Standard Protocol is a digital DeFi solution that is specifically designed to ensure the stability of algorithmic stablecoins. The project has been making waves through the spaces the past couple of weeks, but we felt that a proper introduction to how the world got the level of stablecoins and specifically algorithmic stablecoins is important here.
How Did We Get Here?
The rise of Decentralized Finance (DeFi) has led to several developments in technology and finance in order to achieve its ultimate goal. With new cryptocurrencies being developed rapidly, more people are riding on the wave and want to own a few of these digital assets.
These digital currencies come with several advantages from the standpoint of the average user. First among them is the fact that the users want to make a profit by holding these assets and eventually trading them to make a profit.
Another reason is the over-centralised nature of traditional currencies. People want a decentralized financial sector with no influence from the government and zero centralised price regulation. Cryptocurrencies and other digital assets are just the right answer to these needs.
However, these cryptocurrencies and digital assets are highly volatile.
The volatility and rapid market movements of these currencies have led to people making astronomical gains overnight on one side of the coin and, on the flip side, some people have unfortunately lost a substantial part of their investments.
This volatility is the main reason why some retailers and other businesses have consistently refused to allow goods to be bought in some cryptocurrencies. Though, the CEO of Tesla, Elon Musk recently announced that Tesla cars can be paid for in cryptocurrency. To solve this volatility issue, stablecoins were developed.
The Solution to Volatility
Stablecoins were developed to solve the volatility issues of traditional crypto coins. Stablecoins offer price stability because their value is backed by an external reserve. The reserve can include other currencies such as the US Dollar or even commodities such as gold or oil. They operate in two main ways to reduce price volatility.
First of all, the first stablecoins were collateral backed which offered it stability either by a fiat currency or by a commodity. Secondly, with the evolving technology around DeFi, stablecoins achieve price stability through algorithms. This is a bit more complex than a simple stablecoin backed by the US dollar for example.
Algorithm backed coins also ensure price stability with specialised algorithms and smart contracts which reduces and increases the number of tokens in circulation depending on the market price. Stablecoins came to bridge the gap between traditional currencies and cryptocurrencies.
The main aim of reducing price volatility has been achieved and modern cryptocurrencies are now striving to achieve this stability. Stablecoins boomed in recent years with their market capitalisation increasing slightly over 200% in 2020. Examples of stablecoins include; Tether (USDT), True (TUSD), Paxos Standard (Pax Gold).
Now, the algorithmic stablecoins is what Standard Protocol is all about. Standard Protocol offers a whole new generation of how algorithm stablecoins operate thereby solving the problems of the first generation.
What are Algorithmic Stablecoins?
Algorithmic stablecoins use a mathematical algorithm to control the peg with a currency which in most cases is the US dollar. For example, when the value of the stablecoin increases above the price of the dollar the smart contract will produce more coins in circulation so that the price of the stablecoin would reduce to be even with the price of a dollar. The other way around, when the price falls below a dollar, the smart contract automatically reduces the number of coins in circulation in order to raise the price to be even with the price of a dollar.
There are three main types of algorithmic stablecoins. They include; rebase, partial collateral and seigniorage share.
The popular rebase model entails that there is no limited or fixed supply of stablecoin in the market. The supply is constantly changing depending on the changes in the market price in order to bring the price to par with the reserve currency. An example is where the value of the coin increases by 5%. Holders of the coin would then get an additional 5% increase in their number of coins to reduce the value of the coin and vice versa.
The second sort of algorithmic stablecoin, the partial collateral method is a new development in algorithmic stablecoins. It combines both the algorithm method and the collateral backing method. It normally operates a two token system. Although it makes use of collateralization, it also tries to limit its dependence while tightening the peg and enduring stability so that the purpose of its algorithmic nature won’t be defeated. On the other hand, its design is purely based on algorithms The first of this coin to be developed was Frax. It’s a rather complex system that requires some extra digging to fully grasp.
The latter, the seigniorage model works with both coins and shares. Coins are the stablecoins themselves while shares are used to increase or decrease the supply of shares in circulation when the price is above or below the peg. We kindly invite you to read through this article to fully understand the seigniorage model.
Standard Technology is the first collateralized rebasable stablecoin protocol. The aim is to reduce the problems relating to volatility in the previous generations. It does so by acting as a completely decentralized reserve bank that issues collateralized stablecoins with a value of a dollar flexible supply with the same system as a rebase mechanism.
