The choice between centralization and decentralization: An analysis of the pragmatic principles of the new stablecoin HOPE

Author: CryptoDada, Deep Tide CryptoFLow

What exactly are we talking about when we discuss stablecoins?

Setting aside the similarities and differences in the design principles of various stablecoins, the emergence of such products actually reflects the development of the crypto world: cryptocurrencies have grown from a small-scale geek experiment to a larger-scale entity that can stand alongside real financial assets.

As the industry grows, the functions of stablecoins are also changing in tandem: from a safe haven to avoid significant fluctuations in crypto, to the first stop for attracting traditional investors, and potentially to a vehicle for cross-regional settlements… It is undeniable that stablecoins have established a close connection with the real world. Today's stablecoins need to bear the dual functions of "bringing in" and "going out"—attracting traditional investors into areas like DeFi, while also serving as a settlement medium that permeates traditional economic activities.

However, the reality is that stablecoins are not stable. In the past two years, the collapse of UST and the negative events affecting fiat-backed stablecoins due to banking influences have been vivid reminders, striking a blow to the confidence of both on-chain and off-chain users in the use of stablecoins.

So, do we still need new stablecoins?

The answer is yes. We need a free, practical, and secure asset that serves as a bridge between the real world and the crypto world, one that is unaffected by traditional finance and allows users to quickly understand and use it, thereby better achieving the aforementioned functions of "bringing in and going out."

In following the daily trends of the industry, the recently launched stablecoin HOPE has garnered considerable attention: backed by native crypto assets, its value can fluctuate, and it features distributed custody of funds… Various keywords seem to differ from the traditional concept of stablecoins. Could it be a project that understands the pain points of the industry and is innovating? And for most ordinary users, could this represent a new investment opportunity?

With questions and interest, Deep Tide will interpret HOPE from aspects such as its design intent, product principles, actual experience, and economic model, hoping to provide more references for practitioners and users.

1. Stability, Independent of the Storm

Before studying HOPE, let's first take a look at the current external environment associated with stablecoins.

In the previously popular show "The Storm," a line states, "The bigger the storm, the more valuable the fish," which seems to add too much rationality to risk-taking. However, in the crypto world, the greater the external storm, the easier it is for people to get overwhelmed.

We can outline the potential sources of storms that may affect the crypto world.

• Collapse of the CeFi Ecosystem: The collapses of Three Arrows Capital and FTX have led to the downfall of assets associated with these centralized institutions, reminding people not to let their guard down regarding assets held by centralized entities.
• Stablecoins Are Not Calm: The previous collapse of the UST algorithmic stablecoin, followed by the failures of Silvergate and Silicon Valley Bank during the interest rate hike cycle, has created panic about the USDC's ability to be redeemed, which is backed by fiat; while the over-collateralized DAI, with a significant portion of its reserves in USDC, is also hard to escape when external storms arise.
• Regional Confrontation and Globalization: The increasingly tense geopolitical situations in certain regions and the transaction costs in global cross-border payments and financial activities have made people realize that there may be a need for a decentralized stablecoin solution.

Summarizing the above points, it is clear that the crypto world may need a stablecoin that is not supported by fiat currency or algorithmic mechanisms, and that can become a more widely recognized reserve asset to isolate the significant risks posed by traditional financial systems, centralized institutions, and unreliable algorithms.

So, is it feasible to use Bitcoin or Ethereum as backing for a stablecoin?

This is precisely what HOPE is currently attempting to do—starting with crypto assets as backing, independent of the aforementioned storms, to create a stablecoin.

BTC and ETH, after years of development, have a relatively solid consensus and stable prices (relative to Altcoins), and their influence can be broader. Using these two as collateral to generate HOPE seems to align closely with the concept of "crypto-native stablecoins." Additionally, Deep Tide has learned from preliminary research that HOPE initially does not adopt a complete pegging design; its price will fluctuate with the prices of BTC and ETH, which is quite different from most stablecoins seen before.

If it cannot even achieve pegging, does it mean that HOPE is not suitable as a stablecoin?

But if we temporarily set this question aside, we can feel the obvious advantages under the crypto-native design:

• First, BTC and ETH may isolate the risks of single-point failures in CeFi and systemic impacts from fiat systems;
• Second, the upcoming Bitcoin halving cycle and the potential cessation of interest rate hikes provide expectations for the rise of BTC and ETH, which also means the possibility of market cap expansion.

In the current competitive landscape of stablecoins, we believe that a stablecoin backed by BTC and ETH is a worthy exploration. Returning to the key issue—how is HOPE's price fluctuation with the two achieved? This involves the specific product mechanism of HOPE.

In the following sections, we will introduce HOPE's generation, custody, circulation, and use cases one by one.

