Stablecoin with Elasticity + Farming
VeradiVerdict - Issue #105
Yield farming continues to be one of the hottest verticals in DeFi, but an explosion of interest in liquidity mining and staking is also highlighting some key pain points around exorbitant Ethereum gas fees, difficulties in changing positions, and troubles with converting digital assets.
Origin Protocol, which is building a decentralized e-commerce platform, aims to build much of those core yield farming functionalities natively into a stablecoin, enhancing the use cases for the stablecoin and resolving some of the pain points surrounding yield farming management.
Origin launched OUSD, an ERC-20 token stablecoin that is pegged to the US dollar. The crux of OUSD’s value proposition is that it earns significant passive returns for its holders. Users can mint OUSD by depositing a stablecoin (USDT, USDC, Dai) into an Origin smart contract in exchange for OUSD. The protocol then invests the underlying stablecoins across several DeFi and yield farming protocols to earn returns for OUSD holders; these returns are then distributed to holders as further denominations of OUSD. The protocol’s current strategy is built on Compound, but as they validate the security of their smart contracts and build volume, they plan to expand to mining strategies in other protocols, including Aave, Balancer, Curve, and Yearn. The APY is currently in the single digits but should reach double digits soon as they incorporate new tactics.
Unlike most digital assets, OUSD makes use of elastic supply (previously popularized by Ampleforth) to respond to changes in value. Generally, an asset will adjust its price to respond to a change in value, but OUSD simply rebases the money supply and adjusts the amount of OUSD in each user’s wallet to respond to changes in value. This mimics the experience of a traditional bank account, where interest is earned in additional USD.
The protocol has a four-step path towards fully decentralized governance, where all decisions are executed via governance contracts and the Origin community maintains collective ownership over all contracts. In the short term, the protocol is primarily governed by the engineering team, particularly while they stress-test the protocol’s smart contracts.
OUSD provides an incredibly compelling example of what DeFi functionality natively built into crypto primitives could look like. Earning from yield farming and liquidity mining is now as simple as being a holder of OUSD and removes 100% of the user-facing complexity around swaps, exchanging assets, gas fees, and more. Eventually OUSD can be used for payments, especially within Origin’s decentralized e-commerce platform.
Primitives for Yield Farming
Yield farming, or when crypto owners stake their digital assets in exchange for rewards, continues to be one of the hottest and fastest growing verticals within DeFi today. Tantalizing returns, including some well over 100% APR, have led to an explosion of projects in the space, each with their own governance tokens, distribution strategies, and staking protocols.
The nature of staking, however, has introduced several complexities into how users hold digital assets. Traditionally, a staked asset cannot be simultaneously used anywhere else, including in an asset conversion. That means that if a user stakes digital assets, to convert those digital assets into another digital asset (which they may re-stake in the pool), they would have to withdraw their staking position, do the conversion, and re-stake; this is costly in terms of gas fees and can also hurt users’ potential for rewards. DeFi has come up with several workaround solutions to these problems, like swaps which can convert assets without compromising a position, but many of these alternatives are still unideal due to high fees or difficult management.
Given the ubiquity of yield farming and staking in modern DeFi yet still being very non-mainstream, it’s more important than ever to have powerful stablecoins that can better support these unique functionalities in a way that’s inexpensive, intuitive, and native for crypto users.
How do we build yield farming natively into crypto?
This is where OUSD comes into play. OUSD, or the Origin Dollar, is a novel stablecoin put out by the Origin Protocol. The Origin Protocol has been known for building an e-commerce platform on the blockchain and producing “Dshops”, or decentralized online stores for services like Brave, Kyber Network, and Solana. Further partnerships with Samsung and Google has helped with both user and developer adoption.
The centerpiece of OUSD’s design is that it can be transferred freely and that it earns yields from several DeFi protocols simply while sitting in a user’s wallet. One of the most painful parts of DeFi today are the insane Ethereum gas fees required for a user to switch from a staking position to having liquid assets for use. OUSD can be easily transferred without having to pay fees, meaning that it’s incredibly easy for DeFi enthusiasts to switch between different positions and use the same assets for multiple different functionalities.
Additionally, OUSD earns significant returns for its holders simply while sitting in the users’ wallet. A series of smart contracts on the protocol deploy the underlying stablecoins used to mint OUSD to a portfolio of DeFi protocols like Compound, Aave, Balancer, and Curve. The pool of protocols is expected to grow with time and more decentralized governance. The returns of these protocols are converted back into OUSD, which are then distributed back to OUSD holders. The pool dynamically updates to ensure that the underlying assets are distributed in the most profitable way, maximizing the potential for passive income for OUSD holders. This creates a “native” DeFi experience for crypto users, because they can enjoy the benefits of liquidity mining simply by holding a currency, and not even explicitly staking it.
