Introducing XSTUSD — A Stablecoin on SORA for Polkadot Ecosystem Public Testing

Published date: October 18 2021
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Introducing XSTUSD — A Stablecoin on SORA for Polkadot Ecosystem

TL;DR

SORA Synthetics are tokens pegged to value indices, backed by XOR
The first SORA Synthetic Asset is the DAI-pegged XSTUSD
SORA Synthetic XST assets for other major stores of value will be available in the future, once oracles are integrated into the SORA network
XSTUSD was proposed as an RFP and is currently live

What is XST?

Fisher’s Compensated Dollar

XOR SynThetics, hereafter, XST, are synthetic assets pegged to an index of value and backed by XOR, but, what is a synthetic asset or stablecoin to begin with?

Long before cryptocurrencies (or even digital computers) existed, back in 1912, the American economist Irving Fisher questioned the instability in the purchasing power of the gold-backed US dollar, explaining:

“We now have a dollar of fixed weight (25.8 grains), but varying purchasing power. Under the plan proposed, we should have a dollar of fixed purchasing power, but varying weight.” This would come to be the groundwork for the “compensated” dollar.

In other words, because gold was highly volatile in purchasing power, instead of keeping the dollar fixed to a certain amount of gold, Fisher proposed that the dollar be backed by varying amounts of gold, but pegged to a basket of goods (an index). However, at the time, Fisher’s ideas were not adopted due to operational and harmonization issues of the economy of that period.

With the advent of cryptoeconomic systems on blockchains, the “compensated” dollar principles, Fisher’s groundwork, could finally be translated into the realm of cryptoeconomics and given new life as part of a cryptoeconomic system: “a blockchain-based token can be created as a derivative of another one, targeted at holding a stable unit of value”. SORA synthetics implements this concept and in a way, you could say that Irving Fisher is the father of SORA Synthetics.

Stablecoins and Synthetic Assets Today

Currently, there are 5 different types of stablecoins/pegged assets:

Fiat-Backed Stablecoins (or Tokenized Fiat): These stablecoins are backed by and pegged to dollars (or other fiat currency), their value remains tied to the price of the pegged currency. For example, USDC.
Crypto-Backed Stablecoins (or On-Chain Collateralized Stablecoins): These are backed by other crypto assets. For example DAI.
Precious Metal-Backed Stablecoins (or Off-Chain Collateralized Stablecoins): Like gold-standard fiat, these stablecoins use gold and other metals to back their value. For example Tether Gold.
Algorithmic Stablecoins: These stablecoins use algorithms to back their value, there are some variants that can be pegged to fiat values, depending on the algorithm used. For example AMPL.
Synthetic assets are tokens with value pegged to an oraclized asset. Purely synthetic assets can be used to represent many types of value, such as, to track the shares of financial instruments and securities. For example, SYNTHETIX.

XST is an algorithmic stablecoin for the SORA ecosystem, initially proposed in 2018, based on the ideas of Irving Fisher’s compensated dollar. However, instead of being backed by gold, XST assets are backed by XOR.

What Makes SORA XST Different?

Now that stablecoins and synthetic assets have been defined and classified, you might be wondering what makes XST stand out from the rest?

XST helps to solve the problem of XOR liquidity by creating synthetic assets backed by a variable amount of XOR and pegged to a target index (e.g., a currency). XOR is minted/deminted to always guarantee the value of the pegged index. The first index implemented is linked to the value of DAI and will be called XSTUSD.

Non-Collateralized Stability

In the case of XST assets, as they are backed by XOR, XOR can be algorithmically minted or deminted (burned) to provide the full value for the XST assets upon demand. The XST Primary Market Maker that mints/demints XST assets and XOR is built in as a liquidity source into Polkaswap’s liquidity aggregator, so buyers/sellers will always get the full value in XOR for their XST assets, and the price will never deviate (lower or higher) from the asset price. Therefore, XST is not subject to price slippage or a lack of liquidity. This works, for example, in the case of XSTUSD, because a single XSTUSD is a claim for $1 USD worth of XOR, and not a claim for actual $USD itself.

