Liquidity of CDP-based stablecoins and jFIAT: Creating new lending standards
Introduced how CDP-based stablecoins and jFIAT combine to provide liquidity and peg, creating new lending standards and competing with the money market.Author: Jarvis Network
Compiled by: ChainCatcher
This article is the second in a series of four related to our PLAAS program.
Most crypto-backed stablecoins are based on the CDP model, which is similar to borrowing: users deposit collateral and borrow stablecoins. However, stablecoins are not lent to someone; they are minted and borrowed from the protocol in some way.
However, these stablecoins have low liquidity and poor peg, which limits their usability. Yet, when combined with jFIAT in Curve pools, they can borrow stablecoins in the most powerful, flexible, and cost-effective way, comparable to money markets like Aave or Compound.
In this second article, we will focus on the synergies between jFIAT and its crypto-backed equivalents that use the CDP issuance model.
Most crypto-backed stablecoins follow the collateralized debt position (CDP) model promoted by MakerDAO's DAI: users deposit collateral in a vault from which they can withdraw stablecoins.
For example, fxAUD, a cryptocurrency-backed Australian dollar stablecoin from Handle, or PAR, a cryptocurrency-backed Euro stablecoin from Mimo Capital, are similar to CDP stablecoins. Handle and Mimo users can borrow fxAUD or PAR by depositing BTC, ETH, MATIC, or USDC as collateral.
Minting stablecoins through this mechanism is equivalent to borrowing, very similar to using money markets like Aave. But unlike the latter, borrowing stablecoins does not require another party to have depositors, as they are minted by the protocol without a mining pool or floating interest rates based on utilization.
In this regard, CDP-based stablecoins provide the most efficient and convenient way to borrow stablecoins, and since they do not require depositors, they are also more scalable in provision: the protocol only needs to provide a price to launch new stablecoins and let people borrow them!
These protocols offer their users credit lines denominated in the currency of their choice without needing to find depositors!
Like fiat-backed stablecoins, CDP-based stablecoins lack liquidity, leading to poor pegs. For example, this can prevent them from being used as leverage.
Just like fiat-backed stablecoins, pairing jFIAT with these CDP-based stablecoins can provide the latter with the necessary peg and liquidity.
Relying on this efficient pegging mechanism should allow them to maintain stable interest rates: in fact, some of these protocols adjust interest rates based on their stable peg; when the price is below the peg price, the protocol attempts to incentivize people to repay debts, thus repurchasing assets to drive their price up, and vice versa when the asset trading price is above its peg price.
While fiat-backed stablecoins already have dedicated fiat gateways, due to a lack of liquidity or risks (considering they use unstable types of collateral), CDP-based stablecoins rarely have fiat gateways. Since jFIAT is integrated into Mt Pelerin's fiat on- and off-ramps, they also provide off-chain fiat liquidity for the paired CDP-based stablecoins.
Thanks to PLAAS, DeFi users can now conveniently borrow many non-USD stablecoins without being stuck in illiquid assets, and at low interest rates! For example, they can enjoy deep on-chain liquidity through leveraged trading.
Combined with the jFIAT fiat on- and off-ramps, the borrowing capabilities of CDP-based stablecoins provide users with a seamless way to borrow in various currencies using cooperative protocols like Handle or Mimo, and cash them out through Mt Pelerin's jFIAT integration.
For instance, one can borrow PAR at an annual interest rate of 2.99%, exchange it for jEUR, and cash it out as real Euros, or swap them for any other token leveraging jEUR's deep on-chain liquidity for leveraged operations!
The combination of CDP-based stablecoins with jFIAT's liquidity creates a new standard for borrowing stablecoins and can compete with money markets to capture this emerging niche market.
Read the next article: PLAAS (3/4): Capital-efficient low-slippage on-chain forex markets for remittances and e-commerce.
