO to act more as a complement towards a broader stablecoin collection; offering native yield rewards for stakers and high transparency/security for holders, while accepting the concession that higher slippage and potential de-pegs to the upside may be part of that package.
FAQ
Note that our previous USDO FAQ can be found over on our USDO introductory medium!
Q: Has anything changed since the initial whitepaper draft?
A: Yes, the contract has grown in complexity throughout development, particularly around developing safety features against front-running mint/burn events, maintaining segregated staker/minter wDOGE balances, and making appropriate helper read-only functions available natively on the contract itself.
Coupled with this, for our initial deployment we will be targeting a scaled collateralization starting from approximately 150% backing at a valuation of $0.08 per Dogecoin. While operating as a centralized solution, 30% of all fees generated will be assumed by Studio Nova as protocol fees. This fee will be reviewed, and appropriately split with Nova DAO for USDO’s Dogechain ZK launch.
We will be updating our whitepaper to reflect these changes post-launch.
Q: Will any user be able to stake/mint/burn?
A: Yes, but this will not be exposed publicly until 1–2 weeks after our initial deployment. During the initial launch phase, LP will be fully managed by Studio Nova in order to best ascertain the overall health and stability of USDO. Following this point, a publicly accessible interface (hint: that means a website) will go live, and allow for all users to stake/mint/burn.
This 1–2 week period is subject to change, pending the observations of our initial launch period.
Q: What platform will USDO be made available on?
A: USDO will be added in a v3 (full range) USDO/wwDOGE pair on QuickSwap.
Q: How much liquidity will be provided at launch?
A: Approximately $10,000 USD in wDOGE backing will be staked for minting USDO. The maximum amount of USDO allowable at DOGE’s on-the-day market cap will then be minted and added to a wDOGE pair on QuickSwap.
Once public staking/minting/burning is unlocked after the initial launch, we expect this liquidity to increase.
Q: Is the above liquidity being added by Nova DAO?
A: No, this liquidity is being added privately. Any future liquidity added from Nova DAO will be subject to a DAO proposal and approval.
Q: What will happen to USDO when Dogechain ZK is launched?
A: USDO will be migrating to Dogechain ZK. A 4 week redemption period will begin, where users will be required to redeem any USDO in their wallets. Following this point, all USDO stakers will be able to exit their staked/collateral positions without penalty.
Q: What is the risk for stakers?
A: Stakers will essentially be locked-in in the event of the Dogecoin price falling below our target collateralization levels; and will remain locked until collateralization levels increase either through Dogecoin’s price increasing in value, or in more stakers joining the pool. With this, the overall fees charged per mint/burn (distributed to stakers) will be increased to both compensate for this lock-in time, and to incentivize the arrival of new stakers.
Q: How are fees earned and distributed?
A: USDO’s actual pegging is to $0.997 — with $0.003 (0.3%) being taken for each USDO token minted/burned, and distributed in a 70/30 split between stakers, and the heartbeat operator. Fees will be distributed each heartbeat (approximately every 5 minutes), and will be automatically added to each staker’s respective staked balance.
As such, this automatically increases the level of underlying collateral. These fees are increased to a maximum of 5% in the event of the USDO contract falling under-collateralized, as a measure in incentivizing new stakers to strengthen the USDO pool.
Q: Will there be staking for USDO-wwDOGE LP along with just single-staking wDOGE?
A: As USDO contains no emissions/rewards token (ala UST/LUNA), it is not possible for us to directly provide LP rewards; however, our partners (or Nova DAO via ratified vote) may choose to incentivize any additional LP pools to encourage USDO’s use.
In summary…
USDO itself was a massive undertaking; and we’re hoping we can continue to iterate on and evolve this model, as an underlying system that works towards the greater good of the crypto space.
With this, we’re greatly looking forward to getting USDO launched, and are excited in the hopes of seeing a shared success story both for Studio Nova, and for Nova DAO in what’s likely the most unique offering we’ve developed to date.
Please do remember though, that USDO is inherently experimental; exercise caution when interacting with it, especially in the early days as we see the first wave of real use for the token. Do not interact with assets you are unwilling to lose.
As noted, following direct management/observation under Studio Nova, we’ll be opening our USDO website, and full staking/minting/burning functionality to the public. Keep your eyes on our X, and here on our Medium for more news on USDO as we push forward towards our public launch!
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