This is a project we’ve been working on for some time that we’re finally ready to announce. Not only will it be a significant boon to the value and utility aspects of WEX and WEXpoly, which we’ll elaborate on later in this article, but WUSD is exciting in its own right.
It’s a brand new stablecoin model that has never been done before, taking inspiration from modern stablecoin frameworks such as Frax and Olympus, and improving on their foundations by minimizing the element of uncertainty.
This is not a fiat-backed stablecoin.
This is not an algorithmic stablecoin.
And this is not a crypto-backed stablecoin.
This is what we’ve dubbed as — a commerce-backed stablecoin.
The problem with fiat-backed stablecoins is they are just extensions of fiat currencies, requiring real-world custody, and not existing according to the credos of blockchain.
The problem with crypto-backed stablecoins is they are not capital-efficient, usually requiring over-collateralization to mint.
The problem with algorithmic stablecoins is they are inherently unstable. Whether backed by no assets or partially backed, the organizations distributing such assets attempt to create something out of nothing, and during market shocks or events that hurt sentiment, these tokens have historically not been able to weather harsh storms.
So we have designed a new model. Unlike fiat-backed stablecoins, it only involves blockchain assets. Unlike crypto-backed stablecoins, it is not overcollateralized. And unlike algorithmic stablecoins, our model does not mint tokens that have no utility to start with out of thin air.
This is the commerce-backed stablecoin — WUSD.
Commerce-backed means that the fundamental mechanism that will be supporting the peg is the guarantee of the active commerce within our platform; to be specific, our WSwap DEX that has been generating significant revenues and has become one of the top DEXes on both BSC and Polygon.
Well, since this is a new model, to start with, 90% of the value of WUSD will be collateralized by USDT deposits. That means that in the absolute worst case, a WUSD holder could never lose more than 10% of their invested capital. Since we plan to offer high APY staking for WUSD, this alone will become a simple risk vs. return evaluation for prospective WUSD holders.
The remaining 10% of WUSD’s collateral value is where the commerce element comes in, because it will be backed by our WEX token, which is the foundational token of our exchange on BSC. Instead of creating a new token without utility out of thin air, we’ll be using one that already has a market cap in the tens of millions, with an exchange that is functional and generating revenues, which we will use to support the peg of WUSD.
Here is how it will work:
User deposits 1 USDT as collateral.
Wault mints 1 WUSD and gives it to the user.
Wault deposits .9 USDT into the treasury.
Wault uses the remaining .1 USDT to buy WEX and holds that in the treasury as well.
5. When the user wants to redeem his collateral, he returns 1 WUSD and receives .9 USDT and .1 USDT-worth of WEX according to the price of WEX at that time.
In other words, this stablecoin is fully crypto-backed, since 100% of its value in collateral will be fully redeemable at any time. However, it’s not overcollateralized.
Also notice that unlike algorithmic stablecoins, there is no minting/burning of WEX within the stablecoin itself, removing potential minting vulnerabilities that have been exploited in other protocols in the past.
To be fair though, you could say that WEX, like most crypto tokens, is fairly volatile, and wouldn’t be accepted as collateral in a protocol like MakerDAO. Yet, WEX is much more resilient to market pressure than new governance tokens minted out of thin air like FXS since WEX already has use-cases.
Furthermore, that isn’t truly why we call this model commerce-backed. That term comes from the following stability mechanisms WUSD will have.
We will continuously build the treasury using three sources:
a. 15% of trading fees from WSwap will go towards the treasury. This will ensure the treasury can continue to grow to support any future market volatility.
b. A .5% redemption fee will be charged on each WUSD redemption, half of which will go to the treasury, the other half going to the dev fund to support operating costs.
c. A portion of idle treasury will be deployed within strategies on safe external protocols to earn yields to feed back to the treasury, growing it over time.
As long as the treasury is full and can cover 10% of the outstanding market cap of WUSD, then WUSD will always be fully collateralized, and arb bots and traders will always keep the peg at $1 through arbitrage.