2. Germination, Born from Fluctuation

In the official definition, HOPE is a "pricing token supported by reserves of BTC and ETH, evolving from a multi-stage growth plan into a distributed stablecoin." In the above description, "pricing" and "distributed" correspond to HOPE's generation and custody phases, which are also the focus of our research.

First, let's look at the pricing based on BTC and ETH, i.e., how HOPE is generated.

Anchor Asset: Pegged to BTC/ETH, initially issued at 50% of face value ($0.5); as BTC and ETH appreciate, its market value is expected to gradually reach 100% ($1). The price now fluctuates with BTC and ETH prices while maintaining the established ratio.

From the current official data, HOPE's price is around $0.48. It can be seen that HOPE is not directly pegged to a value of $1 but is pegged to the value of Bitcoin and Ethereum; subsequently, if the prices of the two appreciate, HOPE's price may grow to $1 along with the market cap of crypto assets.

Before that, HOPE is not strictly a "stablecoin," but more like a crypto asset collateral isolated from fiat. If considering exchanges with other Altcoins, it is closer to a mainstream currency-based purchasing power.

Minting/Pricing Principle: After setting the initial pegging ratio of BTC and ETH, the price observation process is completed to determine the pegging ratio with BTC/ETH. From the diagram below, it can be seen that currently, to generate 1 HOPE, a certain amount of BTC and ETH needs to be reserved;

This approach is somewhat similar to the LSD model, where ETH is staked to generate derivatives like stETH. However, in LSD, the derivatives and collateral maintain a 1:1 constant, while HOPE weights BTC and ETH according to a certain calculation formula. The current ratio is shown in the data from the official website below.

As of now, HOPE has completed the price discovery process, and the calculation formula for the discovery mechanism is:

In practice, to ensure fair price discovery, the project team collects OHLC data (open, high, low, close) for Bitcoin and Ethereum from three exchanges (Binance, OKX, and Coinbase) every minute to form an average; from the above formula, it can also be easily seen that the current BTC/ETH ratio is 1:10, which should be able to change with market fluctuations and voting mechanisms.

If we follow the above mathematical calculations, a HOPE valued at $0.5 corresponds to $0.5 of the weighted BTC and ETH. Therefore, if the prices of BTC and ETH rise to a critical point, it means that the value of HOPE will exceed $1.

At that point, it will be a true stablecoin pegging. Once HOPE's value exceeds $1, its price will remain at $1 and will not rise further, while the underlying BTC and ETH, as collateral, exceed $1 in value, essentially meaning that HOPE has become an over-collateralized stablecoin; in the official design, the ideal over-collateralization rate is 110%.

The reason for designing this ratio is that a slight over-collateralization of 110% can maintain the price stability of HOPE while allowing room to adjust the issuance volume of HOPE according to market demand. Both re-collateralization and adjustments to the issuance volume will be decided through community proposals and voting.

Next is about the custody of HOPE. As mentioned, $1 of HOPE is backed by an equivalent amount of BTC and ETH, so the question arises: where are they stored? How is credibility ensured?

HOPE Gömböc: Distributed Reserve Design

HOPE Gömböc is a set of distributed reserve pools that distributes crypto assets among trusted third-party custodians to ensure security; the name Gömböc also comes from a stable geometric shape structure.

At the project's launch, HOPE chose Coinbase for custody and will later select other custodians or decentralized custody protocols on-chain. Additionally, the BTC and ETH in the reserve pool will gradually be converted into distributed, stable-value, and liquid assets to avoid being affected by price fluctuations.

Regarding the wallet addresses of custodians, custody amounts, and fund movements, HOPE has made all of this completely public, and the status of funds can be viewed through the BTC and ETH explorers.

It is worth noting that the public nature of the custody addresses somewhat proves the existence of equivalent asset collateral, but HOPE has not provided specific indications regarding the ownership of these addresses, the entities behind them, or whether there are connections between the addresses, which requires further observation and research.

In the above distributed reserve design, we instinctively raise a question—choosing multiple third-party custodians to hold assets, while diversifying risks, does it not resemble a choice to trust centralized institutions?

With this question in mind, Deep Tide also consulted HOPE's design team, which stated that this is a more pragmatic design:

Choosing a distributed route between centralization and decentralization is intended to leverage the strengths of both while avoiding their weaknesses to achieve optimal feasibility. Traditional DeFi is self-custodial and appears completely decentralized. However, many traditional investors who want to participate in HOPE have raised a very important condition—being able to undergo audits.

Currently, legally recognized audits can only be supported by large custodians like Coinbase. Therefore, from the perspective of attracting traditional investors, HOPE will collaborate with global institutions, including Coinbase, to ensure the safe distributed custody of user assets.

