Stablecoins are cryptocurrencies with stable value regardless of the market conditions. Compared to the high volatility of crypto assets, these stablecoins are well suited to be a store of value, often forming the link with traditional financial systems. Stablecoins have the potential to become global, digital cash. As such, their total addressable market can be considered to be M1 i.e. banknotes and coins, plus overnight deposits. The total M1 supply for USD is nearly 20.5 trillion dollars as of Sep 21, which gives an enormous market to stable coins ripe for disruption.

Stablecoins have been one of the fastest growing sectors of DeFi. In the below chart, I have tried to estimate the market size of stable coins by 2030, which I estimate to reach around USD 13 trillion with steady state growth rate of around 30%.

To further understand the stablecoin market and some of the major challenges, let us first understand how the “stability” of stable coins is maintained. Broadly this is done in one of the four ways — fiat-backed, crypto-backed, commodity-backed, or Algorithm-backed.

1. Fiat-backed Stablecoins are backed 1–1 by fiat currency often USD such as Tether. The peg is maintained by a central institution, which holds the fiat currencies in bank accounts.

2. Commodity-backed Stablecoins are similar, except the peg is maintained to a physical asset such as Gold. The challenge with this method is reliance on issuing entities, which can fail to fulfil their obligation.

3. Crypto-Backed Stablecoins are generated on-chain by depositing cryptocurrency such as BTC/Ether. Since the price of cryptocurrencies is volatile, one often needs to deposit more than the amount of stablecoin received, for e.g.: Depositing $ 150 worth of BTC for $ 100 with of DAI. While this has the benefit of decentralization, the process isn’t capital efficient as users lock a higher amount of capital.

4. Algorithmic Stablecoins in contrast, do not use fiat or crypto collateral; instead rely on the use of algorithms and smart contracts to manage the supply of tokens in circulation. While they optimize for decentralization and capital efficiency, the stability of the peg is still vulnerable to risks/assumptions while developing the algorithms.

This leads us to the stablecoin trilemma, which states that there will always be a trade-off between

1. Stability — The peg is always maintained

2. Decentralization — Issuance & trading doesn’t rely on a central entity

3. Capital efficiency — How much $ of assets for 1 $ eq of stable coin. For eg: if 150 $ of BTC is needed for 100 $, the coin is over collateralized and capital inefficient.

Stablecoin Trilemma

UXD is an algorithmic stablecoin, backed 100% by delta neutral position. By using financial products like perpetual futures, UXD optimizes for all 3 parts of the stablecoin trilemma.

How does it work?

Let’s suppose you want 100 $ worth of the stable coin, but you only have 100 $ of some cryptocurrency, say SOL. So ideally, you could deposit 100 $ worth of SOL into the protocol and get a loan against it. Now, most exchanges will give you a loan of less than 100$, often only up to 50 $, whereas you gave up SOL worth 100 $. The protocol does this to protect itself against volatility.

So if the price of the SOL deposit falls to 70 $, and you refuse to return the 100 $ worth of loan, the protocol has some buffer to protect itself. However, this method is capital inefficient as you are locking up more $ value worth of collateral. UXD solves this problem by creating a delta-neutral position against your deposit.

So what’s delta neutrality?

Delta refers to the change in the price of a financial derivative with respect to a change in the price of underlying. So, if say a BTC-linked product has a delta of 50%, its price will change by 0.5 $ for every 1 $ change in the price of BTC. So, if something is delta neutral, it means that irrespective of the change in the price of underlying, its value doesn’t change.

Coming back to our first example, the main reason why exchange gives you a loan less than the collateral is because of its exposure to the underlying coin, but if the exchange could eliminate this exposure, then it would be delta neutral. Since this would reduce its risk, it can give you a higher loan for the same collateral, i.e., become more capital efficient.

UXD Value Proposition

UXD employs on-chain perpetual futures contracts to create this delta neutrality. Futures are financial contracts that allow users to buy (go long) or sell (go short) at a predetermined price.

