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UXD Raises $3M to Bring Algorithmic Stablecoins to Solana

www.coindesk.com 02 September 2021 14:19, UTC
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UXD Protocol, an algorithmic stablecoin that automatically generates interest and is minted on the Solana blockchain, has raised $3 million in seed funding led by Multicoin Capital.

UXD, which announced Thursday that it’s launching into testnet phase, is also backed by Alameda Research, Defiance Capital, CMS Holdings, Solana Foundation, Mercurial Finance, Solana founders Anatoly Yakovenko and Raj Gokal and Saber founder Dylan Macalinao.

The $120 billion stablecoin market is beset by opaque asset backing, a reliance on centralized banking and capital inefficient methods, making the quest for a fully decentralized and highly scalable “algocoin” something of a Holy Grail.

Of the current algorithmic stablecoin crop, UXD claims to be the first to be backed by delta-neutral positions, a hedging strategy from portfolio management that uses multiple positions with balancing positive and negative deltas – the degree to which an option is exposed to shifts in the price of the underlying asset.

It’s worth noting that stablecoins that automatically work like a savings account are not a new concept; for instance, Origin launched Origin Dollars, or OUSD, back in September 2020, a stablecoin whose reserves leverage decentralized finance (DeFi) so that balances grow wherever it resides, no staking or account required.

In the case of UXD, the delta neutral position is long one BTC spot position, and short one BTC perpetual swap position, explained UXD Protocol founder Kento Inami.

“If you have a hedged position, and you don’t make or lose any money, that’s basically what a stablecoin does,” he told CoinDesk, adding:

“There’s also a native yield for UXD, because when you create a delta-neutral position, you receive the funding rate from the perpetual swap when the price of the perpetual swap is higher than the spot price. This will go directly to the UXB holder’s wallet, which has never been done before.”

The yield on UXD depends on market conditions, as the funding rate is variable, Inami said. On average, at current market rates, it should be around 10% APY. Meanwhile, the stablecoin can also be used at the same time for liquidity mining or on lending platforms.

A portion of the yield will be reserved to secure the protocol’s insurance fund in the event that derivatives trade at a discount to spot. For example, if a market is in “backwardation,” the insurance fund is used to compensate depositors and keep the position fully hedged. The insurance fund will begin accumulating once the protocol goes fully live in Q4, and after a governance token sale in October or November, said Inami.

Under the hood, the perpetual swap protocol is connected to a decentralized exchange (DEX); to begin with, UDX is working with Mango Markets, the biggest DEX on Solana

“If the derivative DEX fails, then the UXD will not be backed 100%. And so you’re taking on kind of like the counterparty risk of the derivative DEX,” said Inami.

But in view of the shortcomings of many stablecoins in the market, Inami said he was surprised no other project has so far leveraged delta-neutral positions as a way of pegging.

“I have wondered why no one else has tried it,” Inami said. “I guess the implementation has been difficult because it’s only recently that derivative DEXs came out. But with Mango Markets on Solana we can now create this type of stablecoin.”

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