Author: 3HOUSE user @0xDigiPap

Stablecoins are an important concept in the field of digital currencies, as they can provide stable value to the cryptocurrency market, increasing market predictability and usability. With the continuous development and maturity of the cryptocurrency market, more and more stablecoin projects are emerging, including centralized stablecoins and decentralized stablecoins. However, due to the single point of failure and trust issues of centralized stablecoins, decentralized stablecoins have gradually become the main choice in the stablecoin market. In this article, we will introduce RAI as an ideal type of decentralized stablecoin.

RAI is a decentralized stablecoin project released by Reflexer Labs, aiming to provide users with a reliable stablecoin option. RAI has the ultimate trustlessness features of non-fiat anchoring, complete decentralization, and minimized governance. It is one of the most decentralized stablecoins on the Ethereum network, and has been referred to by Ethereum founder Vitalik as a "pure ideal type of collateralized automatic stablecoin supported only by ETH."

Users over-collateralize ETH to generate stablecoin RAI, paying an annual interest rate of 2% to continue using RAI. Users can repay RAI and pay loan interest to redeem ETH. System governance is currently carried out by FLX token holders, and they hope to achieve "no governance" in the long run.

For stablecoins and any currency, the supply control mechanism is the most important part of its design. Since the overall market demand is not predictable, the core mechanism for stablecoin price stability is mainly based on supply control. A supply control mechanism that can flexibly respond to the market while maintaining underlying stability is what every stablecoin project hopes to build.

The Reflexer system allows users to generate RAI based on the redemption price at any time, and also allows users to repay RAI and retrieve collateralized ETH based on the system's redemption price at any time. The core of the Reflexer system's supply control is that when the market supply and demand are imbalanced, Reflexer will actively adjust the RAI redemption price, guiding the market price to approach the redemption price by incentivizing user arbitrage behavior, thereby achieving a new supply and demand balance. The RAI redemption price was initially set at 3.14 (pi), and is then adjusted by code based on market prices.

In the Reflexer system, there are two types of roles: net RAI debtors (borrowers) and net RAI asset holders (lenders). RAI borrowers generally refer to users who collateralize ETH to generate RAI and use RAI for other purposes. They have net RAI debt and need to purchase RAI from the market to repay it.

When the demand for RAI in the market is strong, causing the market price of RAI to rise, the system will automatically reduce the redemption price of RAI, making the redemption price of RAI more significantly lower than the market price, thereby making participants in the system more inclined to increase borrowing. They do this by pledging ETH to obtain new RAI and sell it to the market for profit, thereby increasing the supply of RAI and lowering the market price.

When the demand for RAI in the market is weak, causing the market price of RAI to fall, the adjustment of the system is relative. The system will automatically increase the redemption price, making the redemption price of RAI more significantly higher than the market price, thereby making borrowers in the system more inclined to repay their loans. They do this by purchasing RAI from the market and repaying it to the system, thereby reducing the supply of RAI and increasing the market price.

RAI is a stablecoin over-collateralized, and like other stablecoin protocols or lending protocols that use over-collateralization, when the ratio of collateral value to borrowed value of someone's collateral is lower than a specific threshold, to ensure the safety and health of the protocol, it will trigger liquidation. At this time, the liquidator obtains the collateral (ETH) of the liquidated person through fixed discount auction, and at the same time repays the debt (RAI) on behalf of the liquidated person. This process is called "collateral liquidation" and is the first line of defense for protocol safety.

The stable fee (interest) collected by the protocol during normal operation is recorded in the "surplus buffer". When collateral liquidation cannot handle all bad debts, the protocol will first use the funds in the surplus buffer to liquidate bad debts, which is the second line of defense for protocol safety (the amount accumulated in the surplus buffer beyond a certain amount or period of time will be voted by the DAO for repurchasing FLX and destroying it).

If the surplus buffer cannot handle bad debts, the protocol will enter "debt auction". Debt auction is the system's issuance of more FLX tokens to exchange for RAI on the market to complete debt processing. This is the third line of defense for protocol safety and corresponds to the "last lender" function in the FLX token.

So far, the liquidations that have occurred since the launch of RAI have been collateral liquidations, and surplus buffer redemption and debt auctions have not been used.

RAI's circulating market value is less than tens of millions of US dollars, and important indicators such as the number of holders, TVL, and number of transfers are far from those of other stablecoins, but RAI still has good development potential and competitive advantages.

Non-fiat Anchoring

Unlike most stablecoins, RAI's price is not anchored to fiat or any physical item, but is anchored to market demand through a circuitous route. Stablecoins, which have become the "puppets" of the US dollar, have made cryptocurrencies not a super-sovereign currency, but rather a sub-sovereign currency, which is contrary to the anti-inflation and trustless principles that cryptocurrencies were born with. If the Federal Reserve engages in unbridled currency issuance, the cryptocurrency world may also suffer from inflation. From this perspective, Reflexer operates a pure central bank business, while Circle/Tether or MakerDAO operates a commercial bank within the Federal Reserve (European Central Bank) system. Giving up the anchoring to the US dollar allows Reflexer to completely disconnect from US regulation and isolate the impact of US monetary policy on its stablecoin RAI. At the same time, this feature is also a rare fault-tolerant mechanism for stablecoins in the entire cryptocurrency world.

