RGP-000-002: EVI DAO - Bitcoin Backed, Inflation-Resistant Stable Asset

Grants
1

EVI DAO - Request for Fast-Lane Grant.

Links:

  1. Whitepaper - ZSS-whitepaper.pdf - Google Drive

  2. Live (testnet) dapp - https://testnet-app.evidao.finance/ (RSK Testnet)

  3. Video Demo - https://youtu.be/Cm0htM0V8Ic

  4. Investment Deck - EVI_DAO_deck_updated.pdf - Google Drive

  5. Medium - https://evidao.medium.com

  6. Twitter - https://twitter.com/evi_dao

  7. Technical Docs - https://github.com/FoundationCryptoLabs/XSS/tree/governance/Docs

Description of Problem or Opportunity

USD-pegged stablecoins dominate stable asset holdings and crypto payments today. These stablecoins are typically centralised and vulnerable to censorship risk - moreover they are subject to a heavy inflationary tax on holders. Both these problems have come to head in recent months, with regulators showing willingness to sanction decentralised protocols, as well as USD inflation reaching 4-decade highs.

How serious or urgent is it? What arguments/motivation/evidence do you have for that claim?

Crypto-Native Stable Assets that retain purchasing power independent of USD are required for fully decentralising DeFi ecosystems.

Following the OFAC sanctions on tornado cash, the stablecoin space has been thrown into major upheaval. USDC, a centralised stablecoin, has shown to be unilaterally censorable and has previously blacklisted entire protocols. The leading decentralised stablecoin, DAI, is thus facing a challenge due to the bulk of its collateral being composed of USDC.

Given the importance of decentralised, censorship-resistant stablecoins, the only way forward appears to be using native crypto collateral (BTC, ETH) to back these stablecoins (as the Maker DAO founder is proposing right at this moment). Ref. https://forum.makerdao.com/t/the-path-of-compliance-and-the-path-of-decentralization-why-maker-has-no-choice-but-to-prepare-to-free-float-dai/17466

However, utilizing volatile collateral to back stables can run into collateral sufficiency issues. Moreover, pegging to the dollar caries with it increasing regulatory as well as inflationary risks as of September, 2022. Thus it is paramount for the survival of the DeFi space that there exist uncensorable, crypto - native stable asset, that pioneers effective collateral mechanisms to support a stable redemption rate.

Have you validated this problem or opportunity, and if so how?

There are very few existing solutions to this problem. Notably among them, RAI (reflexer finance) also is a non-USD pegged asset, backed solely by Native Ether collateral. However, the redemption rate of RAI has in practice not exhibited inflation-resistance, and remained effectively constant in USD terms. We have discussed this idea with the founders of RAI, who agree that this is an interesting solution worth trying.

How big of a problem would it be to not solve this problem?

If the backbone of DeFi continues to be partially or fully centralised stablecoins like USDC and DAI, it becomes remarkably easy for regulators to sanction, block, or otherwise disallow access to any of these protocols - rendering their decentralised properties completely moot. If USDC all collateral is frozen today, that would effectively signal the end of the DeFi ecosystem, as Tens of Billions of Dollars of collateral would suddenly disappear. Meanwhile, stablecoin holders continue to lose substantial amounts of wealth to the US Treasury via inflation, defeating one of the most basic use-cases of crypto.

Proposed Solution
EVI DAO is a protocol on RSK and Ethereum, that backs and stabilises the value of zBTC through a dynamic system of Collateralized Debt Positions (CDPs), algorithmic redemption rate adjustments, and an autonomous, dynamic collateral ratio mechanism. EVI DAO enables anyone to leverage their Bitcoin assets to generate stable zBTC on the EVI Platform.

Describe the solution

“A path to any cryptocurrency becoming used as money is only viable if you can use it to efficiently and cost effectively pay for goods, services and scarce resources across space and time."

zBTC is a stable version of BTC. Each zBTC is backed by at least one full BTC, however it is only redeemable for a part of a BTC based on the current redemption rate. The redemption rate is based on the 1458-day Simple Moving Average of the BTC/USD exchange rate, computed as follows:

=> SMA1456 =(day1+day2+…+day1458)/1458

Where:

t= Date of calculation

i=1 => t-1 days BTC/USD exchange rate (day1)

i=2 => t-2 days BTC/USD exchange rate (day2)

…

i=1458 => t-1458 days’ BTC/USD exchange rate (day1458)

zBTC can be understood as a dampened version of BTC, that avoids short-term volatility while aiming to capture some of the long term appreciation of BTC.

Instead of significantly fluctuating like BTC, it aims to maintain a stable exchange rate that rises slowly with time, as bitcoin gets more valuable after each halving. If BTC price were to stabilise someday, zBTC price would eventually stabilise at a similar value - however the zBTC would be more immune to demand/supply shocks affecting BTC price, even in such a scenario. (See the whitepaper for further analysis on this point). In the graph below, the green line represents the historical redemption rate of ZBTC.