So, to mint UXD, users first need to deposit collateral. For this example, suppose I deposit 10 SOL worth ~1200 $. Once, the deposit is received, UXD shorts equivalent dollar amount of futures on a Decentralized exchange. Users can deposit this borrowed UXD to redeem their SOL from protocol. UXD in turn shorts 1200 $ worth of perpetual SOL futures on a Decentralized exchange like Mango Markets.

Perpetual futures & Funding Rates- Futures contracts are agreements to buy or sell an asset at predetermined price at a specific time. Perpetual futures as the name suggests do not have an expiration date and as such have price very close to market price of underlying asset. In the below chart, blue line is SOL index price while red line is the price for perpetual future. The more efficient the market, the lesser the difference will be.

Funding rates, help link futures price to that of underlying asset and are updated periodically. When the price difference in perpetual contract is higher than market price, participants who are long, pay the ones who are short. Conversely, a negative funding rate indicates that perpetual prices are below the mark price, which means that participants with short positions pay those with long position. The funding rate mechanism helps to keep contract prices in line with the underlying.

As we discussed earlier, higher the market efficiency, lesser the difference and hence lower the funding rate. However, these rates can spike significantly in times of market dislocations.

When the funding rates are positive, UXD passes them onto users after deducting a small amount for its insurance fund. This insurance fund is created to negative funding rates since they aren't passed onto customers. More reason to convert, eh? The fund was initially capitalized at $57,086,131 on 14th Oct 2021. This means that at its initial value, UXD’s insurance fund could withstand -11.4% funding rates on $500 milllion of UXD for an entire year. If the fund is depleted, UXD would issue UXP tokens to cover it. UXP Token is the governance token to control decisions made through UXD DAO. Governing the insurance fund is the responsibility of the UXP DAO. The two main revenue sources for the UXP protocol are take from positive funding rates and active management of insurance funds

Source: UXD Website

UXP was offered in a public IDO ending November 14th that raised over $57M from 3,676 investors. Funds raised in the IDO are directed towards the insurance fund. In addition to IDO funds, UXD raised a $3M seed round from investors like Alameda Research, Multicoin Capital, Defiance Capital, CMS Holdings, Solana Foundation, Mercurial Finance, Saber DEX founder Dylan Macalinao and Solana Founders Anatoly Yakavenko and Raj Gokal.

UXP — USD Price Source: Coinmarketcap

The main risks for UXD are-

1. Smart Contract Risk — Bug in smart contracts of UXP protocols / underlying exchanges.

2. Negative Funding Rates: If the funding rates are negative long enough to cause full depletion of the insurance fund.

3. Insurance Fund Asset Management Risk: The insurance fund is expected to be deployed in active asset management strategies which might have various investment risks.

4. Insufficient Liquidity to Exit UXD Positions: If the underlying derivative exchanges lack liquidity to service UXD unwind orders.

5. Supply/Demand Imbalance: Due to unrestricted access to mint/redeem, significant crypto assets, there could be a situation where there is imbalance between supply and demand, which in turn could cause UXD to trade off its peg.

Stablecoins seek to combine the stability of developed market fiat currencies with the advantages of the blockchain. While Tether & Circle have already proved the importance of stablecoins to the ecosystem, UXP protocol with its scalable, decentralized, and stable operating mechanisms might just be the next step in the evolution of a true global, digital cash.

References-

1. An Overview of Stablecoins

2. UXD White Paper

3. UXD Website

4. A Beginner’s Guide To Funding Rates

5. Messari Report — UXD tackling the stablecoin trilemma

6. https://multicoin.capital/2021/09/02/solving-the-stablecoin-trilemma/

Stay awake the whole night, in a room with all your close friends, talking.Pondering over the most magical 3.5 years of your life. Laugh. Cry. Sing that song that made all your trips so special. Let go. Dance. Take an early morning stroll on the campus, watch the sun come up, let it hit you that this is it. This is the end to the most memorable 3.5 years of your life. Take a moment, think about the person who entered those gates a few years back. Think about the one who is going to leave. This is the most phenomenal transition that is ever going to happen to you. Embrace it. Get up, dust yourself, and catch a ride to Bogmallo. While sitting on the rocks by the beach, sipping the cheapest beer or just coke :P, relive the memories in that place.

