By launching an algorithmic stablecoin that is 100% backed by delta neutral position, UXD Protocol has created a cryptocurrency for users to be able to access a financial asset class that is similar to the United States Dollar in value but completely decentralized and censorship-resistant!
For users just getting started in cryptocurrencies, a stable coin is a token that maintains a fixed value with respect to a particular fiat currency. The most widely accepted fiat currency is the United States Dollar and that is why you will find many stable coins’ value pegged to 1 USD. Examples are Tether (USDT), USD Coin (USDC), Binance USD (BUSD), Terra USD (UST), NIRV (from Nirvana Finance), etc.
One of the major uses of a stablecoin is its lack of volatility in value when compared to other types of cryptocurrencies. The price of Bitcoin, Ethereum, Solana can fluctuate within minutes. A stable coin like UXD can be used to hedge one’s digital asset to prevent its potential loss of value.
As shown above, there are many kinds of stablecoins but some of them are plagued with some disadvantages. An example is Tether (USDT), a stablecoin project that has been constantly accused of lacking proper audit and minting more USDT than the value of its pegged asset.
Centralized organizations like Tether receive fiat transfer of USD and then they send the worth of it to the depositor in their USDT token. But there has been some accusations that Tether has not been totally transparent above their minting processes.
A more transparent alternative to USDT is USDC. USDC functions just like Tether, but the USD liquidity is audited in the United States and publicly available to view.
One solution that Solan DeFi aims to create is an algorithmic stablecoin that is 100% backed by a delta neutral position.
How UXD works
The current stable cryptocurrencies are faced with what DeFi enthusiasts call the trilemma – Stability, Decentralization and Capital Efficiency. The major problem facing the available stablecoins is that they are not decentralized enough and can be destabilized by bank regulations and government orders. UXD helps to solve these problems by implementing a delta neutral trade strategy. Delta is the amount by which the option price changes for a unit of the asset.
What is a Delta Neutral Position?
A delta neutral portfolio is a portfolio made up of positions with offsetting positive and negative changes in the price action of the underlying Cryptocurrency asset such that the net change in the portfolio is zero.
The positive and the negative changes in this asset e.g., Bitcoin will offset each other. By opening a delta neutral position, the portfolio’s total value must be insensitive to changes in the asset, which is Bitcoin in this case.
In the steps below, we show how a user can mint/redeem UXD with BTC:
Step 1: User deposits bitcoin worth 100 USD to UXD Protocol. (We will use the FTX BTC index rate to calculate the BTC/USD rate.)
Step 2: UXD Protocol will mint 100 UXD. Total USD value of bitcoin deposited by the user = amount of UXD issued to user.
Step 3: Users can transact with UXD. The user can transfer, exchange, and store UXD.
Step 4: The user deposits 100 UXD with Soteria for redemption into 100 USD worth of bitcoin.
Step 5: Soteria will destroy the UXD and send bitcoin to the user’s wallet.
Users will also be able to obtain UXD through exchanges and other third party providers. Once the UXD is in circulation, it is freely traded.
Minting the UXD stablecoin has a very smooth process. Launch the app and connect your wallet to the protocol.
Select the asset you have that can be used in swapping for some UXD stablecoin. In my case I use a dollar worth of SOL. Click on MINT. That will initiate the process/steps as described above in this article.
You will get this message if the minting process was successful.
You can now trade easily with the UXD in your wallet. Or you can just keep it so as to store the value of a volatile asset in a safe way.
If you have UXD, you can swap it for any other asset available on the protocol. In this process, I swapped the UXD I minted for SOL again.
The Redemptive process was successful (as shown in the alert on the topmost right side of the page).
UXD Protocol Token and Allocation
The UXP token distribution is as follows:
Total Supply: 10,000,000,000 UXP
Team: 20% – (25% of the allocation for the team is released after the first year and the rest is released over 3 years linearly).
Investors: 15% – (50% of the Investors’ supply is released after the first year, the rest is released over 1 year linearly).
Community: 57% (UXP tokens will be distributed through liquidity mining and through other means decided by the DAO).
Treasury: 5%. (This is an allocation set aside for future funds to grow UXD protocol).
Token sale: 3% (The funds which was raised from the token sale will be used to capitalize the insurance fund).
An algorithmic stablecoin like UXD protocol that solves the stablecoin trilemma could solve a lot of the current problems facing the current issues with DeFi stablecoins. Since most of the available stablecoins require users to deposit an equal 1:1 value of USD, they by default build a system that excludes people who do not have access to traditional banks.
By developing a stablecoin that works regardless of any fiat backing, stablecoins can scale up for the good of users. UXD holders can also earn some interest from the funding rate on the protocol.