This is the second installment in our #RideTheCosmos series. Our first article offers a primer on IST and the upcoming launch.
Today, we’re exploring the design of IST through its dynamic minting mechanisms and economic protections.
Inter Protocol has been designed to evolve a dynamic, risk-managed set of minting mechanisms that grow with the market. The first minting and price stabilization mechanism is the Parity Stability Module, or, PSM. Although we’ve covered the PSM in our most recent article, here’s a quick recap:
The Parity Stability Module enables users to mint IST with stable tokens like native and bridged USDC, USDT, and take advantage of arbitrage opportunities between stable tokens. By providing a low-cost arbitrage opportunity for traders when IST prices are decoupled from USD, the PSM acts as an organic price stabilization mechanism. ** Update December 2023: PSM now includes bridged and native USDC and USDT, and DAI.
Our roadmap contains three additional minting mechanisms, which will be launched at a later date, as approved by Inter Protocol governance.
The next minting mechanism to launch is user-controlled vaults. Vaults enable a user to mint IST using IBC-native assets. Users can easily retrieve their initial collateral by paying back the minted IST and any associated fees. If the value of the Vault’s collateral falls below the liquidation threshold, the vault is automatically liquidated by a smart contract.
The BLDer DAO can vote to add new collateral assets available over IBC to the vault system. Minting limits are controlled per collateral asset by the Inter Protocol Economic Committee. ** Update December 2023: Vaults launched in June. ATOM was the first asset available for minting IST. In November stATOM was added. New collateral assets are currently being discussed by the community.
BLD Boost is a mechanism that allows stakers of Agoric BLD to mint a limited amount of IST by borrowing against future staking rewards.
The reserved staked BLD collateral will continue generating staking rewards. While there is no risk of liquidation, users have to pay back their minted IST plus fees before being able to withdraw their stake.
The Reserve stores the protocol-controlled value (PCV) for the protocol and acts as the primary collection point for protocol fees. BLD holders may choose to allocate the accumulated Reserve. The Reserve holds PCV in the form of crypto collateral which might include ATOM, IST, liquidity tokens, and other assets as deemed necessary by governance. Future iterations of the Reserve may expand to active management of holdings.
Inter Protocol implements several levels of economic protection to ensure that IST maintains parity with the USD and remains fully collateralized, even in case of extreme volatility for the underlying crypto collateral. There are three main economic measures at work.
IST tokens on Inter Protocol are over-collateralized via the Vaults, meaning that for each newly minted IST token, there is a higher amount of collateral backing it. This enables the protocol to factor in the volatility of crypto assets and provides backing for each IST.
The amount of over-collateralization for each asset is determined by governance based on the asset's risk profile. A decentralized oracle network is responsible for monitoring the value of the collateral, automatically triggering liquidation if it falls below the set collateralization ratio.
The Reserve Pool is a fund of diversified cryptocurrencies held by the Inter Protocol as ‘protocol controlled value’. This provides an emergency fund that can cover a shortfall in a major liquidation or extreme market volatility.
Suppose all the collateral in the vaults were hypothetically liquidated, and there is still uncollateralized IST in the open market. In that case, the Reserve Pool works as the last line of defense, enabling the protocol to cover the un-collateralized IST. If a shortfall remains, additional fees flowing into the Reserve Pool can be used as a backstop.
Each Inter Protocol contract with minting authority over IST includes governed contract parameters that can be adjusted by the elected Economic Committee. These parameters affect user incentives which can be used to drive IST back towards peg.
For example, Vaults charge ongoing stability fees to users. If IST falls below peg, stability fees can be raised, increasing the cost of maintaining open vaults. This causes vault owners to buy IST in the open market in order to close their vaults, reducing IST supply and driving price back towards peg. Conversely, if IST is trending above peg, lowering stability fees encourages more minting, more IST supply, and drives price back down.
Our Economic Committee (EC) is an essential part of Inter Protocol and the stability of IST. The EC includes crypto, TradFi, economic, and FinTech experts delegated by BLD holders to manage the technical-economic parameters of IST.
The EC will set Inter Protocol strategy, manage risk parameters, evaluate new collateral types, monitor protocol operations, and respond to process improvement proposals. Inter Protocol elected the first EC members on September 18, 2022. The first members include:
Jason Potts, director of DCF, professor of economics at RMIT University, and founder of the Blockchain Innovation Hub.
Chloe White, an award-winning cryptocurrency consultant, working with governments and venture capital funds.
Thibault Schrepel, associate professor of law at VU Amsterdam, and the published author of 'Blockchain + Antitrust’.
Chris Berg, associate professor at RMIT University, founder and co-director of the Blockchain Innovation Hub.
Youssef Amrani, core Cosmos contributor involved with the ATOM 2.0 whitepaper, and advisor to Stratified Capital.
Joe Clark, mechanism designer at Opyn focused on replicating unusual payoffs, and economics PhD.
New EC members can be included on a need basis through governance proposals by the BLDer DAO.
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