Stable Coins: Perhaps they can be a driving force for DeFi

By MikeZillo | Blockchain Insights | 27 May 2021


DeFi (Decentralized Finance) has started to move large volumes of money.

First the various crypto loans started, the AAve project is the example and it has been followed by a variety of projects along the same lines.

After that, financial products have increased, always keeping the traditional finance as reference.

Contrary to what happens with traditional finance, we cannot think that DeFi can give rise to medium-long term investments.

Why?

The answer is quickly given: the volatility of the cryptocurrency price.

At this point we could turn our attention to a stable-coin, so as to cancel out the volatility.

It is not advisable, however to peg it to a legal currency: it would have no underlying, such as Tether and the ugly affair in the US.

As if that were not enough, it would become centralized and therefore censurable, it would be a waste of time and above all it could not coexist with DeFi.

In this regard, one could use a token similar to DexToken that aims to limit volatility through AMMs.

More precisely, however, it is better to leverage the Unit protocol.

Through various decentralized assets, it allows users to obtain immediate liquidity.

The protocol increases lending efficiency by expanding the number of crypto assets available for collateralization, and asset holders can use the value contained in a diverse set of tokens to coin the stable coin $USDP

Let's take a closer look at how it works

USDP is a decentralized stable coin active on the Ethereum blockchain. The Unit protocol incentivizes users to increase or decrease the supply of USDP tokens based on supply and demand and ensures that the value remains equal to $1 USD.

The protocol uses the ERC20 standard, so it is adaptable to any application with just a few lines of code.

The protocol is extremely secure, when it comes to collateral in fact if the debt to collateral ratio exceeds a certain liquidation ratio (LR) for a collateralized debt position (CDP) it will be subject to liquidation.

Here's the key to understanding this protocol: in addition to always being hedged by an underlying, when the market has downturns, positions never go into loss, in fact they are liquidated before that can happen.

The CDPs are constantly monitored by the BOTs which immediately activate the liquidation if the conditions are met.

In case a CDP is activated for liquidation, the protocol proceeds in this way: The collateral is auctioned with a linear decrease in price.

Each participant to the auction can purchase part of the collateral for the current price by paying the USDP debt related to the liquidated CDP.

The debt amounts to the USDP amount borrowed plus the liquidation fee, calculated as a percentage of the CDP amount.

Once the protocol balances the account, the excess is returned to the borrower, the debt is discharged and the fees transferred to the designated pool.

Using the token resulting from this protocol is like using the good old dollar, but in this case we have an underlying!

Yes I know, it is very interesting this view of DeFi, in fact soon we will deepen the UNIT protocol!

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MikeZillo
MikeZillo Verified Member

Daily Trader, Mining Farm Project Manager, Blockchain consultant, Cryptocurrency evangelist. You can find more videos here https://www.youtube.com/channel/UCvyXx6I1C__zmLAYUXNZwQQ? Telegram: @mikezillo


Blockchain Insights
Blockchain Insights

Working as a consultant for Blockchain projects, an operative experience comes by itself. In this Blog I am share Blockchain applications, pros and cons, practical use cases I got in touch with. Of course, a good understanding of the topic will be provided with dedicated contents

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