Complete Decentralization

RAI is completely decentralized, and the system only supports ETH as collateral. Similar to LUSD, with excellent mechanisms, RAI has achieved relatively stable prices within a wide range, and its over-collateralization rate has fluctuated between 300% and 400%. However, decentralization comes at a cost. For decentralized stablecoins, it is easy to introduce more centralized assets, but it is difficult to build a stablecoin system based on complete decentralization. Giving up higher capital efficiency and more stable prices is the price Reflexer pays for decentralization and anti-censorship.

Minimized Governance

The most essential feature of RAI is decentralization/trustlessness. In the mechanism design, RAI does not trust the Federal Reserve or any "person". One of its core guiding principles is the concept of minimized governance. RAI believes that it should achieve as much automation, self-sufficiency, and avoidance of external dependencies as possible. Its ultimate goal is to achieve no governance, just like another stablecoin project Liquity. Minimized governance or no governance will certainly affect the protocol's adaptability and adjustment capabilities in a complex and changing environment. For example, Reflexer cannot increase protocol income by raising stable fees when market sentiment is high. Reflexer, which aims to minimize governance, and Liquity, which aims for no governance, are also far behind other stablecoin protocols that are more active in governance in terms of use case expansion. However, having governance is easy, while minimizing governance/no governance is difficult. Giving up governance of the protocol is the price Reflexer pays for decentralization and anti-censorship features.

As Ethereum founder Vitalik has said, "RAI better embodies the pure 'ideal type' of a collateralized, stablecoin backed only by ETH." The future that RAI hopes to achieve is "a peer-to-peer electronic cash system that requires no trusted third parties," which is the biggest narrative in the entire cryptocurrency market.

About Campfire

Campfire is the 3HOUSE community's fortnightly focus direction. Every two weeks, the development team, in collaboration with the community, look at an important and relevant issue within the crypto industry and try to unpack it from multiple angles.

Campfire is our community's way of getting to the heart of complex issues together to better inform investment decisions and cut through the noise of traditional content platforms.

Author: 3HOUSE user @0xDigiPap

Stablecoins are an important concept in the field of digital currencies, as they can provide stable value to the cryptocurrency market, increasing market predictability and usability. With the continuous development and maturity of the cryptocurrency market, more and more stablecoin projects are emerging, including centralized stablecoins and decentralized stablecoins. However, due to the single point of failure and trust issues of centralized stablecoins, decentralized stablecoins have gradually become the main choice in the stablecoin market. In this article, we will introduce RAI as an ideal type of decentralized stablecoin.

RAI is a decentralized stablecoin project released by Reflexer Labs, aiming to provide users with a reliable stablecoin option. RAI has the ultimate trustlessness features of non-fiat anchoring, complete decentralization, and minimized governance. It is one of the most decentralized stablecoins on the Ethereum network, and has been referred to by Ethereum founder Vitalik as a "pure ideal type of collateralized automatic stablecoin supported only by ETH."

Users over-collateralize ETH to generate stablecoin RAI, paying an annual interest rate of 2% to continue using RAI. Users can repay RAI and pay loan interest to redeem ETH. System governance is currently carried out by FLX token holders, and they hope to achieve "no governance" in the long run.

For stablecoins and any currency, the supply control mechanism is the most important part of its design. Since the overall market demand is not predictable, the core mechanism for stablecoin price stability is mainly based on supply control. A supply control mechanism that can flexibly respond to the market while maintaining underlying stability is what every stablecoin project hopes to build.

The Reflexer system allows users to generate RAI based on the redemption price at any time, and also allows users to repay RAI and retrieve collateralized ETH based on the system's redemption price at any time. The core of the Reflexer system's supply control is that when the market supply and demand are imbalanced, Reflexer will actively adjust the RAI redemption price, guiding the market price to approach the redemption price by incentivizing user arbitrage behavior, thereby achieving a new supply and demand balance. The RAI redemption price was initially set at 3.14 (pi), and is then adjusted by code based on market prices.

In the Reflexer system, there are two types of roles: net RAI debtors (borrowers) and net RAI asset holders (lenders). RAI borrowers generally refer to users who collateralize ETH to generate RAI and use RAI for other purposes. They have net RAI debt and need to purchase RAI from the market to repay it.

When the demand for RAI in the market is strong, causing the market price of RAI to rise, the system will automatically reduce the redemption price of RAI, making the redemption price of RAI more significantly lower than the market price, thereby making participants in the system more inclined to increase borrowing. They do this by pledging ETH to obtain new RAI and sell it to the market for profit, thereby increasing the supply of RAI and lowering the market price.

