A Non-Collateralised Stablecoin?? Don’t be NYV!
Introduction
What Is NYV Money
NYV (Naive) Money was started at #HackMoney as a system aiming to enable the bootstrapping of new stablecoins, pegged to any asset imaginable, by leveraging the network effects of more established stablecoins. We do this by creating our own brand of tokens, NYV Assets, which aim to hold their respective pegs by holding liquidity on UniswapV2 with a large variety of stablecoins sharing that peg (source assets). We encourage the addition of liquidity via a depositor system that offers arbitrage and interest opportunities to investors. NYV Money is being developed with the hopes of enabling an international DeFi economy.
This system is meant to serve as a decentralised analogue to currency board authorities existing in places such as Hong Kong — where banks can issue/redeem Hong Kong Dollars for a fixed price in USD. Arbitrage with the market rate being the driving factor in the banks’ decision to do so. This depositor system is beneficial to small niche stablecoins, as it means they can outsource part of their stability mechanism (market making), and can do this without their users having to pay fees to maintain stability.
NYV assets of classes that have less liquidity on chain (e.g. Euros, gold, Indian Rupees) benefit from direct conversion to NYV USD (N$) via the NYV Exchange. The NYV Exchange uses Chainlink’s Reference Data Feeds to guarantee that users get no worse than the traditional market rate. This gives NYV Assets a value proposition that other stablecoins do not necessarily have. Not only does it serve as reinforcement for value of less liquid asset classes, it also enables remittance in ways which have lower barriers to entry for local operators. For example, e.g. one can send can send Dai to Brazil and have their relative exchange into BRL via the following route : Dai → NYV$ → NYVR$ → Local Bank Stablecoin (I found BRZ after a quick search).
Dai → NYV-$ → NYV Exchange → NYV-R$ → BRZ
It’s called it NYV (naive) because we build on top of some naive assumptions. Bonus points if you can guess what they are and start a debate in the comments.
Why Build It
At Bloxis, for example, we are trying to facilitate crypto loans as a means to fund low risk IRL investments. Whilst the investment itself may be low risk; the foreign exchange risk due to these opportunities not being in the US, is a serious damper to using DeFi for this use case. This gives us a handful of options, either use a CeFi provider (eww gross) or buy call/put options on traditional markets to redeem USD at the end of the investment period.
Likewise, I keep recommending stablecoin lending as an investment to my friends here in London. However, if they go ahead, and the pound rises, imma look like an idiot — as they would have got a higher return doing nothing.
DeFi hedging protocols such as Hegic and Opyn exist, but currently only provide insurance for Ether volatility. This led me to originally pursue the idea of on-chain foreign exchange insurance, and began conducting market research — See my tweet below.
However, having developed an understanding for how black-scholes worked, I realised that rates set by leading industry formulas set costs too high for a large variety of use cases. Especially the use case of borrowing to develop projects in LEDCs, where performance of local currencies is poor compared to the US Dollar. Debt is crippling developing economies, and it’s often because the debt is denominated in stronger international currencies (namely Dollars and Renminbi).
However, if we could collateralise Ether to produce Sri Lankan Rupees, for example, we could help Sri Lanka move away from being in the epicenter of China and The USA’s economic influence war.
I, for one, would love to use DeFi to end modern day colonialism.
The remittance industry is a huge battleground for Fintech in general. If we can make it economical to use DeFi for remittance, the composability aspect has the potential to enable us to win long term. Money streaming remittance with real-time currency swap, anyone?
Firms such as RareBirds are aiming to empower immigrant communities living in developed economies to fund businesses and projects back home — using DeFi. Cross border investment (as opposed to donations) is a huge hassle, especially for individuals — so there’s definitely market validation.
Where are We At?
Well, NYV.Money is currently I and not we. I need to fix this by finding the right people to help me validate and develop the protocol. There is a “working” POC on Rinkeby, but a lot of work needs to be done before we can take this to mainnet. I have done a ton of research, as you can see by reading on!
If you feel you’re from the right background hit me up on Twitter. This could be the start of something lit. Likewise, if you have any feedback after reading this, please feel free to comment here or DM me!
If you want a little peak of what I’ve done so far, feel free to watch the HackMoney explainer video I made — below. Or view the repo.
Some DeFi Primer
Keepers in Stablecoin Markets
All stablecoins have their value to a certain extent maintained by “Keepers”, bots which perform mutually beneficial trading activities — arbitrage in particular. For a dollar stablecoin, this arbitrage is quite straightforward, buy below $1, sell above $1 This is simple to implement as a dollar is a dollar (unless you’re Tether, in which case it’s actually $0.74 haha).