Screenshot 2022-09-10 at 8.37.31 PM
Screenshot 2022-09-10 at 8.37.31 PM1716×1094 104 KB

Further, ZBTC implements a novel, dynamic collateral ratio that automatically adjusts the required collateral based on future risk of price volatility, evaluated as CR = c * Px / Psma. This minimizes the chances of liquidation of users and protects the protocol from depegging risks.

Describe the users and stakeholders that are affected by this and will be interacting with the solution

  1. Retail holders
    A number of retail users are afraid of obtaining significant exposure to Bitcoin, due to the extreme volatility in price. Having access to a dampened Bitcoin-derivative asset that captures some of the value appreciation, without subjecting them to the same risks of downside, would serve as a more attractive asset class to onboard a large amount of retail users.

  2. As a crypto-native unit of account
    Denominating invoices and payment schedules in Bitcoin is impractical, given that over 50% fluctuations are common within a year. There is a need for a crypto-native unit of account, that is independent of the devaluation of fiat currency, and retains stable purchasing power over the medium to long term.

  3. As an institutional Balance Sheet Asset
    Institutions are increasingly recognising the value of diversifying their balance sheet away from USD, as they watch the purchasing power of their assets melt away at an alarming rate due to inflation. Native Bitcoin however, carries high volatility risk, and thus does not suit the risk appetite of these institutions. ZBTC could serve as the ideal inflation-resistant stable assets for institutions to add to their balance sheets, as a hedge against inflation.

How would this proposal benefit the Ren ecosystem, RenVM and/or the node operators powering RenVM?

RenBTC would be the sole collateral type utilised by EVI DAO on ethereum, to mint stable ZBTC. This would increase demand for RenBTC and thus increase in the resultant fees earnt by dark node operators.

In addition, we are open to structuring the grant as an investment against EVI tokens - These EVI tokens would be directly issued to the Ren Ecosystem treasury, providing direct benefits to Ren linked to the success of the EVI DAO protocol. Ren would be granted 0.7% of the total supply of EVI tokens, in exchange for this grant.

Can you quantify the benefits, comparing worst-case scenario and best-case scenario? Does the benefits grow or shrink over time?

A successful scenario would result in us building a stablecoin comparable to Maker DAO’s DAI token. This would mean that there would be over $6.5 Billion in required RenBTC collateral, massively benefiting the Ren Ecosystem.
An acceptable scenario would be where we roughly match the uptake of Reflexer Finance’s RAI token, which would imply a demand for around $50 million in collateral RenBTC, a providing a significant use case for Ren.
The worst-case scenario is a low uptake of the protocol, with less than $1 million TVL.

Technical approach

The EVI DAO codebase is inspired by the mechanisms behind Maker DAO and Reflexer Finance; however, the codebase has been built from the ground up by us, optimised to support the functionality we’re developing.

A full deep dive into our technical approach can be found in our technical documentation : https://github.com/FoundationCryptoLabs/XSS/blob/governance/Docs/xBTC%20-%20Technical%20Documentation%20(2).pdf

Current Progress

We’ve already developed and deployed much of the core functionality on RSK-testnet:

This demonstrates the CDP mechanism as well as the stablecoin redemption mechanism.

In light of the urgent need for crypto-native stablecoins on Ethereum to support the DeFi ecosystem, we’re now going ahead with an Ethereum Mainnet launch, utilising RenBTC as collateral.

The core contract prototypes are ready and open-sourced here :

We’ve been publishing articles analysing the use-cases and behavior of ZBTC in various scenarios - https://evidao.medium.com

Execution risks

  1. CDP minting incentives - It is possible due to the appreciating nature of ZBTC, that there would be reduced demand for users opening CDPs. This can be offset by increased demand in open markets for buying ZBTC as a savings asset, which would drive up the price and enable arbitrageurs to open SAFEs for an instant profit. Further, we may experiment with negative interest rates and EVI token incentive programmes to bootstrap liquidity in the initial phases.

  2. Depegging
    A fast Depeg scenario is possible in case of an extreme price drop coupled with insufficient liquidity in the markets. This would only happen in very extreme scenarios, eg. if Bitcoin drops below $5k overnight. In such an event, all stablecoins and lending protocols will likely go underwater, not just ZBTC.

Evaluation plan

The product v1 as described by the docs will be audited and launched on Ethereum Mainnet, utilising RenBTC as the sole source of collateral. We will offer an easy-to-use dashboard for opening and closing SAFEs and for redeeming ZBTC. Open to community suggestions on optimising our UI/UX for best experience.

We’ve already prototyped the core functionality of EVI DAO.