When the demand for RAI in the market is weak, causing the market price of RAI to fall, the adjustment of the system is relative. The system will automatically increase the redemption price, making the redemption price of RAI more significantly higher than the market price, thereby making borrowers in the system more inclined to repay their loans. They do this by purchasing RAI from the market and repaying it to the system, thereby reducing the supply of RAI and increasing the market price.

RAI is a stablecoin over-collateralized, and like other stablecoin protocols or lending protocols that use over-collateralization, when the ratio of collateral value to borrowed value of someone's collateral is lower than a specific threshold, to ensure the safety and health of the protocol, it will trigger liquidation. At this time, the liquidator obtains the collateral (ETH) of the liquidated person through fixed discount auction, and at the same time repays the debt (RAI) on behalf of the liquidated person. This process is called "collateral liquidation" and is the first line of defense for protocol safety.

The stable fee (interest) collected by the protocol during normal operation is recorded in the "surplus buffer". When collateral liquidation cannot handle all bad debts, the protocol will first use the funds in the surplus buffer to liquidate bad debts, which is the second line of defense for protocol safety (the amount accumulated in the surplus buffer beyond a certain amount or period of time will be voted by the DAO for repurchasing FLX and destroying it).

If the surplus buffer cannot handle bad debts, the protocol will enter "debt auction". Debt auction is the system's issuance of more FLX tokens to exchange for RAI on the market to complete debt processing. This is the third line of defense for protocol safety and corresponds to the "last lender" function in the FLX token.

So far, the liquidations that have occurred since the launch of RAI have been collateral liquidations, and surplus buffer redemption and debt auctions have not been used.

RAI's circulating market value is less than tens of millions of US dollars, and important indicators such as the number of holders, TVL, and number of transfers are far from those of other stablecoins, but RAI still has good development potential and competitive advantages.

Non-fiat Anchoring

Unlike most stablecoins, RAI's price is not anchored to fiat or any physical item, but is anchored to market demand through a circuitous route. Stablecoins, which have become the "puppets" of the US dollar, have made cryptocurrencies not a super-sovereign currency, but rather a sub-sovereign currency, which is contrary to the anti-inflation and trustless principles that cryptocurrencies were born with. If the Federal Reserve engages in unbridled currency issuance, the cryptocurrency world may also suffer from inflation. From this perspective, Reflexer operates a pure central bank business, while Circle/Tether or MakerDAO operates a commercial bank within the Federal Reserve (European Central Bank) system. Giving up the anchoring to the US dollar allows Reflexer to completely disconnect from US regulation and isolate the impact of US monetary policy on its stablecoin RAI. At the same time, this feature is also a rare fault-tolerant mechanism for stablecoins in the entire cryptocurrency world.

Complete Decentralization

RAI is completely decentralized, and the system only supports ETH as collateral. Similar to LUSD, with excellent mechanisms, RAI has achieved relatively stable prices within a wide range, and its over-collateralization rate has fluctuated between 300% and 400%. However, decentralization comes at a cost. For decentralized stablecoins, it is easy to introduce more centralized assets, but it is difficult to build a stablecoin system based on complete decentralization. Giving up higher capital efficiency and more stable prices is the price Reflexer pays for decentralization and anti-censorship.

Minimized Governance

The most essential feature of RAI is decentralization/trustlessness. In the mechanism design, RAI does not trust the Federal Reserve or any "person". One of its core guiding principles is the concept of minimized governance. RAI believes that it should achieve as much automation, self-sufficiency, and avoidance of external dependencies as possible. Its ultimate goal is to achieve no governance, just like another stablecoin project Liquity. Minimized governance or no governance will certainly affect the protocol's adaptability and adjustment capabilities in a complex and changing environment. For example, Reflexer cannot increase protocol income by raising stable fees when market sentiment is high. Reflexer, which aims to minimize governance, and Liquity, which aims for no governance, are also far behind other stablecoin protocols that are more active in governance in terms of use case expansion. However, having governance is easy, while minimizing governance/no governance is difficult. Giving up governance of the protocol is the price Reflexer pays for decentralization and anti-censorship features.

As Ethereum founder Vitalik has said, "RAI better embodies the pure 'ideal type' of a collateralized, stablecoin backed only by ETH." The future that RAI hopes to achieve is "a peer-to-peer electronic cash system that requires no trusted third parties," which is the biggest narrative in the entire cryptocurrency market.

About Campfire

Campfire is the 3HOUSE community's fortnightly focus direction. Every two weeks, the development team, in collaboration with the community, look at an important and relevant issue within the crypto industry and try to unpack it from multiple angles.

Campfire is our community's way of getting to the heart of complex issues together to better inform investment decisions and cut through the noise of traditional content platforms.