Stable coins and the possibility to become a new driving force for DeFi
DeFi (decentralized finance) started moving large amounts of money. First, various crypto loans were launched, an example is the AAve project, which was followed by various projects in the same direction. After that, the number of financial products increased, always focusing on traditional finance. But…
A new approach to DeFi
Unlike what happens with traditional finance, we can’t think that DeFi can lead to medium-term investments.
The answer is on the surface: cryptocurrency price volatility.
At this stage, we could turn our attention to a stable coin to neutralize the volatility. However, it is not recommended to link it to a legitimate currency: it will not have a foundation like Tether with an ugly history of the US dollar.
As if that wasn’t enough, it would become centralized and therefore censored, and that would be a waste of time. And above all, it could not co-exist with DeFi.
In this regard, you can use a token similar to DexToken, which aims to limit volatility with AMM. More precisely, however, it is better to use the Unit protocol. Thanks to various decentralized assets, it allows users to instantly receive liquidity.
The protocol improves lending efficiency by expanding the number of crypto assets available for collateral, and asset holders can use the value contained in a diverse set of tokens to create a stable USDP coin.
How it works
USDP is a decentralized stable coin issued on the Ethereum blockchain. The Unit protocol encourages users to increase or decrease the supply of USDP tokens depending on supply and demand, and ensures that their value remains equal to $1.
The protocol uses the ERC20 standard, so it can be adapted to any application with just a few lines of code. The protocol is extremely secure when it comes to collateral, if the debt-to-collateral ratio exceeds a certain liquidation ratio (LR) for a secured debt position (CDP), it is subject to liquidation.
Here’s the key to understanding this protocol: apart from always being hedged by the underlying asset, when the market goes down, the positions never become unprofitable. In fact, they are liquidated before this can happen.
CDPs are constantly monitored by BOT, which will immediately activate liquidation if the conditions are met. In the case of CDP activation for liquidation, the protocol operates as follows: the collateral is auctioned with a linear price reduction. Each bidder can purchase a portion of the collateral at the current price by paying the USDP debt associated with the liquidated CDP.
The amount of debt is the borrowed amount of USDP plus the liquidation fee calculated as a percentage of the CDP amount. As soon as the protocol balances the account, the excess is returned to the borrower, the debt is repaid, and the fees are transferred to the designated pool.
Using the token obtained as a result of this protocol is similar to using the good old dollar, but in this case we already have a basic one.
This view of DeFi is very interesting, and we will soon see its wide application.