We only need to integrate dynamic collateral ratio, oracle and debt auction mechanisms, as well as audit our protocol, before main net launch. This grant is targeted to raise funds for these last steps as well as fund integration of RenBTC into our protocol, and contract publication on Ethereum mainnet.

Timeline

We anticipate a complete v1 launch in the next 60 days after being funded by this grant. There are two key milestones:

  1. Development of peripheral functions, including liquidation/debt auctions, dynamic over-collaterlization, oracle integrations, and RenBTC integration. (45 days).
  2. Audit, security review, community engagement, and Launch. (15 days)

Budget
We’re requesting a fast-lane grant of USD 75,000 to develop, audit, and launch v1 of EVI DAO on ethereum. The cost break down is as follows:

Development cost : 3 developers * $50/hour * 160 hours a month * 2 months = $48,000
Audit cost : $12,000
Community, Media, and Content : $7,000
Ethereum Gas fees for contract publication : $4,000
Testing, Hosting, and other costs: $4,000

Applicant background

Our team of 3 at Foundation Crypto Labs has worked in the DeFi space for 2+ years, developing 4 novel protocols and with over 6 hackathon wins. This included Bridges, NFT-financialisation products, including Lending and Fractionalisation, as well as decentralised AI inference in partnership with Ocean. We have received over $300k in grants for successful delivery of these varied products. Example projects - https://www.youtube.com/watch?v=ksOe9e49hEI, https://www.youtube.com/watch?v=PXZFCTGcfYA&t=232s. Most recently, we recieved 2 BTC in grant funding from Sovryn, using which we developed the prototype of EVI DAO.

Team members:

0xCryptoSeldon (Dhruv Mehrotra)
Smart Contract Core developer - Solidity, Scilla, Rust, JS, Testing frameworks.

Github: dhruvluci ¡ GitHub 1
Gitcoin: https://gitcoin.co/dhruvluci @dhruvluci | Gitcoin
LinkedIn: https://www.linkedin.com/in/dhruv-mehrotra-luci/ 1
Twitter: https://twitter.com/yettisheep4

    • Multiple hackathon winner and leading weekly earner, Gitcoin.

Aranyani01 (Hetal Kenaudekar)
Core developer - Back-end infrastructure, Databases, Solidity, Typescript.

Gitcoin: https://gitcoin.co/aranyani01
GitHub : Aranyani01 ¡ GitHub 1
LinkedIn : https://www.linkedin.com/in/hetal-kenaudekar-796715178/ 1

CitizenKhan (Joshua Nazareth)
Core dev - JS/Frontend, UX Design.

Has worked for leading mobile delivery apps in building key components of their frontend, with over 500k downloads.
https://in.linkedin.com/in/joshuanazareth

Team Github: FoundationCryptoLabs ¡ GitHub

5 Likes
2

I really like this idea. Rai has been called as a possible solution for stables and bring BTC will increase the chances to succeed. I would like to hear from more technical people his thoughts on this proposal, but I initially think must seriously consider. Thank you for putting this together and give the opportunity to this community to participate.

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Interesting proposal, some initial questions and please forgive my naivety on this subject.

  1. Are there any other parties that are investing in the project?

  2. What is the token break down going to be of the EVI token upon launch, and what purpose does the token serve within the system?

  3. How will the DAO earn money after the launch?

  4. You mention some use cases in which zBTC can be used, what kind of plans do you have to develop these to make sure there is demand for it?

  5. At this point you mention depegging will only happen if bitcoin goes below $5k, but this can also happen on smaller moves if Bitcoin volatility decreases over time or if it does not make new highs. Can you explain what happens exactly on a depegging event.

  6. The peripheral functions which still need to be implemented sound more like core functionality to me, which makes your timeline sound a bit optimistic. What happens if V1 cannot be delivered within the stated timeline?

  7. I believe that I do not speak out of line when I say that we are all for increased partnerships with aligned DAOs, but what will happen to your project if this grant is not approved by the community? Are you pursuing other avenues for funding?

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Hi @Thomm, thanks for the interest. I hope this helps:

  1. Are there any other parties that are investing in the project?

Yes, we have already received a few investments, while we’re in conversation for closing more:
A. Sovryn DAO has invested 2 BTC (120k USD at the time), in exchange for 1% of EVI tokens for SOV stakers.
B. Angel investors have already contributed $20k, with tentative commitments for another $20k.
C. We’re engaged in productive dialogue with leading angels like Pomp, the founders of RAI, as well as a number of VC firms - we hope to onboard them soon.

  1. What is the token break down going to be of the EVI token upon launch, and what purpose does the token serve within the system?