Liquidity drives the success of markets. In Uniswap adding liquidity is literally as simple as adding liquidity to a pool. Order book based markets, however, require market makers — participants which buy and sell simultaneously. Market makers profit off the price difference between what they buy and sell at. This is known as the bid-ask spread, if you trade actively on exchanges you already know this.
Arbitrage and market maker keepers are essential to maintaining the health of Dai’s peg, they only exist because they’re profitable. However, if a bot fails, it could temporarily break the peg. This effect is exacerbated when market volumes are low, i.e. liquidity is low.
Lines of Credit
Lines of credit (LOCs) allow you to borrow and repay debt freely — unlike loans which have fixed terms. Example of LOCs you probably have access to are credit cards and overdrafts. These services often have high interest rates, namely because they are unsecured. Secured LOCs such as Equity LOCs (ELOCs), which allow people like Bezos to use their shares as collateral, are much cheaper to repay.
In DeFi, we too have lines of credit. They’re called MakerDAO, Aave, Synthetix, Compound etc. They allow you to borrow up to a given percentage value of your savings — meaning you can spend Dai now without having a Pizza Day experience with your Ether. These services charge interest. In theory, UMA could be used to create interest free LOCs, however, a lack of liquidity and price stability measures would be barriers.
Stablecoins which function as LOCs for their issuers have the benefit of over-collateralisation — meaning they’re at least worth their face value. This creates a price floor.
Stablecoin Savings
AMMs such as Aave & Compound, enable users to gain interest on deposits. These deposited assets are then lent to other users. MakerDAO also offers a savings feature to incentivise users to park their supply.
Manipulating Supply & Demand
Supply and demand curves map the relationship between buyers and sellers in a market, given the price of a good and the quantity demanded/supplied. The key assumption in most cases is that demanded quantity increases as price falls, while the opposite happens for suppliers. The point where supply and demand converge is the equilibrium. Dollar stablecoins and their keepers rely on the equilibrium price somehow being $1.
For stablecoins, we simplify quantity to mean total amount in circulation. When the price falls for a significant period of time, algorithmic stablecoins often employ economic trickery to push the demand and supply functions back into a position where the equilibrium price is $1. An example of this is the stability fee imposed by MakerDao on vault holders. The stability fee is effectively an interest rate on the crypto-asset LOC service offered by Maker. By increasing the fee when Dai is underperforming, MakerDao can incentivise the reduction of supply by making it more expensive to hold vault positions. Likewise, if Dai is above its peg we can lower fees, to encourage more borrowing.
With the Dai Saving Rate (DSR), we are now able to manipulate the demand side — by incentivising people to buy Dai to get interest in the future. Make the DSR higher, demand quantities rise, lower it and they fall. Note, however, that the DSR must be lower than the stability fee — otherwise MakerDAO would be a perpetual money machine (money printer go brr).
Bonding Curve Exchanges
A bonding curve describes the relationship between the price of a token and its supply. Uniswap is powered by a bonding curve called the “constant product formula”. All trades on Uniswap must satisfy the following condition : x*y == k after the trade, prior to fees — where x is the total amount of tokenA in a pool, pre-trade; and y being the total amount of tokenB, pre-trade.
Other bonding curve driven exchanges include curve.fi, a tool for swapping stablecoins. Bonding curve exchanges allow instant, same transaction swaps because the liquidity is always there. However, for larger orders, slippage becomes a huge factor for buyer and seller — this price impact is the cost one pays for instant transactions.
Exercise : Liquidity Drives Stability
Go to Stablecoin Index and compare the volatility of various stablecoins compared to their daily trade volume and market cap.
NYV Depositors
Introduction
Unlike the majority of algorithmic stablecoins designs, which rely on being overcollateralised and manipulating LOC parameters — NYV intends to heavily incentivise keepers to operate directly on Uniswap V2. In addition, NYV doesn’t assess prices against the entire market, but individually — on a source asset / NYV Asset pair basis.
Our NYV assets maintain incentivised liquidity with a large number of curated source assets in the same class, via depositor contracts. These depositors create an incentive to provide liquidity and correct peg deviations, between NYV Asset / source asset pairs.
Our system is designed to be highly modular, we could link as many source assets to a given NYV Asset as we wish. In addition, we can add many, complementing depositors to each pair. As well as giving NYV Assets value, this approach bootstraps liquidity for less known stable assets.
Look above : this is all a depositor is. A profit generating box, that invests directly into Uniswap. Of course, its design must align incentive provision with system stability. The easiest way to use deposited capital is to mint NYV Asset alongside it — to add liquidity to the Uniswap pair.
