ABOND
Our protocol has a mechanism to handle credit and volatility risk through the downside protection built in through our Delta neutral function and dCDS. However, our protocol should have flexibility to manage the liquidity risk as well.
Liquidity is the lifeblood of any economy, and it must flow seamlessly through the financial system. The quick transfer of liquidity within an economy brings great flexibility for the government and central banking infrastructure to implement quick policy actions and manage an expansionary and contractionary economic situations. Historically, monetary policy relied on leverage to generate liquidity, after which it depends on the velocity or speed at which the capital or currency circulates within an economy. Stablecoins are able to achieve this through technology alone. It has been observed that stablecoins have an astonishingly high velocity compared to traditional forms of currency. This high velocity is attributed to several key characteristics:
Fast Settlement: Transactions with stablecoins settle rapidly, reducing the time it takes to complete financial transactions.
Settlement Finality: Once a stablecoin transaction is recorded on a blockchain, it is final and cannot be reversed, providing a higher level of trust and security.
Traceability: Every stablecoin transaction is traceable on a blockchain, ensuring transparency and security.
Public, Open-Source Protocols: Stablecoins are built on open-source protocols, allowing anyone to participate and innovate.
Programmability: Stablecoins are not just a form of currency; they are programmable, making them faster, more efficient, and cost-effective.
The combination of these characteristics gives stablecoins a high natural velocity, creating liquidity without the need for traditional forms of leverage.
While high velocity is advantageous in creating liquidity, it also poses challenges. Stablecoins become “collateral silos” that wall off high-quality liquid assets. Stablecoin deposits are also considered “volatile money deposits,” as they can be withdrawn in large sums within minutes. This liquidity risk could lead to payment system risk if not managed effectively. Therefore, a solution is needed to tackle this issue and ensure the stability of stablecoin issuers.
Autonomint’s Time-Bounded Liquidity Mechanism
At Autonomint, we recognize the liquidity risk faced by stablecoin issuers. In response, we’ve introduced a Time-Bounded Liquidity Mechanism designed to address this challenge while generating yield-bearing time assets for users who borrow or mint stablecoins through our protocol.
Users who hold these time-bound assets have the flexibility to redeem or end the maturity of these assets at predefined regular intervals. Not only does this mechanism mitigate the risk of a mass redemption of stablecoins, but it also contributes to interest rate discovery in the DeFi landscape, essential for building a crypto yield curve.
The Time-Bounded Liquidity Mechanism ensures that our protocol can handle the risk of all stablecoins being redeemed simultaneously, whether due to a prisoner’s dilemma, systemic risks, or volatile market conditions. By introducing time-bound liquidity, users are less likely to hoard stablecoins for immediate redemption, reducing selling pressure and the potential for significant peg deviation. Moreover, we aim to avoid becoming a collateral silo by replicating collateral with our yield-bearing assets, ensuring that it remains accessible and generating regular yields for its holders. ABOND is the asset which will be generated at a premium against collateral deposited and at a discount against USDa deposited. ABOND will be utilised to reduce our reliance on collateral assets volatility and mange liquidity risks. By providing incentives through ABOND to participants we can diversify risk from collateral assets to ABOND.
ABOND Minting
ABOND in enabling time-bounded liquidity - ABOND is minted or issued against collateral deposited. Assuming Ethereum is the collateral so ABOND will be minted at a 20% premium to ETH price to reflect the risk related to ETH volatility in Bond price. This premium will be dynamic in future as per the ETH volatility.
ABOND as Peg management tool - ABOND is minted in the dCDS module whenever the peg falls below $1 to offer an incentive to users to re-deem USDa for ABOND at a premium. This allows to capture any excess supply of USDa in the market and deposit the same in our dCDS module to be utilised for volatility hedging. This will also help stabilise the yields offered to dCDS users as the yields accrued in dCDS module on USDa deposited can be distributed back to dCDS users and USDa will be burned as per the desired downside protection offered to borrowers
The purpose of minting ABOND is three fold
Creating a yield bearing asset with flexible maturities decided by borrowers
Creating a risk management mechanism through a time-bounded liquidity concept which helps insure the protocol against black swan events like redeeming of the stablecoins by everyone at a short duration or similar to bank-run scenario.
Utilisation of ABOND to restore the peg in case other mechanisms are not able to fully restore the peg in a limited time period
Yield Accrual and Redemption:
Borrowers deposit ETH as collateral, which is then split in half, with one part placed in an external protocol to generate yields.
When a borrower repays the borrowed USDa, the ETH price is checked. A 20% discount is applied to half of the collateral ETH to determine the amount of USDa required to back the ABOND.
Example:
During Deposit: ETH = $1000
1 ETH is initially deposited by the borrower as collateral, with 0.5 ETH sent to an external protocol.
During repayment, ETH = $850
Half of the collateral (0.5 ETH) is valued at $425, with a 20% discount reducing it to $340.
$340 (or 340 USDa ) is used to back the ABOND asset, while any remaining returned USDa is burned.
This results in 0.5 ETH valued at $425 being locked in an external protocol, which secures 340 USDa stablecoins. These 340 USDa tokens are then used to mint ABOND tokens in a 4:1 ratio, yielding 80 ABOND tokens. The current price or redemption value of ABOND is set at $4.
Key Considerations:
Users are assured that their ABONDs will always be redeemable for $4 in value, regardless of any fluctuations in the backing ETH's value. Example: If the price of the 0.5 ETH collateral falls to $300, a user can redeem 80 ABOND tokens for a total value commitment of $320.
Users receive 0.5 ETH (valued at $300) and 20 USDa (valued at $20) in return for 80 ABOND tokens, after which these tokens are burned.
If the price of ABOND rises to $5, users can redeem their ABOND tokens for ETH and accrued yields by depositing the equivalent in tokens. For example, if the ABOND price is $5, users need to deposit 64 ABOND tokens to receive the collateral and yields accrued since the deposit.
In the scenario where there is an excess supply of ABOND tokens in the market due to users not redeeming them, a balance is naturally maintained through various mechanisms.
New users returning loans will receive fewer ABOND tokens when ETH prices remain constant and unchanged during the loan period. For instance, if a user initially deposits 1 ETH as collateral and the price remains $1,000, they receive 64 ABOND tokens upon repayment. The balance (e.g., 16 tokens) must be purchased to reach the total of 80 ABOND tokens required for redemption.
Last updated