How to make money with decentralized stablecoins
High volatility is a characteristic feature of cryptocurrencies. The sharp fluctuations in the price of Bitcoin or Ethereum can provide a crypto trader with a quick profit. But high volatility makes cryptocurrencies too risky to store savings and inconvenient for everyday settlements. These problems pushed the crypto community to create a new type of cryptocurrency with low volatility – stablecoins.
Stablecoin is a trading instrument that is resistant to sharp fluctuations in the exchange rate. The stablecoin price is tied to one or several assets: national currency, cryptocurrency, stock exchange index, raw materials.
Large stablecoin projects offer coins tied to the US dollar: for example, USDT from Tether or TUSD from TrueUSD. Such stablecoins are provided with national currency, which is kept by a centralized organization, most often a depository bank.
But centralized stablecoins take over the typical problems of centralized structures: vulnerability to attacks and the need to trust a third party.
An alternative to centralized coins is stablecoins with cryptocurrency collateral. In this review, we will talk about one of these solutions – the Neutrino decentralized stablecoin protocol.
What is Neutrino
Neutrino is a protocol for creating stablecoins. It describes the rules to which an issued asset must comply. The same task is performed by the ERC20 and ERC721 standards on the Ethereum blockchain.
The price of a Neutrino coin can be tied to the price of an asset like the US dollar, Bitcoin, or the S&P 500 index. The algorithm in the Neutrino smart contract ensures that the price of the stablecoin is equal to the price of the asset to which it is linked. One of the review sections is devoted to the price stabilization mechanism in Neutrino.
The Neutrino protocol is built on the Waves blockchain and uses WAVES tokens to provide Neutrino stablecoins. Security tokens and stablecoin operation rules are stored in a smart contract.
One of the features of Neutrino is the ability to freeze stablecoin to receive a mining reward.
Neutrino launched in beta. The first implementation of the protocol is the stablecoin USD-N. The coin can be used to pay in decentralized Waves applications. USD-N is available on the Waves.Exchange and Tidex exchanges.
Why stablecoins are needed on Neutrino
Users can use Neutrino stablecoins as:
- Tool for storing savings. Neutrino tokens can be frozen to receive passive mining income. Due to the low volatility of coins, savings will not depreciate overnight.
- Tool for trading. In Neutrino dApp, any asset issued based on the Neutrino protocol (currently USD-N dollar neutrino) can be exchanged at a fixed price. If the coin rate in the market changes, traders will be able to earn on the price difference.
- Means of payment. Neutrino-stablecoin USD-N is already used for payments in applications based on Waves Platform, including DAO and WaveFlow.
How is the Neutrino stablecoin USD-N
USD-N – Neutrino stablecoin pegged to the US dollar. This is the first coin based on the Neutrino protocol.
In the Waves blockchain, a smart contract has been published, in which the stablecoin operation algorithm is recorded. This smart contract is responsible for issuing USD-N coins.
Collateral is the key to stability of the stablecoin exchange rate. To issue one USD-N coin, you need to block $ 1 WAVES tokens in the smart contract. These tokens fall into the stablecoin security fund, which is stored in a smart contract.
Thanks to the funds in the collateral fund, one USD-N coin can always be sold to a Neutrino smart contract for $ 1 in WAVES tokens.
At the same time, USD-N and WAVES coins are traded on crypto-exchanges, so the market price of these assets can change under the influence of supply and demand. The objective of the Neutrino algorithm is to reduce USD-N price fluctuations and maintain it at $ 1. Representatives of the project noted that while the maximum fluctuations of the coin rate reached $ 0.05 and were short-term.
Oracles in Neutrino
To receive information from the outside world, Neutrino uses a system of external oracles. The oracle is a data source from outside the blockchain, like a smart contract in another blockchain, exchange API or trusted server.
In the final specification, the protocol implies three types of oracles:
- Price Oracles provide a smart contract with a summary of the price of the stablecoin and asset in collateral.
- Emergency Oracles stop a smart contract if the price of an asset in collateral drops sharply.
- Pacemaker Oracles are bots that initiate transactions, pay commissions, and process complex calculations. Such oracles are needed only in blockchains with limited functionality of smart contracts.
There are 5 price oracles and an oracle metronome currently working for USD-N. The list of active oracles is formed by the project stakeholders. During the alpha test, this role is played by the project developers. In subsequent iterations of the platform, the list of oracles will be decentralized through the so-called NEP (Neutrino Enhancement Proposal) initiative.