Arbitrage Depositor
The first potential type of depositor I will discuss is a “arbitrage depositor”. Please note that in this model, depositors don’t target a price, but a target ratio (source assets in pool / NYV Assets in pool). What we are targeting is that : a keeper can swap up to a given proportion of the NYV Asset liquidity reserves, for an equal or greater amount of source asset — excluding fees. I’ll spare the derivation, but the target ratio = 1 + givenProportion. The target ratio is also the marginal price for the swap.
Having a target above 1 means that, in effect, we enable small trades from NYV Assets to source assets to trade for a better rate than 1:1.
The SimpleDepositor.sol contract I made for #HackMoney did this in the most simple way: provided the source asset / NYV Asset ratio is above a threshold ratio (> target ratio), the keeper can turn their source asset into NYV asset 1:1 — investing the deposit into Uniswap. The issue, however, is that keepers could easily exploit this — via immediately selling the NYV Asset. If the ratio is above 1:1 when the keeper sells their minted assets, they would receive more than they put in. However, if this action keeps the ratio within the yellow zone, as shown above — this is fine. The main risk is sudden drops in price triggering market panic. This is especially true as keepers will be competing for opportunities.
The saving grace of SimpleDepositor.sol is that it only allows deposits to take place when the threshold ratio is exceeded. This means that in order to use SimpleDepositor immediately after using it and selling your minted NYV Asset, you need to bring the reserve ratio back to the threshold. Assuming the ratio when calling the depositor was equal to the threshold — this means selling more source asset than you could have gained. This means there is a limit to profitability for this kind of arbitrage on Uniswap. It is also the reason SimpleDepositor.sol uses reserve ratios as an oracle, instead of a special oracle contract — there is a non-zero cost to exploit the depositor. Assuming all keepers want to do flash arbitrage, setting a maximum deposit that keeps reserve ratios in the yellow zone makes sense.
However, non-flash arbitrage strategies using would work quite differently. Deposit, wait, sell for the highest price possible. This depositor could also be useful as a market maker for market makers in order book dexes. Keepers trying to maximise NYV Asset holdings would use different strategies entirely. This is all a work in progress, if you have any good ideas please tell me!
Liquidity Lending Depositor
An example of a design that could work is a “liquidity lending depositor”. In this set up, the lender provides a source asset deposit, this deposit is combined with newly minted NYVAsset to add liquidity to Uniswap. Unlike adding directly to uniswap, however, the keeper of the depositor is effectively providing double the liquidity. The keeper would effectively get a wrapped pool token, that they could redeem for the full number of source and NYV asset units that token represents — minus the NYV asset up to the value put in by the depositor contract. This means that the keeper can effectively provide liquidity with 2x leverage. In return, keepers benefit us by making the peg require more capital to break in the future. This would be available as an option while reserve ratios are above the target.
NYV Governance
Many processes regarding depositors and the exchange are possible to entirely automate — see Liquity and Reflexer’s whitepapers for more information. Making good decisions as to which source assets to add and which markets NYV should enter requires some human judgement. Having a centralised board make decisions seems fundamentally against the spirit of decentralisation — thus a DAO would be a good way forward. I’m not too well versed on how to design one properly, so DM if you could help out.
Having a platform token would be highly beneficial, as it would give us more tools to manage the peg, namely a last resort source of backing — much like Maker.
The DAO would manage the NYV Registry, depositors, exchange and NYV Assets; as well a significant proportion of the platform’s total liquidity — either directly or via depositors. The NYV Registry will simply be an updateable mapping of hashes to contract addresses. Strings following an agreed upon semantic format such as “NYVUSD_USDC_LIQUIDITY_LENDER” would hashed to form IDs.
Updating depositors for example would be multiple step processes involving : removing mint permission for the old depositor; updating the registry; adding mint permission for the new depositor; deciding how to manage the liquidity of the old depositor etc. Figuring out protocol for such events early on will be crucial to the success of the platform.
NYV Exchange
Having a built in exchange enables us to efficiently tie together the greater family of NYV Assets, and incentivise price corrective arbitrage — especially needed for less traded asset types. The NYV Exchange works by directing a NYV Asset A → NYV Asset B trade via an intermediate asset on Uniswap, and then minting the balance between the output and the price collected from Chainlink. This intermediate asset would be the platform token.
This enables us to simulate infinite liquidity. Using an intermediate asset, instead of just minting and burning, incentivises trading routes with the wider ERC-20/777 economy. It also creates trade volume for the platform token, which is essential for being able to use it as a tool to regulate NYV Asset value. It also enables simplified keeper design, as the majority of arbitrage work will be between NYV Assets and the NYV Platform Token.