OUSD is an ERC-20 token that is pegged at roughly 1 US dollar. The token is backed by other stablecoins like USDT, USDC, and Dai; users can convert these coins into OUSD via the Origin Dollar Dapp. Users can liquidate their OUSD into stablecoins at any given time via the app as well. OUSD also leverages the concept of elastic supply, which was popularized by Ampleforth, to adjust the value of user’s portfolios and wallets. Unlike other DeFi tokens, whose price changes in response to a change in value, Origin maintains the price of OUSD but rebases the money supply based on changes in value. That means returns to users are distributed not as an inflated asset, but rather as additional denominations of OUSD. Though inspired by and similar to Ampleforth, Origin’s rebasing protocol differs because (1) the tokens are backed by stablecoins, not fiat, making pegging easier, (2) rebasing is biased towards more supply, since the minting of OUSD depends on the success of the underlying strategies, and (3) rebasing is done continuously, in real-time instead of daily. It’s the stablecoin equivalent of accruing interest in your bank account.
The Underlying Strategies
OUSD’s underlying yield farming strategies are key to guaranteeing that users receive passive income form and are incentivized to hold and use OUSD. At launch, OUSD will primarily leverage a simple strategy on Compound; as they validate the security of the protocol and the smart contracts, Origin plans to expand the set of strategies to include protocols like Aave, Balancer, dYdX, Yearn, and more. Within protocols, Origin strategies are structured around lending fees, AMM fees, and the reward tokens offered by the protocol, to determine what allocation is the most profitable.
How is the protocol governed?
In its final form, OUSD will be a fully decentralized protocol that is entirely governed by minters and holders of OUSD. In the short-term, the protocol plans to validate the security and efficiency of their smart contracts, which requires more team-driven governance. The engineering team has built in a 48-hour timelock to any pending protocol changes, ensuring that the broader community has the time to process and respond to updates. Initial strategies will be entirely executed by the team while smart contracts are audited and stress-tested.
Origin has then devised a 4-phase plan to reach fully decentralized governance. Phase 1, which we’re currently in, involves complete management and oversight from the engineering team and rigorous testing of the architecture. Phase 2 involves scoping out value-creators for OUSD and building them privileges in the protocol’s governance. Phase 3 involves deploying governance contracts and further distribution of governance privileges. Phase 4, the final phase, involves full reliance on the governance contracts and the Origin team rescinding ownership of the contracts.
OUSD’s path to decentralized governance (Source: Origin Blog)
Final Thoughts
With the explosion of functionalities and protocols around yield farming and staking, it’s more critical than ever that the crypto sphere build out powerful primitives that specifically target these use cases and make the most of them. The launch of OUSD is a powerful example for how DeFi can natively be leveraged in crypto primitives to enhance the experience of everyday users. Yield farming is now as easy as exchanging a stablecoin for OUSD and watching your wallet grow in value. There are no more exorbitant gas fees, difficulties with strategy management, or problems with changing positions or making swaps. Origin handles everything under the hood for users, helping expand the community of users that can begin to earn rewards from DeFi and yield farming.
OUSD is also an interesting parallel for several key functionalities in traditional consumer finance. With the elastic supply model, OUSD functions much like a bank account that slowly earns interest over time. This interest isn’t earned simply by inflating the value of the underlying asset, but rather just increasing the supply of the token in the wallet, much like how interest adds to the quantity of USD in a regular bank account. OUSD also fits nicely with Origin’s ventures into e-commerce. Dshops on Origin will be able to accept OUSD in transactions. The token is a powerful digital analog for the dollar, in that it can effectively earn interest and be used in day-to-day payments. Altogether, these functionalities offer a promising vision into what mainstreaming DeFi, especially yield farming, could look like, and how these complex, but high-reward functionalities can be natively leveraged in crypto primitives for the entire community’s benefit. With Origin’s experience in building user-friendly products, OUSD has an opportunity to bring decentralized finance to the masses.
Try it out here.
- Paul V
DIGESTS
Crypto Market Structure 3.0
This essay outlines the two significant evolutions in the crypto market over the last decade and articulates a vision for what the future could hold.
NEWS
Startup Backed by Uber Co-Founder Poaches CoinList President Andy Bromberg
CoinList co-founder Andy Bromberg is leaving the token offering platform to helm Eco, a cryptocurrency built to marry savings and spending.
Grammy Award-Winning Artist Releases Ethereum Token
The $RAC token shows how artists can capture the value of their music without relying on third parties.
REGULATIONS
All stocks could become tokenized, says SEC chairman Clayton
Jay Clayton, chairman of the U.S. Securities and Exchange Commission (SEC), thinks that all stocks could become tokenized one day.
IN THE TWEETS
NEW PRODUCTS AND HOT DEALS
With $18M in new funding, Braintrust says it’s creating a fairer model for freelancers
“Just imagine if Uber had given all of its drivers some ownership in the company what a different company it would be today,” Jackson said. “Braintrust will be 100% user-owned. Everyone who participates on the platform has skin in the game.”
Equilibrium, a Polkadot-based project for cross-chain DeFi, raises $5.5 million
Equilibrium, a Polkadot-based, cross-chain decentralized finance (DeFi) project, has raised $5.5 million.
LETS MEET UP
Walks at the park or Zoom coffee meetings!
ABOUT ME
Hi, I’m Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing in blockchain companies and cryptocurrencies. The firm invests in equity, pre-auction ICOs, and cryptocurrencies on the secondary markets. I focus on early-stage investments and share my thoughts on what’s going on in the industry in this weekly newsletter.