The currently proposed token breakdown can be found here: EVI_tokenomics.pdf - Google Drive. Any unused tokens from the investment budget will go to the treasury. As the governance token of the protocol, EVI token holders vote to set important protocol parameters, including the interest rate and the base collateral ratio. Further, they will vote on improvement proposals. Finally, the EVI DAO has exclusive rights to decide how funds in the treasury are spent.

  1. How will the DAO earn money after the launch?

All interest payments on CDPs, as protocol surplus, will go to the DAO-controlled treasury. This will serve as a revenue stream for the DAO. The DAO in turn sets the ZBTC Savings Rate (ZSR). This aligns incentives of EVI token holders with that of zBTC protocol - that is, to maximise usage (and resulting ZSR revenue) by adjusting parameters to optimise for stability around the peg.

  1. You mention some use cases in which zBTC can be used, what kind of plans do you have to develop these to make sure there is demand for it?

Firstly, we will be providing incentives for early users to open vaults, and increase the available liquid supply of zBTC on DEXes, allowing easy adoption by retail holders. We are also in conversation with market-making arms of a few VC firms to help assist this process. Secondly, from a marketing perspective, we have ongoing partnerships with Sovryn and IOV labs, who have agreed to promote the product for us - moreover, we hope that we can rely on some of the Ren community to help spread the word after our launch :wink:

Thereafter, the DAO is empowered to fund initiatives that further increase adoption by various stakeholders. We’re very open to ideas in this regard!

  1. At this point you mention depegging will only happen if bitcoin goes below $5k, but this can also happen on smaller moves if Bitcoin volatility decreases over time or if it does not make new highs. Can you explain what happens exactly on a depegging event.

This is a very important question, and I would like to offer a complete answer. We’ve been working on a extensive risk analysis document analysing several scenarios, which I will share later today here on the forum.

Very briefly, the protocol is always over-collateralised by at least 150%. Therefore, the risk of the CDPs going underwater is correlated with massive market corrections and/or insufficient liquidity in the markets - that may cause the protocol to fail to liquidate debts in time. As such, this risk profile is identical to over-collateralised loans drawn against Bitcoin on lending platforms such as Aave or Compound. In some cases, zBTC is even better protected than these existing protocols, as it increases collateral requirements in some scenarios.

Separately, there is also the risk of zBTC slowly losing value in dollar terms if Bitcoin stays much below SMA for sustained periods, bringing the SMA down- however, this would not strictly be a ‘depegging’ event as the protocol is behaving as expected, as explained by the ‘dampened bitcoin’ narrative. We dive into a number of these scenarios in the Risk analysis document as well, with graphs to aid intuitive understanding.

  1. The peripheral functions which still need to be implemented sound more like core functionality to me, which makes your timeline sound a bit optimistic. What happens if V1 cannot be delivered within the stated timeline?

Fair point, perhaps a better distinction would be between novel and standard components. We’ve developed the new functionality which required a lot of analysis and testing, and now have to integrate other, existing components - with which we already have deep familiarity, having worked with the GEB codebase for over 6 months.

We’ve already implemented the CDP accounting / surplus accounting / interest calculation / redemption rate adjustment / redemption & repayment mechanisms.
What remains is integrating liquidation auctions and oracles - for these, we can utilise existing standards from Maker DAO / GEB, with some changes to adhere to our accounting standards. DYN-OCR is theoretically interesting, but technically almost trivial to implement.

Technical roadmap aside, we acknowledge that the timeline estimates may prove to be a bit optimistic - First and foremost, we’re committed to delivering a fully-functional and secure end-product, whatever that may entail. To that end, we’re fully prepared to work on this for at least 90 days based on current funding status, and even longer if necessary - by sourcing additional funding from angels etc.

  1. I believe that I do not speak out of line when I say that we are all for increased partnerships with aligned DAOs, but what will happen to your project if this grant is not approved by the community? Are you pursuing other avenues for funding?

This grant would enable us to dive full steam ahead towards a main net launch, right away. However, alternatively, we can continue to raise funds from angels and pursue other grant/investment/partnership opportunities.
Regardless of the outcome of this vote, we look forward to launching on ethereum soon, and we will be utilising RenBTC as our source of collateral. This is due to RenBTC having the best decentralisation roadmap - we do not have any principled faith in centralised, wrapped bitcoin providers.

Feel free to reach out if you’d like further clarification on any point!

4 Likes
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Hi all, following up on this, you can find the detailed risk analysis document here - ZBTC_risk_analysis.pdf - Google Drive

Some brief takeaways:

  1. The price of ZBTC is linked to the 4-year Simple Moving Average Price. Any decline in this measure in USD terms is, first and foremost, extremely slow. Analysis shows that ZBTC price will only drop significantly if very low BTC prices (<50% of SMA, or less than ~$10k) are sustained for over 24 months.

