Voting

This AIP will be a simple YES or NO voting

• A Yes vote would approve the proposal and grant the team access to the fund to start this development
• A No vote would require us to go back and come up with a new product proposal

If a yes vote is passed,

• The team will work on a more detailed development timeline
• Progress update will be share with the community on a monthly basis (and more frequent towards the launch)

Product Overview

We propose to create a decentralized stablecoin product on Stacks. Its main feature will be to allow users to use Bitcoin on Stacks as collateral to mint stablecoin. Key value propositions for our stablecoin will be:

• 1.) Capital Efficiency
• 2.) Interest-free (i.e., no borrowing interest)
• 3.) Robust pegging mechanism. (Some information are omitted due to characters limit. Please refer to the forum post for full details: https://forum.alpacafinance.org/t/aip-30-new-product-proposal/883/1)

Product Details

Users will be able to deposit Bitcoin as collateral to take out a loan (i.e., mint stablecoin), interest-free. The stablecoin is backed by users’ deposited collateral, stability pool, and the collective borrowers as last resort.

Interest-Free Borrowing

We will charge a one-time loan origination fee to users when they borrow stablecoin. Only paying a one-time loan origination fee is one of the killer features in our opinion as borrowers are not susceptible to interest rate risk during the lifetime of the loan.

This is especially true during a bull market where the demand for leverage goes up significantly and there could be periods where the borrowing interest rate spikes or remains stubbornly high for a period of time.

How is peg achieved?

The issue with the original AUSD:

AUSD's lack of adoption was mainly due to its ability to hold the $1 peg. While the AUSD system was safe (i.e., overcollateralized and fully backed at all time), it couldn’t hold peg because there was no robust direct redemption framework available.

While we had a stable swap module in place, it required a stablecoin treasury to be built up first (i.e., someone needs to first mint AUSD via a stable swap module) before it can be used for redemption (AUSD -> BUSD.) In this scenario, arbitrageurs were reluctant to step in and buy AUSD when it was < $1, because they did not know how long they had to hold onto AUSD before it returned to peg.

A way to solve this problem is to allow for a direct redemption of the stablecoin for an underlying asset. One way this can be achieved is by building up a treasury to be used for direct redemption. One example of this would be FEI where they raised a massive amount of treasury to allow for a direct redemption from FEI -> USD. However, building up a large enough treasury is no easy feat, and has only been achieved through a fund raise in conjunction with token sales.

How will we keep the new stablecoin's peg?

We propose a way for direct redemption via the ability to close out debt positions by anyone. Specifically, anyone who holds our stablecoin (not just the debt position owner) will be able to redeem it at $1 worth of collateral, net of fee. This means an arbitrageur can step in anytime the stablecoin price < $1 - fee, and would keep our stablecoin hard pegged to that price.

In order to determine which positions will be (partially) closed out when the redemptions occur, our smart contract will sort all existing positions by their risk level (collateralized ratio) and close the positions with the highest risks first. This method also has the benefits of reducing the overall risk level of the protocol.

For debt holders, if their positions are closed, they will forfeit the value of their collateral equivalent to the amount of stablecoins redeemed against their positions. In exchange, they do not have to return the stablecoins. Debt position owners can lower the risks by either partially paying back the debt or adding additional collateral to their positions to prevent it from being redeemed againsts.

Conversely, if the price of stablecoin is > $1, an arbitrager can deposit collateral, mint stablecoin, and sell in the open market.

How does Stability Pool work?

Assets in the stability pool are used to pay back debt for liquidated positions. When a liquidation happens, stablecoin in the stability pool is used to close the debt position (i.e., burn) and the position’s collateral is transferred to the stability pool. Over time, the collateral assets (e.g., BTC) in the stability pool will grow and stableoin will decrease, as liquidations happen.

Instead of requiring technical sophisticated liquidators in the past, this model will allow users of all technical levels to participate and support the protocol by becoming a liquidator. Stability pool depositors will earn a liquidation fee which is the source of yields.

Resources and Timeline

• We estimate that the development effort will take ~3 months to complete and we are requesting a budget of $150k USD, which will be funded from the collected fees from BUSD conversion (AIP-29). A more detailed timeline and development plan will be provided if this initiative gains support from the community.

• If actual spend is less than the allocated amount, the remaining budget will be released back to be used for other initiatives as decided by the Governance process.

• We will need additional budget for launch incentives & marketing at the time of launch, which could come from a combination of Warchest and other sources.