What are the design highlights of the decentralized stablecoin protocol Angle, recently led by a16z?

Original Title: 《 Introducing Angle Protocol》

Author: Angle Team

*Editor: *Perry Wang

At Angle, we have designed a decentralized stablecoin protocol that is over-collateralized and capital efficient, capable of issuing any type of stablecoin. We will soon launch the first reliable and liquid euro-pegged stablecoin. This article aims to introduce the reasons and methods behind our construction of the stablecoins needed for decentralized finance (DeFi).

Why Does the World Need Better Stablecoins?

In the past few months, the supply of crypto stablecoins has grown at an unprecedented rate, and it is expected that the total amount of stablecoins will surge in the coming months and years. With a large global population lacking bank accounts and sufficient banking services, people and businesses are seeking faster and cheaper cross-border payment methods. Additionally, an increasing number of institutional investors and retail businesses are looking to access crypto/blockchain services such as DeFi and stablecoins, indicating that stablecoins indeed have tremendous growth potential.

Stablecoin Supply (Source: The Block)

The founders of the Fei Protocol summarized the current state of stablecoins well in the FEI Whitepaper: "Fiat-backed stablecoins like USDC and USDT are centrally controlled. This represents regulatory risks and potential weaknesses that could trigger failures for applications that wish to be truly decentralized. Due to low capital efficiency, crypto-collateralized stablecoins like DAI face scalability issues."

Currently, there are several decentralized and capital-efficient designs, but they often rely on under-collateralized protocols, as seen in the issues faced by Iron Finance in June or the past Basis Cash. These design mechanisms cannot withstand bank runs and are still vulnerable to severe liquidity crises.

Moreover, with the exception of some protocols like Synthetix, most stablecoin solutions are pegged to the US dollar and cannot scale to multiple assets. For example, there is currently no liquid euro stablecoin. As a result, Europeans who use euros in their daily lives face the risk of value fluctuations when interacting with DeFi, which is priced in dollars.

In short, there is currently no stablecoin solution that is scalable, liquid, capital efficient, robust, and decentralized, which means there is no stablecoin that perfectly suits fully decentralized finance at this time. This is why we have taken the time to think about the optimal design for stablecoin protocols.

After months of research, we are proud to introduce the Angle Protocol: a capital-efficient and over-collateralized decentralized stablecoin design mechanism.

In a Nutshell: The Angle Design Mechanism

Angle's decentralized solution addresses the shortcomings of current approaches and fully leverages the strengths of both centralized and decentralized protocols. It also incorporates the robustness brought by over-collateralization while maintaining capital efficiency similar to low-collateral designs.

The innovation of Angle lies in its ability to guarantee a 1:1 ratio for the two-way swap of stablecoins and their collateral without slippage: with 1 euro of collateral, you can obtain 1 stablecoin, and 1 stablecoin can always be redeemed for collateral worth 1 euro.

The Angle protocol involves three groups that are commonly found in other DeFi protocols, all of which can benefit from the Angle protocol:

• Stablecoin demanders and holders (or users) who mint or burn stablecoin assets
• Hedging agents (HA) who engage in leveraged trading in the protocol in the form of perpetual futures contracts to shield the protocol from the price volatility of their collateral
• Standard liquidity providers (SLP) who provide additional collateral to the protocol while automatically earning interest, trading fees, and rewards.

Angle will support many different stablecoins, each backed by different collateral assets. We will first launch a euro stablecoin backed by USDC and DAI.

One of the Angle Stakeholders: Stablecoin Demanders and Holders

The design of Angle essentially allows anyone to easily issue and destroy stablecoin assets in a capital-efficient manner based on oracle values, without experiencing price slippage, and only incurring a small transaction fee.

For example, with a euro stablecoin backed by USDC and DAI and zero transaction fees, if you deposit 2000 USDC worth 1800 euros into the Angle protocol, you will receive 1800 euro stablecoins. Later, you can return the 1800 euro stablecoins to the protocol and receive collateral worth 1800 euros, meaning if 1 euro can now be exchanged for 1.2 dollars, you can receive 2160 (= 1800 x 1.2) USDC or 2160 DAI.

This convertibility makes the tokens issued by the protocol very stable. Whenever the market price of the tokens deviates from the peg, and without the need for active governance to maintain the peg, profitable arbitrage opportunities arise.

So the key question arises: how does this protocol manage to always have enough collateral to maintain this convertibility?

One of the Angle Stakeholders: Hedging Agents (HA)

When someone joins the Angle protocol and provides collateral for stablecoins, the protocol is affected by the volatility of the relative value of the collateral to the stablecoins obtained. In this case, a surge in collateral prices may benefit the protocol, but due to insufficient collateral, a decline can have severe consequences.

To ensure that the protocol is not affected by the volatility of the collateral backing the stablecoins, Angle creates a method to transfer the volatility risk to other participants willing to leverage the corresponding collateral: hedging agents (HA). These individuals obtain perpetual futures contracts from the protocol. From the HA's perspective, they are simply engaging in leveraged trading on the relative price evolution of the collateral to the stablecoin it supports. However, from the protocol's perspective, they ensure that the system is shielded from the impact of declining collateral prices, ensuring that the protocol always has enough asset reserves to repay stablecoin holders.

The participation process for HAs involves joining Angle, bringing some collateral, and choosing how much volatility risk of the collateral they want to cover for stablecoin demanders. They leverage their initial investment to bet on all the volatility of the underlying amount, gaining leveraged profits when prices rise but incurring leveraged losses when prices fall.

For example, suppose, as planned in the roadmap, Angle also accepts ETH as collateral for its euro stablecoin.

