INTRODUCTION

Kujira is a Layer 1 Blockchain in the Cosmos ecosystem. It has one of the best fundamentals of any Blockchain and has products that are very compelling. Since it is on the Cosmos Ecosystem the gas fee is very low and moving funds across the Cosmos ecosystem is a breeze given the ICB bridge. But the main part about this Chain and protocol is something that has been tried before and failed - "The Algorithmic Stablecoin". With the introduction of $USK, things are going to be very different (not an algorithmic Stablecoin)

WHAT IS $USK?

To give you an idea of what is $USK, we need to dive back into the ruins of $UST; which was an Algorithmic stable coin on the Terra Ecosystem. $UST was not pegged to anything other than LUNA and it was made so that the arbitrage system would always hold, but they never accounted for what would happen in a bank run as we saw in the First quarter of this year. $USK is fundamentally different in that it not only overcollateralizes the soft pegged $USK but also with a currency ($ATOM) that is inherently not theirs to mint or burn. 

Since the team wanted the Stablecoin to be censorship resistant they went with a soft pegged model instead of a hard pegged one that requires Coins like USDC or USDT to back it up. Instead, it uses the same principle as $DAI which overcollateralizes its Stablecoin, but unlike $DAI it does not use USDC in its portfolio.

MECHANISM OF $USK

As far as I can understand the mechanism of $USK is pretty simple.

• To Mint $USK            ➜ Stake collateral ($ATOM as of now)
• To redeem collateral ➜ Burn the $USK

Each burn and mint will generate a fee that is given democratically to the $KUJI Stakers.

$ATOM sitting in the reserve will act as collateral which gives the $USK its value. 

⚠In case the value of the underlying asset class goes down than the recommended limit of 60≈67%, the underlying assets will be Liquidated via ORCA 

This also generates a fee for the $KUJI stakers. 

The team knows $ATOM alone is not enough to make $USK popular so they might be including more asset classes to be used as collateral. 

❌RISKS :

Obviously, after the LUNA collapse people are worried about losing the value of the Stablecoin, and rightfully so. 

But in the case of $USK, things are different. 

➡The Minters themselves provide the collateral. Hence, $ATOM lenders are the $USK borrowers. We do not yet know if $USK can be Bought on CEXES.

➡$ATOM sitting in the reserves can be used to buy back the $USK. Thus guaranteeing the value.

Now, there are 2 outcomes ↴

OUTCOME 1

⪢Borrowers return the funds, no problem. They pay a 5% borrowers fee which is distributed among $KUJI stakers and everyone is happy.

OUTCOME 2

⪢$ATOM price drops below the threshold limit for assets. In this case, the Liquidation of $ATOM automatically happens via ORCA and the $ATOM bid must be bought in $USK and some fee is paid to $KUJI stakers. here's an example from the medium article,

"""Lender/borrower Dale has provided $100 of $ATOM collateral at $ATOM’s current price of $8 (so 12.5 $ATOM) and has minted $50 of $USK. Dale would be liquidated if the ratio of his borrowed $USK to provided $ATOM collateral were to drop below 60%, that is if the price of his $ATOM collateral position were to fall below ($50/60%) $83.3. Therefore, $6.664 or lower per $ATOM would trigger the provider’s $ATOM collateral to be liquidated.

Say $ATOM hit $6.664. At this point, liquidation would occur automatically via ORCA. ORCA calculates the price, executes the swap, sends 99% i.e. $82.467 to the $USK market and 1% i.e. $0.833 USK is distributed to all $KUJI stakers. The loan principal is written off, and the same amount of $USK is burnt. Meanwhile, accrued interest is deducted from the $USK returned from ORCA and sent to stakers. Finally, the remaining repayment amount is sent to the borrower’s account.

In this case, 12.5 $ATOM is purchased at varying discounts by $USK positions deposited in the ORCA liquidation queue, and when withdrawn overall 0.5% of that $ATOM (0.0625 $ATOM) is paid as a fee. Across all fees, that’s 2% per liquidation."""

There is a 3rd OUTCOME but that would mean the end of the whole ecosystem not just KUJIRA but COSMOS as well. But after the Terra Luna fiasco, there is nothing that is really "Too big to fail"