Collateralized Stablecoins: What Goes On Under Our Hood? | Hacker Noon

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@unitprotocolUnit Protocol

Unit is a decentralized lending protocol that allows using a variety of tokens as collateral. Acc is owned by community.

Decentralized finance plays an increasingly important role in the Ethereum ecosystem with the adoption of classic financial operations such as borrowing, lending, and various derivative issuance, as well as instruments with stable value creation. DeFi is in the early stages of existence, and the overall efficiency and variety of decentralized services are low compared to the fiat financial world. However, the programmable and decentralized nature of such services provides the potential for massive growth in the coming years.

DeFi services have different purposes and functionality, but their token economic models are mostly weak, such as simple governance token economic models, and do not allow long-term value capture. The majority of their token value is based on speculation without sustainable organic drivers. While a lot projects weathered the storm of cascading liquidations, Unit Protocol proved the legitimacy of its business model with its USDP stablecoin.

What is $USDP?

$USDP is a dollar pegged stablecoin similar to other stablecoin offerings like $DAI. However, one of the concerns increasingly associated with $DAI is it’s growing reliance on centralized assets (e.g. USDC, USDT, WBTC, etc.) as collateral. One of the main differentiators for $USDP is the diverse set of cryptocurrencies that are allowed for collateral giving it a healthier mix of decentralized collateral.

USDP token address: 0x1456688345527be1f37e9e627da0837d6f08c925

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$USDP is pegged against the US dollar in a free-floating peg. Meaning that the value of $USDP although pegged against the US Dollar, it will still experience low level fluctuation in value. $USDP maintains its stability through a combination of external (market), internal forces, and incentivization tools utilized by $DUCK token holders & Protocol Team.

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Every issued $USDP is overcollateralized, meaning that at any given point of time, the value of provided collateral is higher then the value of circulating $USDP.

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Unit protocol takes into account that the market can be self-regulated and ensures that the price of stablecoin reaches its peg. Unit protocol lets users issue the $USDP stablecoin for a provided collateral. Instead of focusing on the stablecoin price, it focuses on the value of $USDP to ensure that it reaches the peg over time. This mechanism allows Unit Protocol to scale in the long run.

What if collateral value drops?

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Liquidations

In Unit protocol, every USDP is fully backed by provided collateral. If the debt/collateral ratio exceeds a Liquidation Ratio (LR) for a CDP, it will be subject to liquidation. Anyone can trigger liquidation by sending a trigger transaction. There are liquidation bots that consistently monitor CDPs and trigger liquidations if the stated condition is met.

After a CDP is triggered for liquidation, a Dutch auction starts for underlying collateral with a linear decrease in price. (the price decremental step can be different for various assets, but for the most amount of assets it is ~0.09% decrease per block).

Every participant can buyout the part of the collateral for the current price by paying the USDP debt for a liquidated CDP. USDP debt is equal to borrowed USDP amount plus the liquidation fee in % from this amount.

After collateral realization, the remaining part is returned to the borrower’s address, their USDP debt is burned, and the liquidation fee is sent to the governance pool address for fee distribution.

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