  2. Liquidation of over-collateralised vaults can rarely carry some risk due to insufficient liquidity. We argue that this is especially unlikely with BTC collateral, because it has one of the most highly liquid markets. In general, risks associated with liquidation that apply to ZBTC have already been well studied and are heavily in use. A great empirical analysis on the subject for anyone who is interested : https://arxiv.org/pdf/2106.06389.pdf (in particular, see page 4, which links magnitude of drop in price of WBTC to volume that needs to be liquidated, in Compound/Aave/MakerDAO/DyDx).

We also recommend checking out this medium article, for examples of expected behaviour of ZBTC in relatively “normal” future scenarios - ZBTC — Scenario Analysis. In practice, how will ZBTC behave? Here… | by EVI DAO | Aug, 2022 | Medium

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Folks - Maker DAO has just tweeted more info on liquidation volumes by price drawdown - have a look for the latest data: https://twitter.com/MakerDAO/status/1571897994709966849?s=20&t=5_kA_-JbYKeSZs7xWY5B6Q

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Can you elaborate about the main differences between your project and FloatProtocol? Float Protocol
What is it that makes your project superior and why?

Thanks!

1 Like
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Hi @XTC0r, sure, here is a comparison with FLOAT:

Peg mechanism

Sensitivity
FLOAT is pegged to a measure of a basket of assets, the majority of which is WETH. However, this mechanism is far too sensitive to market crashes - if ethereum declines for even 1 month, FLOAT price also drops significantly. In contrast, ZBTC’s 4-year Simple moving average peg offers far more purchasing power stability in the medium-to-long term. A Bitcoin price drop even for 6 months does not affect ZBTC price, showing true crypto-native stability.

Reaction to price drops
From the litepaper - “The target price of FLOAT is only shifted if the Basket of the Protocol and the market are in alignment, i.e. in the cases where the market price is greater than the target price and the Basket Factor is greater than 1 or, the market price is less than the target price and the Basket Factor is less than 1.” ( Target Prices / Float Protocol / Float Protocol | Observable ) Thus, in all existing “dampened volatility” models, including FLOAT and RAI, all negative price action in the collateral is reflected in token price. If ETH declines, FLOAT has to decline.

In contrast, ZBTC is only negatively affected by price declines under the SMA. Thus- if BTC declines, ZBTC may still appreciate significantly! A great example for this is analysing what would’ve happened to ZBTC during the BTC crash this April-May. As you can see in the graph of “scenario 1” here: ZBTC — Scenario Analysis. In practice, how will ZBTC behave? Here… | by EVI DAO | Medium , ZBTC would have continued to appreciate! This is because ZBTC is linked to much longer term measures of appreciation.

Price action

The de-facto behaviour of FLOAT has almost mirrored RAI token. In the past 1 year since launch, FLOAT price has declined by ~20-25% in USD terms - during a period where USD itself has shown inflation in excess of 8%. Thus, FLOAT is an interesting experiment in theory, but has completely failed in practice to offer any sort of protection against inflation. Ref. Float Protocol: Float price today, FLOAT to USD live price, marketcap and chart | CoinMarketCap

During the same period, ZBTC redemption rate would have risen by around 15%, more than sufficient to offset inflation. As far as we know, ZBTC is the only token model that offers actual, tangible appreciation & inflation resistance across all backtest scenarios. Ref. whitepaper for more backtests.

Type of Collateral

FLOAT utilises a basket of tokens, which is an active investment strategy- the success of which depends on the (ever changing) fundamentals of various tokens in the basket - and dynamic adjustment of price targets by the community. It is not as effective or reliable as a passive investment fully redeemable for a scarce, monetary asset with unchanging fundamentals, which is BTC.

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Hi thanks for your proposal! Excited to hear you are planning to use renBTC as a part of your protocol.

I’m curious what the relationship for zBTC cross-chain will be? You’ve mentioned that RSK is an early funder of the project, does this mean on RSK that rBTC is the onky collateral? Will zBTC be a separate system on RSK vs Ethereum? How will this evolve in the future, considering the nature of REN, if this is a project we fund as a community we would probably like to see it across many chains (as is the nature of our protocol).

So what is the relationship here with the different versions of zBTC that will be operating simultaneously?

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Hi @cowboy ,

Good questions. zBTC contracts will be deployed independently on each chain, and their parameters will also be set independently based on liquidity, demand, and other factors. However, the governance token (EVI) will have a common total supply across chains, and the same EVI tokens can be used to vote for setting ZBTC params (interest rate etc.) on every chain, as well as for controlling the treasury.

The liquidity of assets as well as the versatility of dApps available on ethereum make it one of the most attractive places to launch ZBTC, and will likely host the largest percentage of the total TVL.

We look forward to being cross-chain beyond ethereum and RSK as well, and would love to utilise RenBTC as collateral on all chains that it is supported. I look forward to community inputs on which chain we should expand to after ethereum.