Remember those drunken trips, those post-exam celebrations, those mid-semester escapes. Spend the night at Curlies, while you listen to the most trippy Goa Trance ever, lie on the chairs by the beach and get drunk with your friends who have come down from PS. Pass out and wake up at 5 in the morning, roam the empty beach, get on a cab and stop by the only cafe on the way for breakfast. Get back to the campus, sleepless, attend your last Waves with your friends. Don’t sleep for those 3 days. Bid adieu to your friends leaving for PS.

Make a final trip to the Insti building. Thank that prof. who helped you when no one else did. Drop by those labs where you had no clue what you were doing. Sit at Monginis or Ice n’ Spice for a while. Observe the firsties talking, this was you a few years ago. Get on the top of B-Dome Or on the top of the library. Sit there for a while, observe life going on around you. Accept, that it’s over. Don’t cry. Just pick yourself up and move on, to a place where there is no Zero-attendance.

As one journey ends, the new begins.

This article is about the journey of my team, BPGC Firsties, to the world finals of the inaugural International Quant Championship, 2018, at Singapore, a journey which provided us glimpses on how the field of quantitative finance is evolving and the role played by technology and human capital in shaping it, a journey which gave us the opportunity to meet and interact with some of the finest minds in quant finance and who no doubt would be the torchbearers of the industry in the coming years, a journey which brought us a lot of rewards, both material and intellectual. The objective of the competition was to create alphas or mathematical models to predict movements of financial instruments. Over the course of the competition, we used WorldQuant’s WebSim platform to develop and backtest these predictive models, which simulated equity positions and expected returns, and we were scored based on the performance of our alphas. The competition itself had three rounds: the university round, the national round and finally, the international round.

University Round (Mar 20-May 20):

The university round began on 20th March. My teammates and I were quite excited as, being freshmen, this was one of the first competitions we were participating in. Most of us had very little experience and practically no exposure to the world of quant, so this was the round in which we struggled the most. By watching online webinars, reading books and blogs, watching videos on WebSim, interacting with seniors, and discussing amongst ourselves, we slowly learned the process of alpha creation. Ideation of new alphas was a very creative exercise, which we came to love a lot. More often than not, we would actively follow the news and see if the idea could be implemented before others in the team.

I remember an instance when we were reading about Jio, a telecom company started by Reliance, an Indian energy giant. On delving deeper into the news, we learned that it had nearly tripled its debt in the last 5 years to buy telecom assets and had amassed a phenomenal number of internet users. Now, a debate ensued amongst us about whether it would be successful or not. Over the night, everyone in the team began researching the impact of debt on the company’s future prospects and soon enough, Sreeram came up with an idea, which combined changes in capital structure, growth in assets and changes in operating efficiency and interest expense, to model the answer about the impact of debt. Later, he got a treat from all of us. Finally, on May 28 after nearly 2 months of relentless hard work, we made it to regional finals.

National Round (May 29-July 8 )

Similar to the previous round, the initial phase involved building alphas. However, in this round, we had an opportunity to have a websim researcher from WorldQuant, Mr. Vivek Aloor, as a mentor for our team, who helped us refine our alpha making process and improve our alpha pool. We participated in various practice sessions and asked a lot of questions related to our ideas and their implementation. Previously, our ideas were basic and rudimentary, but as a result of these sessions, we started making more and newer operators. We also started working on more complex ideas and multiple datasets. All of this helped us diversify the alpha pool and was an amazing learning experience. Finally, we managed to make it to the top 15 teams nationwide and were invited to participate in the National finals in Mumbai.

National Finals Mumbai (July 8)

At the end of over three months of alpha making, we finally had the opportunity to showcase our work in front of members of the WorldQuant team. To prepare for national finals, we watched dozens of videos and gave many mock presentations to each other. The day of the presentation was one of the best days of our lives. At the end of the day, when the results were announced, none of us could believe that we had finally made it to world finals.