Unlike the first-generation algorithmic stablecoins that operate with absolutely no collateralized assets, Standard Protocol offers collateralized rebasable stablecoin and regulates digital assets within its vault. The first generation traditional algorithmic stablecoins have the following problems;
Difficult Auction Method
The auction mechanisms of these coins are really difficult and very frustrating. It is often difficult to track. Even the process of entry proves to be a slow process of sharp plutocracy. Only high skilled developers often participate in these auctions.
For a technology that came onboard to stop price volatility, these stablecoins have also had their fair share of price instability. This is as a result of the fact that the coins are not collateralized and as such, over expansion is imminent. There is also a lack of sustainable use cases for interoperability.
Centralization of Current Oracles
The oracles are over-centralised and it lacks the proper incentives in its operational ecosystem to distribute them. There is a lack of a reward system for current Oracle providers and most of the current providers of the oracles are controlled by both validators and the company which leads to manipulation.
In addition to these, these stablecoins also deal with other challenges which include censorship vulnerability because the issuing entity is able to blacklist the coins at any time. Furthermore, some of these coins like Tether are accused of not being entirely about their collateralization of USDT and are actually under collateralized. This whole back and forth leads to distrust in the whole system.
Finally, there are also centralization issues even crypto-collateralized algorithmic stablecoins are not an exception as coins such as MakerDAO have allowed users to mint DAI with USDC.
How Would The New Age Of Standard Protocol Solve These Problems?
Standard Protocol came on board with new technology and adaptations to solve all the above-mentioned problems and to create a better approach to algorithmic stablecoins. Due to its rebasable protocol, it will be at the forefront for drastic change. It operates on a Polkadot ecosystem which introduces a new paradigm for liquidity aggregation. Standard protocol solves the problem through the following ways;
Increased Blocked Rewards
In the previous generation, oracle providers lacked proper incentives which led to the centralization of the system. Standard Protocol goes ahead to reward oracle providers with a juicy offer of 20% of the total blocks.
Oracles generate synthetic assets from a stablecoin meter which makes it very important to the system. Oracle providers are chosen through a phragem algorithm and they don’t pay to participate. To prevent many oracle transactions from taking up one block, the number of transactions that can be done on a certain block is limited.
The Adoption of Automated Market Makers
Automated Market Makers being deployed by standard protocol has created an arbitrage opportunity. The standard protocol developed its unique automated market maker where liquidated assets in the pool are used to create vast opportunities for arbitrage. Arbitrage is a type of trading which involves the trading which involves the exploitation of the difference of prices of assets in two or more markets.
They are very present in automated market makers where the price in the liquidity pool is influenced by activities of arbitrageurs from the market. Where the market price of a pair in the pool is down, arbitrageurs then sell it cheaper to the liquidity pool and make profits.
This is a solution that solves the problems of the former generation. Normally, when the price goes out of the epsilon range, it immediately shuts down and no more MTR would be issued until the next era.
In the next era, the system would adjust the issuance ratio of MTR to make MTR price-stable with the dollar. If the MTR is above the dollar, excess MTR would be minted while if it is more, less MTR would be minted.
Using the rebasable mechanism, Standard Protocol automatically adjusts the collateralised stablecoin with its unique algorithm. The stability of price is the end goal and as such, the rebasable mechanism which mints excess or less MTR when above or below the dollar perfectly achieves this purpose.
Furthermore, the stabilisation of prices through algorithmic rebasing provides a base price for the estimation and speculation of digital assets. Standard Protocol works among different blockchain through smart contracts in each network which creates an interoperable ecosystem.
The Mechanism of Standard Protocol
As a collateralised rebasable protocol for digital assets, Standard Protocol has adopted a unique working mechanism and key features to enable it to achieve its objectives and to create the perfect ecosystem.
First of all, the rebase in standard protocol has been programmed to take place every eight(8) hours. This is to ensure that the price stability and low volatility which it sets out to maintain is achieved. With rebases done every eight hours, 270 rebases or 90 days is equal to a season in standard protocol.
The token pattern of Standard Protocol is worthy to note as it uses three tokens which serves different purposes.
The first among them is Meter. Meter MTR is the stablecoin that is getting generated in the vault. Meter is generated automatically by the collateralization of other digital assets. As Standard Protocol is built on the Polkadot system, DOT is the token that is deposited.