Recovering Pegs
In the depositor section we did not cover the red or green zones at all, this is because we will need more tools in our arsenal to protect from these situations. In theory, the arbitrage opportunities from being tied to a large variety of source assets should be enough to protect NYV assets from deviating from its peg. Likewise, if one NYV Asset e.g NYV$ falls below their peg, but the others are doing well, dollar coin holders would benefit from buying NYV$ to convert into e.g. NYV£ to do arbitrage. Peg correction when NYV Assets are above their peg is quite simple — keepers will simply use depositors to leverage arbitrage.
Due to the way NYV is designed, all corrective measures when below the peg are demand side, however, if a NYV Asset is stuck in the red zone we have a handful of solutions. These include: removing liquidity and selling source assets ; and, selling platform tokens to burn NYV Assets. Reducing liquidity would only work if we can be confident that the fall in value is decelerating or if the value is rising towards the peg again. This is because reducing liquidity increases the amount that a trade of given absolute size will change the marginal price.
Creating an insurance market on the peg seems like an intuitive solution also — we mint NYV Asset to investors who can lock source assets that we could use if the peg fails. Selling the insurance collateral would enable us to work to recover a peg without lowering liquidity. In addition, facilitating DeFi insurance markets for our end users is a great way to build confidence in our platform.
In addition, we could manipulate the demand curve by creating a savings rate system much like the DSR — I need to run the numbers on this. However, given that part of my original goal was to give Europeans DeFi savings options with lowered FX risk, this seems like a good way forward.
Minting platform tokens should be seen as a method of last resort, the goal of which is to encourage underperforming pairs to correct. The best way to do this would be to have a depositor of sorts, that takes source asset; mints platform tokens to sell for NYVAsset to burn; and then obtains platform token for the keeper — using the Uniswap route : Source Asset → NYV Asset → Platform Token.
This also has the effect of giving holders of better performing tokens more power over the platform, as they would gain more platform tokens. This in turn would hopefully regulate the quality of platform governance.
I am still researching how to best implement these features, and trying to model how they would affect the market. If you know anything about this and are interested, please DM me.
Rewarding Platform Token Holders
It’s important to encourage investors to hold platform tokens, especially since we rely on selling them when the NYV Assets fall below their pegs. The best way to do this is to continually reduce the supply when things are going well. Burning tokens is a well known crypto-economic tool, by reducing supply, you increase value — much like with stock buybacks. We could actively do this by using a percentage of deposit capital to buy platform tokens on Uniswap. We could also do it by burning a proportion of the platform token obtained during the NYV Exchange process.
Ideal Source Assets
Tokens which enable real world financial use cases are ideal. Lines of credit and fiat on/off-ramps are my favourite use cases for source assets.
Collateralised synthetic token platforms, such as UMA, enable people to theoretically create stablecoin lending facilities backed by any asset. The problem is incentivising liquidity, as assets are worth nothing if you can’t trade them for what you need. This is where NYV comes in.
Many platforms within DeFi charge fees for borrowing, interest rates in Aave and Compound etc, stability fees in MakerDAO. By giving liquidity to new synthetic assets which do not charge fees, we can greatly reduce the cost of collateralised credit. Liquity protocol have picked up on this with their proposed stablecoin. Likewise, UMA doesn’t charge stability fees.
Cheap credit in any currency imaginable could enable Ether holders to go out into the real world and invest in much needed projects. This would especially benefit LEDCs, as investors could put money without worrying about foreign exchange risk. In such a scenario, an investor could buy Ether and use it to create a facility to borrow an LEDC currency. They would do this with the confidence that Ether is likely to appreciate against the LEDC currency, and that the project is likely to profit in local currency terms.
This would be especially beneficial in Africa where interest rates are sky high. Africa is a high growth market and there’s no doubt a good investment there will reap insane dividends in the coming decades.
Becoming real-world financiers would really bring positive awareness to DeFi. However, to do this our currencies must be able to interface with the real world. One way would be to encourage stablecoins to be used for day to day transactions. However, a more practical route may be to link fiat to blockchains, we already know this works — look at Tether & USDC.
Conclusion
NYV.Money is an upcoming project aiming to enable an international DeFi economy. We do this by manipulating Uniswap liquidity pools, in ways which incentivise keepers. Through bootstrapping liquidity we effectively lower the barrier to entry for niche stablecoin players. It’s really early days, but I see something promising here and wanted to share it. If you want to give feedback or be a part of this just lmk — either through here or Twitter.
Also, don’t mind me shilling : if you want to use DeFi lines of credit to fund non US Dollar projects RIGHT NOW, hit me up! Bloxis is working on that right now! Reach out via the company site or just DM me on Twitter.