The role of emergency oracles in the early stages of development is replaced by keys held by developers and stakeholders who can update and suspend a smart contract. After the launch of the emergency oracles, this part of the platform will also be decentralized.
Neutrino dApp is a user interface for working with the Neutrino protocol.
The main function of the application is to process user requests for the release of new coins or the release of WAVES tokens from the collateral pool.
Neutrino dApp also displays up-to-date USD-N information:
- Smart contract address;
- Stablecoin ID in the Waves blockchain;
- Number of coins in circulation; current WAVES rate to the US dollar.
In addition, the application has a separate menu for staking coins. There you can set the size of the steak, find out the average annual yield (annual yield) and see the rewards for mining, but more on that below.
To log in to Neutrino dApp, you need an account in the Waves Keeper extension. Such an account is suitable for all applications on the Waves blockchain.
Staking at Neutrino
Neutrino stablecoin holders can freeze part of their coins to receive a mining reward.
The Waves blockchain uses the Leased-Proof-of-Stake (LPoS) algorithm to form new blocks. For an LPoS miner, the chances of receiving a block reward depend on the size of the steak – the amount of tokens that the miner froze in the smart contract as a guarantee. The user can lend his tokens to the miner. So the miner will have more chances to add a new block, and the user will get back not only their tokens, but also part of the mining reward.
WAVES tokens in the stablecoin support fund are automatically leased to the Neutrino mining node. The node transfers the mining reward in WAVES tokens to the Neutrino smart contract, and the smart contract issues one USD-N coin for every $ 1 reward. Once a week, the reward is distributed among the holders of USD-N.
The holder of Neutrino is entitled to a share in the mining award. The share will depend on his steak and the annual income from the delivery of tokens for rent. The annual income indicator is set by the system and depends on Waves capitalization in collateral.
The exact amount of remuneration cannot be calculated in advance, therefore, Neutrino dApp displays an indicator of the expected annual income from staking. With an indicator of 69.9% and a steak of 1000 USD-N, the expected annual income is 699 USD-N.
How the price of Neutrino is stabilized by the example of USD-N
Neutrino provides several price control mechanisms for fluctuations in USD-N rates or WAVES tokens.
If the price of USD-N is above $ 1
If the market price of stablecoin rises above $ 1, the tasks of the Neutrino algorithm:
- Add WAVES to the collateral fund.
- Increase the supply of USD-N on exchanges.
While the market price of stablecoin is overvalued, it is beneficial for traders to issue it at a fixed rate using a smart contract, and then sell it on the exchange. To generate coins, traders transfer WAVES to a collateral fund.
As a result, the number of WAVES tokens in collateral and the USD-N offer on exchanges will increase, and the stablecoin price will return to $ 1.
If the price of USD-N is below $ 1
If the price of USD-N fell below $ 1, the tasks of the algorithm:
- Release WAVES tokens from the collateral fund.
- Increase demand for USD-N on exchanges.
In such circumstances, the trader will make a profit if he buys a stablecoin in the market at a lower rate and exchanges it for $ 1 in WAVES using a Neutrino smart contract.
The number of WAVES in collateral will decrease, demand for USD-N in the market will increase, and the price of the coin will return to normal.
If the WAVES / USD rate has risen
If WAVES rises in price, the capitalization of tokens in collateral may exceed the capitalization of stablecoin.
To stabilize the price, the Neutrino algorithm needs to issue new USD-N coins. If the capitalization of WAVES in the collateral fund is $ 100 more than the capitalization of the stablecoin, the algorithm will issue 100 coins.
In the event of a surplus, available funds are used to repay bonds. And if there are no bonds orders in the list, they are saved as a reserve.
If the WAVES / USD rate has fallen
If the WAVES price drops, the smart contract is not enough to secure all the USD-N coins.
In this case, the algorithm will start issuing special USD-NB bond tokens and selling them for stablecoins at an open auction in the Neutrino dApp application. Traders will be able to offer their price, for example, 9 USD-N for 10 USD-NB.
When the capitalization of WAVES equals the capitalization of stablecoin, each USD-NB token can be exchanged for one USD-N. This mechanism motivates traders to buy USD-NB through an in-app auction.
After finalizing the beta of the protocol and the Neutrino dApp application, the Neutrino team will transfer project management to the community. Upcoming versions will be supported and updated by community members and large USD-N stakers.
According to the developers, the project community will develop other implementation of stablecoins based on Neutrino. Participants in the social networks of the project are already discussing the prospects of launching Neutrino stablecoins for euro and gold.