From the perspective of stablecoins' function of "bringing in," attracting traditional investors is crucial. Thus, pursuing complete decentralization means sacrificing stability and capital efficiency, which is not the optimal choice in the current market cycle. For HOPE to become a bridge for real-world payments, it cannot completely detach from the capital operation rules of the real world to attract traditional funds and project participation.

After understanding HOPE's generation and custody design, another important point is the circulation aspect.

Phased Guidance for Circulation:

The development of $HOPE can be roughly divided into two phases: the growth phase (price between $0.5-1) and the maturity phase (price stabilizing at $1).

In the growth phase, its design mechanism only accepts BTC/ETH as reserve assets to mint $HOPE, and market makers can arbitrage based on market prices and deviations in the value of $HOPE;

In the maturity phase, it will accept other stable assets like USDC/USDT as reserve assets to mint $HOPE; at the same time, the project will open on-chain automated mint/burn protocols at appropriate times, allowing more market participants to directly mint/burn $HOPE.

Finally, when the value of BTC and ETH rises, the total value of the collateral corresponding to a single HOPE will exceed $1, at which point it will become an over-collateralized stablecoin, with the DAO deciding on the use of the excess reserve funds. In summary, HOPE does not pursue immediate stability but aims to gradually grow towards stability, representing a relatively novel design in the current market, which still requires time for validation.

3. Product Functions: Prioritizing HOPE Liquidity Expansion

Currently, HOPE's mainnet has been launched, and the official website offers two basic products: HOPE staking and HopeSwap.

Among them, the staking function is similar to common DeFi projects, allowing users to stake HOPE to receive liquidity tokens stHOPE. stHOPE can be used in current Swap and future lending products like HopeLend, and holders can also earn the project's governance token $LT as rewards.

We will introduce the specific details of the LT token in the economic model section later. The simple logic to understand here is: staking HOPE generates stHOPE, and holding the latter can earn LT; at the same time, the more stHOPE one holds, or the longer the earned LT is locked, the more LT will be generated.

In HopeSwap, users can exchange between tokens, currently supporting project-related tokens and USDT; simultaneously, on the liquidity pool side, users can also inject liquidity into the pool to earn LP rewards.

In addition to the existing staking and Swap products, HOPE will also launch the following products:

• HopeLend: A non-custodial lending protocol with multiple liquidity pools. Lenders can deposit liquidity to earn interest, while borrowers can withdraw tokens after providing collateral.
• HopeConnect: A decentralized custody and clearing platform that allows various applications to be built on its foundation. The overall product is divided into three phases, with the first phase allowing users to earn payment and transaction credit by staking assets within HopeConnect, without bearing the risks of centralized custody. Ultimately, it aims to become the standard protocol connecting DeFi, CeFi, and TradFi.
• HopeEcho: A synthetic asset that tracks the prices of real-world assets (RWA), democratizing access to traditional finance, including but not limited to stock indices, fixed income instruments, commodities, foreign exchange, etc.

Overall, we believe that HOPE's product strategy is relatively clear—first attract users and expand HOPE's liquidity through functions like Swap and staking to address the foundational issues, gain some recognition in DeFi, and then layer on higher-level financial plays, gradually penetrating into CeFi and TradFi.

4. Economic Model: Hope and Light ($HOPE $LT)

The product experience section has already touched on the LT token, and here we can conduct a more detailed examination. In fact, the project has two tokens, HOPE and LIGHT. The former serves as collateral (growing into an over-collateralized stablecoin later), while the latter is a governance token. The names of the two tokens symbolize "hope" and "light."

The total supply of LT is designed to be 1 trillion, with an initial supply of 400 billion tokens, accounting for 40% of the total supply; the remaining 60% of LT follows a segmented linear inflation model, with the released tokens allocated to liquidity providers in the HOPE ecosystem.

In the initial circulation, 50 billion LT will be allocated to the project treasury as reserves, and another 50 billion will be allocated to the HOPE Foundation.

According to official statistics, in the first year of the project's operation, approximately 260 million LT will flow into the supply daily. Further examining the role of LT, we can summarize two main directions: locking and governance.

Locking: After holding or obtaining LT, users can choose to lock LT to gain veLT. Similar to the ve model of most DeFi projects, the duration and amount of locking are proportional to the LT rewards that can be earned, encouraging users to lock their tokens while also somewhat suppressing the inflation of token emissions;

From the table below, it can be seen that when other conditions are the same, there is a difference in the rewards that can be earned between holding veLT and not holding it.

Governance: LT holders can participate in various governance aspects, including the monetary policy of $HOPE, such as maintaining the peg and managing reserves. For example, if 10 billion $HOPE are initially issued, the total reserve value will be approximately $5 billion; as the value of assets like Bitcoin increases, the reserve value may grow to $50 billion, resulting in $40 billion of excess reserves. The community will decide how to handle the excess portion through proposals.