With respect to RSK, since that offers native BTC bridging support via RBTC, which is also the gas token - it is convenient to utilise that as a collateral type. But we could consider including renBTC as a collateral type on that chain as well.

Incidentally, a small correction, we have received funding from Sovryn DAO so far, whereas IOV labs (RSK network) has simply agreed to support our marketing efforts on their chain. Thus, we are not bound to use any particular collateral, even on RSK chain.

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I am a bit concern of the quality that is being planed for the audit. 15 days and 12K$. What is being audited? has been already audited any part of the code? Will the audit surely be complete by a trusted and experienced party?

1 Like
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Hi @martign0 ,

The cost of the audit is an estimate based on quotes we’ve gotten from a few auditing firms - It is on the lower side because the new lines of code are limited. in particular it is based on a quote from https://omniscia.io/ , which ranges from $14-19k based on timelines. Our budget in this regard is fairly flexible and we’re willing to pay upto $20-25k, over a longer time frame, for a good and thorough audit. Any suggestions/opinions on auditing firms is welcome.

In terms of scope of audit, we’ll be covering the full CDP and interest rate mechanisms, and integration with oracles etc. The governance and liquidation auction contracts we are utilising are existing standards and have already been audited for compound/Maker DAO.

13

Thanks for this proposal, @0xCryptoseldon. A dampened version of BTC sounds like an interesting middle ground between BTC and dollar-pegged stablecoins.

  1. You mention the protocol is at least 150% over-collateralized, but in the “ZBTC - Dynamic Overcollateralisation” slide in your investment deck, there is a chart that shows the dynamic collateral ratio dropping well below the linear ratio (150%) and appearing to only require 100% collateral. Can you clarify how this works?

zbtc
zbtc1568×788 102 KB

  1. Can you elaborate on why the appreciating nature of ZBTC might reduce demand to open CDPs? Is it because the Savings Rate would need to be higher than ZBTC’s expected appreciation rate to prevent the mere opening of a CDP from being profitable, which would make CDPs more expensive than Maker vaults?

  2. In the core contract repo you linked to, there is only one contributor (Hari). This person is not listed as a team member and seems to have paused most development back in February. Is this person no longer on the team?

  3. You list yourself as a smart contract core developer but don’t seem to have any professional development experience, a technical background, or GitHub commits in the past year. @aranyani does not appear to actually have a LinkedIn, and none of his few public commits have been in any public FoundationCryptoLabs repos. Can you comment on each listed team member’s technical contributions to date and how long each of you have been working on the protocol full-time? With due respect, it would be prudent for the community to exercise proper diligence on anyone who requests a grant within mere days of joining the community to determine their legitimacy and whether they’re the right team to build this idea.

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Curious about zBTC, but not excited about the grant itself. The idea is interesting, sure, but there are a few things that are concerning:

a) I’m not sure the team can deliver the non-tech part (can’t judge the tech part, plus David already pointed out some good questions on that front). For things like this to gain traction you need adoption and for that to happen it must be an insane market fit or one needs good influence, ties with other projects. Doesn’t look like this is the case now.
b) “B” goes hand in hand with “A” - the marketing budget is $7k? I assume project will use EVI DAO token for this, but close to no details on the marketing plan itself.
c) Our CEF is spread insanely thin after RenBase approval and from the treasury management POV we can’t afford to give out money like some VCs do. We need high conviction plays. This is not it and has way too many variables and unknowns.
d) The RGP clearly states that the project WILL CONTINUE TO BE DEVELOPED and the guys behind zBTC WILL USE renBTC regardless of the vote outcome (for which I applaud them). So the success of the project does NOT hang upon our decision to support it via grant. The project has investors and is looking for more. Grant is not crucial. This is a very important part!

Considering the facts above, I don’t see how it makes sense to vote “yes” for this RGP in this moment in time. We’ve got to be careful how we manage our money. But with that said I totally see how the RenDAO and the team behind zBTC can find common ground for cooperation down the road.

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You mention the protocol is at least 150% over-collateralized, but in the “ZBTC - Dynamic Overcollateralisation” slide in your investment deck, there is a chart that shows the dynamic collateral ratio dropping well below the linear ratio (150%) and appearing to only require 100% collateral. Can you clarify how this works?

Correct, and good observation - that is a slight inaccuracy with the graph as it demonstrates pure dynamic over-collaterlisation, whereas we are employing dual collateral floors. This means, we impose two conditions on collateral requirements

  1. Each zBTC must be backed by at least 1.5 renBTC, regardless of price;
  2. Each zBTC must be collateralised 150% in USD terms.