For security, the treasury will be under a Multi-sig and Timelock.
Like other DEXes, WEX emissions acting as rewards for LPs are one of the building blocks of the AMM model, providing the incentives for LPs to stake, which in turn creates sufficient liquidity for traders to use the underlying exchange.
However, to keep APYs high for LPs, WEX price needs to stay high. For this, WUSD doing buybacks of WEX to hold as 10% of its collateral and locking those tokens up will create significant buying pressure on WEX, and as a result, APY for LP farmers on Wault will increase.
Furthermore, with the additional trading of WUSD and its mints and redemptions continuously trading WEX, the WSwap exchange should add significant volume and trading fees.
Therefore, it stands to reason that WUSD and WSwap will have a co-dependent relationship that builds a positive cycle of reinforcement. That’s why we have instituted this 3rd stability mechanism in which WEX emissions also act as a support for the WUSD peg.
For every .001(1% of .10, representing the non-USDT-collateralized portion) that WUSD is below $1 on a 24-hour TWAP, .5% of the emissions rate to LPs will go towards the WUSD treasury, making sure it is always growing and healthy in times of market turbulence. This is the heart of how WUSD is commerce-backed, but it’s not the only commerce-related mechanism.
As mentioned before, at launch, 15% of trading fees from WSwap will be used to build the treasury. However, this % will be flexible in scenarios where the peg is below or above $1 in order to reinforce the peg. To be specific, for every .001 that WUSD’s peg drops under $1 on a 24-hour TWAP, the WUSD treasury will earn an extra .5% of the trading fees, reinforcing the treasury when the peg is low.
Vice versa, for every .001 that WUSD is above $1 on a 24-hour TWAP, the WUSD treasury will reduce its 15% inflow of trading fees down by .15%, reaching 0% above $1.10.
As we grow WUSD’s utility, it will have many trading pairs and connected farming pools. However, to start with, we will have WUSD-BUSD. This pair will receive a significant amount of WEX emissions in order to incentivize early holders of WUSD. In time, these emissions will spread over other pairs. In addition, the emissions rate itself will serve as a stability mechanism for WUSD’s peg.
For every .001 that the WUSD peg drops under $1 on a 24-hour TWAP, we will raise allocated emissions for WUSD by 5% up to 500%. Vice versa, for every .001 that the WUSD peg is above $1 on a 24-hour TWAP, we will lower allocated emissions for WUSD by .8%, down to a minimum of 20% of starting emissions.
(As a side note, in preparation for WUSD, we will stop emissions reduction of WEX, because these will be needed for 2 of the stability mechanisms)
Once we implement governance, WEX holders will be able to vote to adjust various parameters. In the beginning, WUSD will be available on BSC. Then, we will also launch on Polygon with the WEXpoly token acting as collateral. After some time, once the peg of WUSD has proven stable on both blockchains, we will implement a cross-chain bridge, allowing the two blockchains to exchange their versions of WUSD 1:1 and thus implementing another stability mechanism through connecting cross-chain liquidity.
Over time, as WUSD proves stable, we will also seek to lower the USDT collateralization ratio down from .9 in gradual steps, enhancing the commerce-backed element, and empowering WEX and WEXpoly.
For holders of WEX and WEXpoly, this is a very bullish development as well. It means not only sizable and regular buybacks and lockups of these two tokens, but that they will now have gained significant utility: as collateral, and stability backstops of a stablecoin, as well as gaining governance power over said stablecoin. If WUSD reaches significant adoption, that governance power will become very valuable.
Unlike other stablecoins, since Wault is a platform with hundreds of millions of dollars in TVL, we can instantly create use-cases for WUSD which is a unique advantage.
We will also work on partnerships to increase the adoption of WUSD, helping it gain acceptance in other protocols.
In the coming days, we’ll reveal our official launch date for our new commerce-backed stablecoin WUSD. We’re excited and we hope you are too!