International round (July 9-Sept 10):

After the national round, we began our preparations for the final round. At this point, while we were quite comfortable with making and implementing various ideas, we were focussed on diversifying our alpha pool as much as possible. We also started making alphas on different sets of instruments based on their liquidity. The best learning experience, however, was at the sessions organized to help us make effective presentations. Finally, we reached the last stage of our journey, the international finals.

Singapore (Sept 8–10)

We left for Singapore on 8 September. The international final was a grand event which was spread over 2 days, with 47 exceptional young minds from 15 different countries participating, each of whom had distinguished themselves in their country and now had one final hurdle left before they could call themselves the quant champion. The opportunity to interact with such a wonderful group of people was an amazing experience. The finals began with a welcome session, which was followed by an icebreaker session. We were given a sheet of paper and were asked to find people who were described by the qualities given on the sheet. The entire room was filled with laughter, questions, and excitement. Thanks to IQC, we made friends from various countries around the world. After the fun-filled activities of the morning, we were introduced to our problem statement about creating a combination of alphas and were given three hours for it. It was extremely challenging and intriguing. This was followed by an extremely exciting dinner where participants and WorldQuant employees showcased their talents. Before we even knew, the day was over!

The second day consisted of team presentations, where each team talked about their method of solving the problem statement. All the presentations were absolutely fantastic. We learned a great deal from the way the other teams had approached the problems and their mindsets

After the presentations, we had firechat sessions with various distinguished personalities, who talked about the evolution of the quant industry. This was followed by an inspiring talk on leadership by the founder of WorldQuant, Mr. Igor Tulchinsky. Later, we left our hotel for the gala dinner and awards ceremony at S.E.A. aquarium. It was a memorable evening, where we had the opportunity to interact with some of the senior executives of WorldQuant, and have fantastic food. While we didn’t make it to the top three, the experience taught us a lot of things which would undoubtedly be extremely helpful as I embark on a career in the field of quantitative finance.

There are very few events in life which make one retrospect and think about how the present would have turned out had the event not occurred. The IQC was one such beautiful event, a one of a kind experience, a journey which began on a library table in March and ended at the financial capital of the world, Singapore. It was a perfect start to learn about one of the fastest growing areas in finance. Due to my performance at the IQC, I got an opportunity to intern at WorldQuant India for the summer of 2019. I look forward to joining the company and learn about the industry in greater detail.

Contained in Ben Franklin’s autobiography are the words, “The next thing most like living one’s life over again seems to be a recollection of that life and to make that recollection as durable as possible by putting it down in writing.” This has been my attempt to relive some of the best days of my life and a memory which I would fondly look back on.

Here is a short video about our journey: https://www.youtube.com/watch?v=5ePjbQlIo4g

A huge credit belongs to Aleks, the girl who took me to the dancing arena turning me into a messy, kind of chaotic but super excited kid who just got first candy from a breathless spectator revelling in the beauty of seeing others dance. It was truly amazing. I still remember the basic instructions about trusting the partner, the way we communicate with just hand movements is something I have never experienced before. It still fascinates me everytime I think about it. The way steps flowed, the rhythm and of course occasional motivation from Aleks all contributed to a wonderful memory which I will probably cherish for rest of my life.

Another great memory was the way human beings communicate. I had read somewhere that there is a universal language which every being in the creation understands. Today was my first glimpse of it. Later when I was searching for someone with whom I could practise my newly learnt moves, I saw the lady who was dancing next to me a few minutes back. What followed were some of the most exciting moments of my life when I asked a girl for dancing with me. As it happens she gladly accepted but in Spanish. The next few minutes were truly amazing when two people separated by continents, cultures and language danced to the same rhythm of the music while the night slowly set in. For the entire dance, none of us spoke save a little word of encouragement here and there but that was it. It was truly wonderful.

Of course, the night didn’t end there, we walked a bit around seine, chatted a bit at a cafe overlooking Notre-Dame where I had possibly the most expensive coke of my life. Finally, we headed back to City U where I am writing this at 4 in the morning.

Something amazing happened today and it will be something I will have with me forever.