When DOT gets deposited, the user gets MTR in return. Standard Protocol ensures that vaults are over collateralized to protect liquidity. To achieve this, the number of DOT deposited is multiplied by the price of the digital asset. Meter as a stablecoin has four major pillars;
- Accessibility: Meter is readily available to anyone interested in them. All that is required is online access and cash to make deposits. It is available on Polkadot ecosystems.
- Decentralization: Meter can be used and transferred peer to peer with no external interference with the user.
- Reduced cost: The fees associated with the transfer of tokens are relatively low.
- Speed: The stellar speed for obtaining Meter and transferring them are well known.
LITER (LTR): This is referred to as the Automated Market Maker token. It is a special token for liquidity providers. As standard protocol operates its own AMM, LTR can be burned and exchanged for assets. LITER can also be used for liquidity mining.
The third token used by Standard Protocol is Standard (STND). This is the token of the platform itself. It is used for network staking whereby the holders of the token take a part of their STND holdings to make the system more decentralized. It is also used to pay fees. As the system’s token, certain fees are to be paid with STND. Finally, STND holders can participate in the administration of Standard Protocol which leads to decentralized governance.
The total number is STND is pegged at 100,000,000. Funding amounts for 21.3% of the total distribution with a seed round netting 5% which is given to several noteworthy investment firms. Strategic partners would also get 5%. Private round tokens would amount to 10% of the distribution and finally, public IDO gets 1.3%.
Asides from the above, ecosystems planners and advisors get 3%, the team gets 10%, marketing and ecosystem get 4.7%, community incentives gets 6%, the foundation gets 15%, yield farming gets 30% while protocol developers and external contributors get 10%.
Who is behind the project?
A complex project like Standard Protocol should be brought to live by a team of clever minds. It seems that Standard has this covered with tons of bright minds with years of experience in the cryptocurrency space.
Hyungsuk Kang — Founder & CTO
Software Engineer at Plasm, Head Ambassador for East Asia of Polkadot, Co-founder of PolkaKR
Jaewon Shin — Co-founder
Founder of Chiko Media, Co-founder of PolkaKR, Formerly Korean Executive Director at BitBlock Group
Billy Lee — Lead Developer
Software Engineer with over 4 years of experience in full stack web development, Leading UX for Standard Protocol
Tony Ling — Head of China
Founding partner of Bitblock Capital, Guest lecturer at Zhejiang University, Author of “Unlock the New Cipher, From Blockchain to Crypto”
Dixon Wong — Product Owner
Product Manager in Digital Banking, Former Marketer and Analytics Consultant, Ex TEDx Organiser
Beli Hong — Operational Director
Co-founder of Fiat Capital, Ex-chairman of Zhejiang University Blockchain Association, Operational Director of DeepThinker Capital
Michelle Tsing — Community Director
Managing Partner at Cognito Capital, Co-founder of Governance Research Institute (e-governance), Host at Laptop Radio
We’re hosting an AMA on the 23th of April 20:00 CET with Standard Protocol which you can attend in our Telegram channel! Once again there are nice rewards to get for the best and most creative questions, so stay tuned on twitter and telegram. To be eligible for rewards the next steps are important:
- Follow Sylant and Standard on Twitter
- Join the telegram channels Sylant’s Room and Standard
- Comment your best or most creative question on an upcoming tweet (TBA)
- Submit your question during the AMA on Telegram as well to increase your chances
Prepare any questions you may have and get ready for the AMA, we’re very excited and will update this review with the most important questions afterwards!
The decentralized world can be a rather complex system. In the centralized world, everything it thought out and presented in a way to make things as comprehensible as possible. Whenever you remove that centralized party, you’re expected to understand whatever is going on through these decentralized protocols, algorithms and economic models. It can be quite overwhelming, but to completely grasp what’s going on, we should be doing some learning over time.
Standard Protocol is one of these innovative projects that can truly take the entire industry up to new levels. It’s a project that represents the complexity of the financial world, but that simultaneously has the bright minds to bring the project to fruition. It’s evident that the team has observed the market closely, took their lessons and brought their experiences and knowledge together in this project.
The three-way model that Standard Protocol is embracing creates a level of complexity that not many will grasp in the first place, but does bring opportunities for those who invest time and effort into researching the project. With complexity comes responsibility, so it will truly come down to the right execution for Standard Protocol to see if they can live up to the expectations.