We use a higher of the 2 selection criteria to ensure that the assertion “at least 150% over-collateralized” always holds true - and the scenario you highlight in the graph never occurs. For a bit more detail on the mechanism, please have a look at page 9 (Appendix-1) of this document: ZBTC-risk-analysis.pdf - Google Drive

Can you elaborate on why the appreciating nature of ZBTC might reduce demand to open CDPs? Is it because the Savings Rate would need to be higher than ZBTC’s expected appreciation rate to prevent the mere opening of a CDP from being profitable, which would make CDPs more expensive than Maker vaults?

This is because the appreciation could make it more costly to repay the CDP debt in USD terms, than the interest rate specified. To take a simple example, let’s say you open a vault today, and mint 1 zBTC (~20k usd value). After one year, zBTC has appreciated 10% to 22k, and the interest rate is set to 5%. Thus, you would effectively be paying a higher interest than stated in USD terms - by repaying 22.5k worth of zBTC to unlock your vault. Simply opening vaults cannot be profitable in BTC terms, unless the market value zBTC is trading at is higher than the redemption rate - which may occur because of excess demand.

In the core contract repo you linked to, there is only one contributor (Hari). This person is not listed as a team member and seems to have paused most development back in February. Is this person no longer on the team?

Hari is one of my alts - all the core smart contract development so far was performed by me, and we’ve been actively developing till June - see this branch : GitHub - FoundationCryptoLabs/XSS at governance. Incidentally, Hari seldon and cryptoseldon are both references to the same fictional character.

You list yourself as a smart contract core developer but don’t seem to have any professional development experience, a technical background, or GitHub commits in the past year. @aranyani does not appear to actually have a LinkedIn, and none of his few public commits have been in any public FoundationCryptoLabs repos. Can you comment on each listed team member’s technical contributions to date and how long each of you have been working on the protocol full-time?

Foundation crypto labs has always been just the 3 of us. In general, I was the lead smart contract dev for all the work done by foundation crypto labs so far - I encourage you to look at all the repos on this for some of our work and skillsets- FoundationCryptoLabs · GitHub. You can also have a look at this portfolio highlighting some more of the development we’ve done: FCL-portfolio.pdf - Google Drive

Regarding this specific project, we’ve been working on it full-time since November 2021, when we received the grant from Sovryn DAO. We built it in stages, running a number of backtests and experimenting with a number of different possible pegs and stability models, before settling for this setup.

Specifically speaking, I am responsible for all the novel protocol components, CDP mechanisms and dynamic collateralisation. I have previously won 5 hackathons, including for:

  • An early prototype for the near-eth bridge (June 2020)
  • A prototype of data tokenization for Ocean (August 2020)
  • LiquiNFT - an NFT-fractionalisation tool on Zilliqa - This required me to pick up their smart contract programming language (Scilla) in under a month, and build functional contracts within its constraints - like no nested lists.
  • Taocoin, an experimental staking token I developed, got significant adoption, with over $50k in transaction volume from over 1200 unique addresses.

Aranyani01 is responsible for implementing relevant mechanisms from the Geb codebase [GitHub - FoundationCryptoLabs/geb: Core smart contracts for GEB] (liquidation, taxcollector). She has previously won 3 hackathons, including:

  • building a bitcoin backed RAI analogue for the Sovryn Hackathon ($15k) - which was the predecessor idea for this product,
  • cfy.finance - a P2P NFT collateralised lending tool on Harmony and Polygon (Oct 2021).
  • Aranyani01’s linkedin is here : linkedin.com/in/hetal-kenaudekar-8a01b422a/ As with mine, it may not be up to date, because none of our web3 connections currently use LinkedIn.

Citizenkhan has been responsible for developing the user interfaces and designs for all of the products listed on the portfolio.

If you require any further verification of our bona fides, I can request someone on the Sovryn team to vouch for our existing work on this project - I believe he is already known by some people in Ren management. Hope this helps, happy to answer questions about any of our past work as well!

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@Arviee Thanks for sharing your views. I would respectfully have to strongly disagree with a few points you make:

Firstly, its hard to overstate the importance and urgency of executing on this project at this moment - with rapidly escalating censorship and inflation risks with existing stables, the window to build an alternative is quickly closing - and with it, the risks of complete centralisation of DeFi are increasing - which is an existential risk even for Ren Project, as explained below.

The US is attempting to ban any stablecoins not backed by physical (paper) USD collateral. This is because decentralised stable assets are a key threat to the fiat dominated financial system, and further, regulating all stables by forcing them to utilise centralised collateral would allow for the state capture all of DeFi.

None of this is hyperbole - even Maker DAO is potentially affected by these regs, as it would impact all CDP based decentralised stable assets. The use of decentralised collateral like renBTC to build stables may not be permissible in the future - unless a valid use-case is proven before regulations are applied.