One possible proposal could be to convert the reserves into stable assets like Hong Kong bonds and Singapore bonds to increase the application potential of $HOPE. Having $50 billion in stable reserves essentially means more $HOPE can be issued, distributing more excess value to $LT holders.

Additionally, 50% of the fee income generated by various protocols within the HOPE ecosystem will be allocated to liquidity providers, while the other 50% will be distributed to community members holding $LT tokens.

From the design of the above economic model, it can be seen that the project's economic incentives balance both short-term and long-term. If HOPE can peg to $1, the value generated by the excess assets will actually be more beneficial to LT holders, and theoretically, after reserving real assets, the project's imagination will be greater.

By synthesizing the above surface information, we can deduce the subsequent value representation of LT:

1. LT is essentially a perpetual call option on BTC/ETH:

Since the target price of $HOPE is 1, meaning that when the prices of BTC and ETH reach double their current values, the price of $HOPE itself will no longer continue to rise (from $0.5 to $1);

In the next bull market, when BTC/ETH exceeds the above prices, the reserve value of $HOPE will continue to grow, and this portion of value will be fully reflected in the price of $LT. As long as one is optimistic about the long-term market trend, LT essentially becomes a call option.

Assuming that when BTC reaches $100,000 and ETH reaches $10,000, the value of the $HOPE reserve pool will be five times its current value. However, as a stablecoin, without additional issuance, the market cap of $HOPE can at most double. Other values will be reflected in the overall ecological value of $LT and HOPE, as $LT holders can decide how to use these excess reserves, determining decisions on issuance increases, re-collateralization, etc.

2. veLT holders may become the biggest beneficiaries of the HOPE ecosystem:

veLT holders can receive mining reward bonuses, with 50% of the platform's fee income distributed to veLT holders; additionally, veLT holders decide the mining reward ratios for each pool and the monetary policy of $HOPE, the use of the Treasury, and other matters;

3. Positive Flywheel Effect Formed by Ecological Effects:

It can be imagined that the development of the HOPE ecosystem will bring more use cases for $HOPE, further expanding the ecosystem, which means an increase in the demand for $HOPE and the scale of reserves; at the same time, the rising prices of BTC/ETH will also lead to an increase in the scale of $HOPE reserves.

As the scale of $HOPE reserves increases, the overflow value will be borne by $LT, which will to some extent also lead to an increase in the underlying value contained in $LT, while forming a complete value chain:

Development of the HOPE ecosystem and increase in $HOPE reserve scale -> Increased demand for governance (veLT) -> Increased demand for $LT.

However, it should be noted that currently, the absolute daily emission of LT is relatively high, and whether the ve model can sustainably lock liquidity to prevent selling pressure remains to be seen; additionally, the initial liquidity of 50 billion LT allocated to the project foundation, the purposes and usage of this portion will also affect market confidence in LT.

5. Future, Connecting Crypto and the Real World

Overall, we hold a positive attitude towards project innovation in the stablecoin space. More competitors mean more possibilities for changes in the landscape.

However, whether the landscape can truly change depends on how well the project plans and executes its strategies.

Currently, HOPE has not yet achieved the $1 peg, and there is still a considerable distance to go. At the same time, the project is regularly holding AMAs, along with various rewards and promotional activities, attempting to create noise in the early stages of development to increase user awareness of HOPE. To venture into the traditional financial industry, it still needs to actively showcase itself in more traditional financial conferences and events to establish deeper resources and connections, addressing channel and regulatory issues.

In terms of specific planning paths, HOPE has also designed a three-step plan:

• 2023-2025: Create application scenarios, establish a robust liquidity market and interest rate market for $HOPE, with the initial main task being to develop $HOPE into a reliable collateral choice in the DeFi space;
• 2026-2029: The narrative of halving and a relaxed interest rate environment will give HOPE the opportunity to transition from native asset reserves to over-collateralized stablecoins. The goal during this phase is to make $HOPE a payment tool, providing financial services to everyone, including the unbanked population;
• Long-term: Enable all users, including those without crypto and DeFi experience, to use various financial services through $HOPE and the HOPE ecosystem seamlessly, openly, and transparently.

This long-term goal returns to the characteristics of inclusive finance in DeFi, which is also a direction that the industry collectively strives for—Web3 has not done well enough in bringing in users, and going out seems to be a challenging task.

From the small-scale collateral in DeFi to international clearing and settlement currencies, we hope that more similar projects can undertake the functions of "bringing in and going out."

Though the journey is long and arduous, it is worth climbing.