At the core of Xloop Finance is its focus on GMX and GLP, which are yield-bearing assets. This unique approach inspires special protocol designs that enable automatic yield compounding, resulting in the accumulation of more GMX and GLP.

For example, Alice can bring in $100,000 worth of GMX or GLP and borrows $50,000 worth of IOU at a 200% collateral ratio (excluding fees). By burning $1,546.39 worth of XLOOP tokens, Alice mints $51,546.39 worth of XDC at a 97% minting ratio. This process ensures that the total system value remains unchanged at that moment. This minting ratio (97%), driven by market confidence on XDC, is separate from the collateral ratio. More details about several ratios within the Xloop Finance system will be detailed in a separate article.

The borrowed XDC tokens can be further swapped into GMX or GLP, introducing additional collateral into the system. Continuing with the example, the $51,546.39 worth of XDC can be swapped into GMX of equal value (excluding fees and slippage) and re-introduced into the Xloop protocol to borrow $25,773.2 worth of IOU tokens at a 200% collateral ratio. This looping process can continue until an equilibrium or some limit is achieved. Hence, this concept can be viewed as a form of leveraged borrowing, enabling borrowers to benefit from significantly amplified compounded yields.

The yields generated in Xloop Finance are allocated in a balanced manner. Seventy percent of the yields are dedicated to enhancing and optimizing the protocol, ensuring continuous improvement of loan health factors. The remaining 30% of yields are distributed among key participants within the ecosystem, including LP providers, Xloop stakers, IOU depositors to the stability pool, and team members. The initial allocation assigns 23% to LP providers, 17% to team members, and evenly splits the remaining 60% between the staking contract and stability pool. These percentages may be adjusted based on the practical needs of each category.

This design creates a sustainable and rewarding experience for stability pool depositors, who earn constant rewards without having to wait for unpredictable liquidation events. Similarly, Xloop stakers benefit from a continuous influx of yields, augmenting their staking rewards beyond unpredictable and unforeseeable redemption fees alone.

Xloop Finance aims to provide a secure and rewarding platform for borrowers, LP providers, stakers, and all participants within its thriving ecosystem. By combining innovative borrowing mechanisms, strategic collateral options, and a thoughtful distribution of yields, Xloop Finance is redefining the possibilities of decentralized finance.

One crucial realization in Xloop Finance is the importance of separating the concepts of debt and stable value. To this end, we have created two different tokens - the $IOU and the $XDC. The $IOU token is designed as an internal accounting mechanism that represents the debt within the system, whereas the $XDC token serves as the stablecoin – a medium of exchange intended to hold a steady value pegged to the US dollar.

This separation allows for a more accurate and independent adjustment to the intrinsic (system-centric) and extrinsic (market-centric) mechanisms affecting each token's value. To ensure the stability of $XDC, we've adopted a market-proven approach by Frax to build a fractional minting mechanism, taking $IOU as the sole collateral.

A crucial element in maintaining the stability of our system is the concept of a collateral ratio in the fractional minting process. Initially set at 100%, it means the $XDC stablecoin is fully collateralized by $IOU. However, this collateral ratio is algorithmically adjustable, flexing based on the market price of $XDC and broader system conditions. The adjustable range is carefully calibrated between 93% and 100% in Xloop, ensuring $XDC is always overcollateralized. With heightened market confidence, the collateral ratio can decrease, inversely increasing during times of market uncertainty. This dynamic interaction not only provides a robust stability mechanism but also enhances capital efficiency in converting collateral into stablecoins.

In case of an excess market value in $XDC, value can be transferred to the $XLOOP tokens through an arbitrage process, indirectly capturing excessive value in the $XDC market and benefiting $XLOOP holders. Conversely, if $XDC is deficit in value, value can be pulled over from $XLOOP tokens during redemption. This mechanism ensures a healthy balance between the stablecoin and the broader tokenomic system, akin to the dynamic seen in Frax.

The $XLOOP token, as the third token in the Xloop Finance system, plays a less direct but nonetheless significant role in the overall ecosystem. While its exact governance function is still under consideration, it serves as a crucial component in maintaining the stability and efficiency of the system.

In summary, Xloop Finance's innovative approach of separating debt and stable value promises more capital efficiency and a more reliable and scalable stablecoin solution. The interplay of the $IOU, $XDC, and $XLOOP tokens within this mechanism allows for a resilient and adaptable system. Stay tuned as we delve deeper into the details of our unique approach in forthcoming posts.

Fast forward to the era of cryptocurrency, this principle was carried over into the design of some of the earliest stablecoins. Projects like MakerDAO and Liquity have essentially digitalized this centuries-old banking practice. They take in collateral in the form of cryptocurrencies, issue their own stablecoins as units of debt, and use smart contracts to automate the enforcement of these obligations.

However, a fundamental challenge arises when a unit of debt is also expected to serve as a stablecoin. While the value of a unit of debt is tied to the underlying collateral and the system’s debt mechanics, a stablecoin is intended to maintain a peg with a specific value, such as the US dollar. Market trading activities can push the stablecoin’s price away from its intended peg due to factors such as supply and demand dynamics, market sentiment, and broader economic conditions. This dual role of the stablecoin as both a unit of debt and a medium of exchange can lead to a conflict between its intrinsic value and its market value.

This is where Xloop Finance brings in a significant innovation. Recognizing the challenges presented by conflating the concepts of debt and stable value into a single instrument, Xloop Finance has separated these two roles. In our system, we have the $IOU token representing the internal accounting token or the ‘debt’ and the $XDC serving as the stablecoin.

This clear separation allows for the independent adjustment of systemic and market mechanisms for each token, resulting in more precise responses to changes in market conditions. In addition, the standalone nature of the $XDC provides a robust tool for arbitrage, improving price stability and creating a favorable environment for traders.

While we acknowledge that both Liquity and Frax have made tremendous contributions to the evolution of DeFi, we believe that Xloop Finance’s unique model takes these innovations a step further. By identifying and addressing the fundamental challenge of conflating debt and stable value into a single instrument, we have crafted a system that brings increased resilience and flexibility to the decentralized finance ecosystem.

Stay tuned as we explore and share more about our unique approach to stablecoin design in upcoming posts.