Secondly, volatility in crypto assets is one of the main prongs of attack on the crypto industry. Under the guise of “consumer protection”, many countries are moving to outlaw or severely restrict their citizen’s access to “volatile” crypto assets (see for example - Trudeau in Canada criticising crypto for “volatility”, and India imposing the same tax as “gambling returns” on crypto assets, to discourage adoption). Thus, solving for volatility becomes a very central need for protecting crypto against regulatory onslaughts.

Onto the specific concerns:

A & B) As we mentioned, we’ve a number of partnerships with companies and angels with over 50k twitter followers each, who have all agreed to support our product and enhance its reach upon launch. Further, the use-case speaks for itself and is essentially a financial no-brainer for any stablecoin holder - as explained below.

C) This is a very high convection bet, and could very well be the largest use-case (by volume) for renBTC till date, by a large margin. The protocol behaviour is fully deterministic - there are no unknowns, the future price action can accurately be calculated today for various scenarios of BTC price. To prove this point, I would challenge you and the community to outline a single rational reason why one woudn’t hold the bulk of their net worth in zBTC instead of stables upon launch.

To illustrate, let us consider the best and worst case scenario over the next 12-24 months, for a holder of zBTC:
a. Best case, say Bitcoin rises to an average price ~50k after a lot of volatility - zBTC would appreciate over 20% in 12 months and over 50% over the next 24 months, with no downside risk.
b. Worst case, say bitcoin crashes to a 10k average price. The user would still get the exact same dollar value back after 12 months, and maybe stand to lose a very small amount (<2%) over 24 months.

All other scenarios fall within this spectrum. The only possible outcomes in the short to medium-term are stability or appreciation. This is exhaustively better than a dollar-pegged stable in literally every scenario. If you still have doubts over whether this is even possible, I encourage you to read the Whitepaper. Most rational individuals holding stables would thus prefer to hold zBTC instead, challenging the $300 Billion stablecoin market.

D) While we would do our best to launch regardless, losing this grant would significantly delay the project as we scramble for additional funding - and with incoming regulations, we might not be legally allowed to execute it at all. This grant may well spell the difference between executing this in time and being too late.

There’s a time to be risk averse, and a time to take action to protect the integrity of DeFi and decentralisation. The DAO can always vote to increase CEF allocation if needed in the future. Moreover, if successful, many times more value than the grant amount would be received by the CEF in the form of EVI tokens over the coming months - to say nothing about increased DNO revenues.

Sources:

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How did you arrive at $22.5k worth of zBTC owed? If the interest rate on a 1 zBTC vault were 5%, then after one year, you would owe 1.05 zBTC. At a price of $22k, 1.05 zBTC would be $23.1k, no?

Assuming the above is accurate, my impression is that a 15.5% APR in USD terms would be far too costly compared to Maker’s 2.25% APR in DAI terms on renBTC vaults. If it’s not profitable to open a CDP, we can assume that borrowers will spend their zBTC on other things. That means they would be incurring a 15.5% APR in USD terms without any exposure to zBTC’s appreciation while they could be paying just 2.25% in DAI terms in a Maker vault. With 10% annual appreciation, CDPs would need negative interest rates in perpetuity to be competitive with Maker vaults, which wouldn’t work.

Would be interested in your thoughts on this.

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Thank you for the proposal, if it’s completed it would greatly increase REN’s value.

I only have one question for now, why did the GitHub commits stop in June and you waited 3 months before opening a grant proposal?

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Yes 23.1k is correct in that scenario. Your analysis would be correct under the condition you state:

However, the key point here is that there are many scenarios in which CDP creation will be profitable. Specifically, excess demand would temporarily drive up price, allowing arbitrageurs to profit from opening CDPs.

We expect retail/institutional demand will exist on DEXes to buy zBTC, because of the desirable properties of holding zBTC in the medium to long term. Say the redemption rate is 20k, but not enough CDPs have been opened to meet the demand for zBTC on DEXes. This would drive up the price beyond the redemption rate to say 20.5k. This would then allow arbitrageurs to open vaults, sell zBTC at a premium and then close their position once the price drops back down to the collateral value. Thus, the incentives to open vaults will be demand-driven.

We would only utilise negative interest rates briefly, in cases where zBTC market price has stayed above the redemption rate for extended periods. This would be with the goal of bringing the market price back down to the redemption rate, to allow arbitrageurs to close their position.

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Thanks @Shine.

Our initial roadmap was to launch on RSK network first, with our Ethereum launch scheduled for closer to early 2023. Thus, we were working on co-ordinating the RSK launch on Sovryn Origins launchpad, integration with RSK’s Mynt stablecoin, risk analysis, and initiating the audit process, over the past 2 months.

Events of the last month, in particular USDC censoring a smart contract for the first time, highlighted the urgency of building a decentralised stable asset on Ethereum to support the DeFi ecosystem. To this end, we decided to move up our ethereum launch right away - and thus, we’ve posted this grant request now.