If someone deposits 1 ETH worth 2000 euros to issue 2000 euro stablecoins, and a HA brings in 0.5 ETH and commits to covering all price change risks of the 1 ETH for token holders. When the HA withdraws, they will receive their 0.5 ETH plus the capital gains from covering the 1 ETH risk.

For instance, if the price of ETH doubles from 2000 euros to 4000 euros, the HA will receive their 0.5 ETH plus the capital gains from the 1 ETH risk they covered (in ETH), resulting in capital gains of 2000 euros, which is equivalent to 0.5 ETH at the current price. Ultimately, they withdraw 1 ETH from their initial 0.5 ETH investment, meaning they turn their initial investment of 1000 euros into 4000 euros.

The protocol now only holds 0.5 ETH, but this is not a problem because it is sufficient to cover the 2000 tokens issued: these tokens can be exchanged for 0.5 ETH at the current market price.

Similarly, if the price of ETH drops by 25%, the HA's withdrawal will be their 0.5 ETH minus the capital loss from covering the 1 ETH risk, which is 250 euros, valued at 0.333 ETH at the new market price. Therefore, the HA can only withdraw 0.1667 ETH. The Angle protocol holds 1.333 ETH, which is sufficient to ensure the stability of the stablecoins in circulation.

Note that the HAs we describe here are similar to some liquidity pool owners on Maker or borrowers on Compound: they are individuals voluntarily engaging in leveraged trading. However, they can directly choose their desired leverage without needing to conduct multiple trades. In the case of Angle, you only need to enter the protocol, customize your perpetual futures contract to meet your needs, and ultimately achieve the leverage you choose.
In short, hedging agents (HA):

• Bet against the volatility of the collateral brought by stablecoin demanders
• Ensure the protocol is shielded from the impact of declining collateral prices
• Obtain direct leveraged contracts from the protocol in the form of perpetual contracts

In the example above, the 1:1 exchange ratio between stablecoins and collateral can always be maintained because HAs accurately cover the price changes of the collateral brought by stablecoin demanders.

However, at any given point in time, especially after new users enter or HAs exit, mismatches may occur where not all users' positions may be covered, or there may be insufficient demand for betting against volatility in the form of perpetual futures. Therefore, a new type of LP is needed to address these temporary imbalances, acting as a buffer between users and HAs.

One of the Angle Stakeholders: Standard Liquidity Providers (SLP)

When HAs cannot fully cover the price volatility risk of the collateral provided by users, SLPs come in as a buffer.

SLPs delegate liquidity to Angle, just like LPs in other protocols (Compound, Uniswap, Aave), automatically earning returns from the assets they bring. The risk they face is that when the protocol is not well-collateralized, and they want to cash out, slippage may occur.

As compensation for lending their collateral and taking on minimal risk, SLPs receive a portion of the transaction fees paid by stablecoin demanders interacting with the protocol.

Additionally, at every point in time, the Angle protocol has reserve assets provided by stablecoin demanders, HAs, and SLPs who mint stablecoins. To accumulate some returns with these assets and create surpluses for the protocol, these reserve assets can be lent to protocols like Compound or Aave, or used in yield strategies similar to Yearn's liquidity pools. For example, Angle's first yield farming strategy will involve optimizing the best APY between Compound and Aave.

A portion of the interest earned from such loans can be provided to SLPs, creating an interesting multiplier effect. Suppose the protocol has 150 USDC, of which 50 comes from SLPs. If all funds are lent out, it means earning interest on 150 USDC, but this interest will be distributed to the SLPs who only brought in 50 USDC, meaning SLPs will earn twice the interest compared to directly lending to Compound. The fewer SLPs there are, the more profitable it becomes to be an SLP, as the same amount of returns is shared among a smaller group.
In short, SLPs:

• Deposit collateral into the protocol and automatically generate interest
• Act as a buffer between stablecoin holders and HAs
• Can earn higher returns than directly participating in Compound, Aave, or even Yearn due to the multiplier effect we described

ANGLE Token and Protocol Governance

The Angle protocol will ultimately be fully decentralized and will rely on its ANGLE governance token. The ANGLE token will be distributed through a joint curve and a staking contract that will be released later, allowing for a broader and fairer distribution of ANGLE tokens.

The design of the Angle system minimizes governance and allows it to operate autonomously, as the stability of the tokens in the protocol does not require any active intervention at the governance level.

The Future of Angle, Stablecoins, and DeFi

As mentioned above, the Angle protocol has key advantages compared to existing stablecoin models: high capital efficiency, deep liquidity, robustness against bank runs, and strong stability even without active governance intervention.

We will soon release a series of articles that delve into different stablecoin design mechanisms and specifically explore the advantages and disadvantages of Angle compared to them. A brief look:

Angle vs. Other Types of Stablecoins

Angle is not just an improvement over existing stablecoin protocols; it unifies much of what DeFi has to offer in 2021 in a highly attractive way: a single transaction integrates easily minted and burned stablecoins, yield farming with higher returns than traditional lending platforms, flexible leveraged trading, and perpetual futures contracts.

What Are Our Next Steps?

The Angle protocol is still under development by its core team and community. We are currently conducting high-pressure testing of the protocol on Kovan and Rinkeby, running some bots in the contracts.

The audit of the smart contracts will begin on July 26. The beta testnet version will be released in August, at which point everyone will be able to interact with the protocol.

We aim to launch the euro stablecoin backed by USDC and DAI on the Ethereum mainnet in October 2021. We will soon expand to other types of collateral (such as ETH) and new stablecoin types shortly after the launch.

As the release of the Angle protocol approaches, we will announce more details about the protocol and how to participate!