# Introducing TAO By [Tao Money](https://paragraph.com/@tao-money) · 2023-06-27 --- Intro ----- We are excited to announce TAO, an Internet Computer version of the RAI stablecoin that will support ICP, ETH and BTC as collateral! Users will be able to assume low-interest loans of TAO against these collaterals and many others. The vast majority of the system backing token, LAO, will be distributed to users of the TAO protocol. To further understand TAO, it helps to understand its predecessors, RAI and the more well-known DAI. ### The State of DAI MakerDAO's DAI is the most popular "decentralized" stablecoin. However, since DAI's launch the MakerDAO team has made continuous sacrifices of DAI's decentralization in favor of growth. We believe this is short-sighted and the credible neutrality of a stablecoin will provide further long-term sustainability than immediate prioritization of growth. ### What backs DAI? This focus on growth spawned **Maker's adoption of risky, centralized collateral**: USDC and real-world physical assets. The main reason for adopting USDC was to control DAI's market price by expanding the supply of DAI. The extent of DAI's reliance on USDC and USDC derivatives can be seen below in one of the most notorious charts in DeFi. ![Source: daistats.com](https://storage.googleapis.com/papyrus_images/105d736188fbb52d27381a233463cab66c436a564619b1ad5c4a5ceabba20b62.png) Source: daistats.com Many in the Maker community believe this dependence on USDC is an [existential risk](https://forum.makerdao.com/t/can-we-justify-the-existential-risk-posed-by-psm-usdc/16180), but are still unable to stop DAI's advances towards centralization. ### Enter RAI [Reflexer's RAI](https://reflexer.finance/) was born 2 years ago in response to DAI’s shortcomings and has [already demonstrated](https://twitter.com/ameensol/status/1548374997072166914) how a floating peg can offset supply/demand imbalances inherent in over-collateralized stablecoins. The floating peg is _fully autonomous, managed_ by an on-chain [PID controller](https://en.wikipedia.org//wiki/PID_controller) that controls the rate of change of RAI's price. Basically, the controller makes the rate positive when there is excess RAI supply and negative when there is excess RAI demand. These corrections incentivize the market price to converge to the actual redemption value of RAI. ### RAI’s Sovereign Peg At face-value, [the purpose of changing RAI's price through rates is to influence market prices](https://youtu.be/wyr297JjEGY?t=631), avoiding extended de-pegging seen in other crypto collateralized stablecoins. However, since de-pegging is correlated with the price of the underlying collateral, the system's response creates a RAI price that indirectly reflects the USD price of the underlying collateral(s). Like RAI, TAO will have this _sovereign exchange rate_, controlled by a similar on-chain controller. Below is RAI's recent USD price(in green) in comparison with other world currencies since the crypto bear market begin in Nov 2021. ![Source: Reflexer Discord](https://storage.googleapis.com/papyrus_images/9c9f7eded7dc9dea11a9872de8c88608de9c14a78887ad13ae7ef176bf1d4a52.png) Source: Reflexer Discord To learn more about RAI, visit [RAI's price dashboard](https://reflexer-labs.github.io/geb-data-science/controller/output/index.html) or read the [whitepaper](https://github.com/reflexer-labs/whitepapers/blob/master/English/rai-english.pdf).- ### So what is RAI missing? RAI only accepts ETH as collateral. This is by design, as RAI sought to be an ungoverned system, and managing collaterals requires governance. However, with the success of the Merge and adoption of Proof of Stake, a considerable amount of ETH will be staked by validators for the foreseeable future. Some people believe the lost opportunity cost of using ETH as collateral in RAI, and not staking it, has contributed to [long-term negative rates in RAI](https://stats.reflexer.finance/). _What if there was a decentralized RAI-like system that accepted multiple collaterals like BTC, ICP (and staked ICP), ETH (and staked ETH)?_ ### Enter TAO Upon launch, TAO will support ICP, ckETH, ckBTC and other derived collaterals . Users will be able to lock these collaterals in a safe and mint TAO. Other LSDs will be assessed in the future. TAO will support multiple collaterals like DAI, but will retain the floating price mechanism of RAI. **_Because of the floating peg, there is no temptation to onboard centralized stablecoins in order to obey a fixed USD peg, as was done with DAI._** ### Lower Liquidation Penalties TAO will use the same general liquidation mechanism as RAI and DAI, [increasing discount auctions](https://docs.reflexer.finance/system-contracts/auction-module/increasing-discount-collateral-auction-house), but will charge a **much lower penalty** when a position is liquidated. Based on our analysis, this lower penalty will not tangibly increase risk to the system. Liquidation Penalties * RAI: 10% * DAI: 13% * TAO: 2-5%, collateral-specific ### Token Distribution _We believe the control of a decentralized stablecoin should be distributed as much as possible._ This is why we have chosen a "fair launch" style of token distribution, leveraging the SNS system of the Internet Computer. There will be **no pre-sales or VCs** involved. Users of the protocol will be given the majority of the system token, LAO, in order to maximize [credible neutrality](https://nakamoto.com/credible-neutrality/). ### LAO Allocation * Team: 10% * Treasury: 10% * **_TAO Users: 60%_** * SNS: 20% ### LAO Rewards TAO will launch with LAO rewards for users who 1. mint TAO and/or 2. provide liquidity in the pools used for the TAO oracle. ### Oracles The system will use custom oracles created using HTTPS outcalls for collaterals upon launch. The system also needs a TAO/USD oracle used by the rate controller in controlling the floating peg. The TAO/USD oracle will be derived from several DeFi protocols on the Internet Computer. ### System Automation TAO protocol has functions that are called periodically to maintain the system. Examples include * Collecting interest * Starting auctions * Updating oracle prices These functions will directly pay callers with TAO from the protocol's treasury. So external parties will be intrinsically motivated to keep TAO running efficiently. ### Tokenomics TAO will adopt the **buyback-and-burn** token model of DAI/RAI, using the governance/system token, LAO. Surplus from safe interest and liquidations will be auctioned off for LAO at a discount. The LAO collected is automatically burned. RAI has already [burned 2.5% of its governing token, FLX](https://tokenomics.reflexer.finance/) through surplus auctions. Like RAI/DAI, LAO will also be printed and sold in the event of any unbacked debt the system experiences. For more details, read about [MakerDAO's surplus and debt auctions](https://docs.makerdao.com/keepers/the-auctions-of-the-maker-protocol). ### Additional Automation _We believe the future of stablecoin governance involves impartial automation._ ![Source: Internet](https://storage.googleapis.com/papyrus_images/279bfd11604f216d42052c1f077266808be11e73b61699081b581f51b3de6a53.png) Source: Internet We are researching further automation of TAO's operations, replacing governance with on-chain mechanisms wherever possible. Further areas we would like to automate in the future: * Stability fees * Collateral management ### When? We plan to launch TAO on the Internet Computer in early **Q1 of 2024.** --- *Originally published on [Tao Money](https://paragraph.com/@tao-money/introducing-tao)*