With normal stablecoins (specifically fiat-backed), the adjustment of collateral value and the value of the issued stablecoins is not automatic. This is due to price changes in the collaterals, and it is therefore necessary to overcollateralize. With stable tokens like DAI, for example, you have to lock up 130% of the value in ETH to mint new DAI, and your vault gets liquidated if you go under the required collateral level.

XST does not require overcollateralization and users of XST assets do not risk liquidation. This is because new XOR can always be minted to provide the full value of an XST asset upon exchange back into XOR.

Normally, algorithmic stablecoins derive their value from smart contracts linked to oracles that determine current prices, however, XSTUSD’s value is currently derived from the price of XOR-DAI, although (Spoiler alert) SORAcles are currently under development.

How Will This Be Implemented?

XST implementation is quite an exciting topic, however, it isn’t complete yet. The RFP proposing the implementation of XSTUSD was published and now it is live on the SORA network. The implementation scenario includes whitelisting XSTUSD on Polkaswap and subsequently setting up a liquidity source, as mentioned before, where the price users pay would never deviate from the price of XOR-DAI.

Some more interesting details available from the XSTUSD RFP mention: “If the XSTUSD-XOR price goes lower than DAI-XOR, then when the user is buying, new XOR will be minted and used to fill the order (similar to the token bonding curve). When buying XSTUSD with XOR, then new XSTUSD can be minted/deminted when filling the orders, in order to maintain the peg.” Before you ask wen, there is no concrete answer …for now.

XST implementation is just the beginning and, as was hinted earlier, SORAcles are also in the development pipeline which will ensure that a variety of XST assets can be implemented for many different indices of value. Another interesting implementation tied to this is the SORA Social Insurance.

In the meantime, you can find XSTUSD on Polkaswap.io. The XST asset id is 0x0200080000000000000000000000000000000000000000000000000000000000

You can swap XOR to XSTUSD and vice-versa. After getting some XOR, you can swap it for XSTUSD in the swap section by selecting it as the TO value.

After you click on SWAP, you will receive a confirmation message with the transaction details. Click CONFIRM and sign the transaction with the Polkadot.js browser extension in the popup window.

Finally, if you’re interested in how the SORA RFP system works, take a look at this complete guide on Proposing New Functionalities to Polkaswap and the SORA Network

Sources:

Kołodziejczyk, H., & Jarno, K. (2020). Stablecoin — the stable cryptocurrency. Studia BAS, 3(63), 155–170. https://doi.org/10.31268/StudiaBAS.2020.26

J. M. Keynes, Irving Fisher, Harry G. Brown. The Purchasing Power of Money: Its Determination and Relation to Credit, Interest, and Crisis, The Economic Journal, Volume 21, Issue 83, 1 September 1911, Pages 393–398, https://doi.org/10.2307/2222328

Patinkin, D. (n.d.). Irving Fisher and His Compensated Dollar Plan. 34.

Takemiya, M. (2019). Sora: A Decentralized Autonomous Economy. 2019 IEEE International Conference on Blockchain and Cryptocurrency (ICBC). doi:10.1109/BLOC.2019.8751489

About SORA, Polkaswap, and Fearless Wallet

SORA is a new economic system aimed at creating a supranational multiverse economic system with built-in tools for decentralized finance (DeFi). The SORA network implements a new way of parachain architecture on Polkadot and Kusama network, with the capability to bridge external blockchains (like Ethereum) to the Polkadot ecosystem.

One of the DeFi applications that will run on the SORA network is Polkaswap, a non-custodial liquidity aggregating, cross-chain AMM DEX designed uniquely for the Polkadot ecosystem with boundless liquidity through its one-of-a-kind Aggregate Liquidity Technology (ALT).

Fearless Wallet is a mobile wallet designed for the decentralized future on the Kusama and Polkadot ecosystem, with support for iOS and Android platforms. An awesome user experience, fast performance, and secure storage for your accounts. Fearless Wallet will integrate Polkaswap for easy, decentralized swaps of assets.

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Introducing XSTUSD — A Stablecoin on SORA for Polkadot Ecosystem Public Testing was originally published in SORA on Medium, where people are continuing the conversation by highlighting and responding to this story.