Analyzing Stable++: The First CDP Stablecoin Protocol on RGB++Layer

Camus said in "The Plague": "To understand a city, look at how its people work, love, and die." Similarly, to assess a public chain ecosystem, one must first examine its DeFi data, including the number of protocols, TVL, and application scenarios. DeFi data directly reflects the development status of the public chain. Although this assessment method has its shortcomings, it remains an important reference standard for observers.

The modern DeFi ecosystem relies on four foundational components: DEX, lending, stablecoin, and oracle. On this basis, there are also LSTs, derivatives, and more. These are common in the EVM ecosystem, but quite scarce in the Bitcoin ecosystem. As a result, many BTCFi and BTC Layer 2 projects have emerged, but most have simply built EVM chains on Bitcoin, largely replicating applications from Ethereum, lacking innovation.

In contrast, CKB and UTXO public chains like Cardano may be more attractive. The "isomorphic binding" and "Leap bridge-less cross-chain" solutions proposed by Cipher, the founder of RGB++ Layer, have attracted widespread attention. Projects like UTXOSwap, ccBTC, and JoyID wallet are also quite notable.

For the CKB and RGB++ Layer ecosystem, the stablecoin system is a key focus. Stablecoins are the hub of various DeFi scenarios, requiring healthy and reliable issuance protocols and a good circulation environment. RGB++ Layer, with its advantages of Turing-complete smart contracts and native account abstraction, can provide an ideal circulation environment for stablecoins in the BTCFi ecosystem. In addition, many large holders are accustomed to holding BTC long-term. If they can safely issue stablecoins collateralized by BTC, it can improve the capital utilization of BTC and reduce dependence on centralized stablecoins.

Next, we will analyze the stablecoin protocol Stable++ within the RGB++ Layer ecosystem. This protocol uses BTC and CKB as collateral to generate the RUSD stablecoin, and combines the Stability Pool insurance pool and bad debt redistribution mechanism to provide BTC and CKB holders with a reliable stablecoin minting channel. With CKB's unique issuance method, Stable++ is expected to build an underdamped system within the RGB++ ecosystem, playing a moderate buffering role during severe market fluctuations.

The Product Functions and Mechanism Design of Stable++

There are mainly four types of common stablecoins:

1. Purely centralized stablecoins represented by USDT/USDC
2. Stablecoins that require collateral, represented by MakerDAO and Undo, have both centralized and decentralized aspects (.
3. The CeDeFi stablecoin represented by USDe ) anchors its value through derivative contracts on centralized exchanges (.
4. Pure algorithmic stablecoins represented by AMPL

Among them, MakerDAO is a representative of the CDP) debt collateral position ( model stablecoin. Under the CDP model, users over-collateralize blue-chip assets such as ETH and BTC to mint stablecoins. Due to the strong consensus and relatively low price volatility of these assets, the stablecoins issued based on them have a stronger risk resistance capability. The CDP model lending protocol is similar to the "point-to-pool" of AMM, and all user operations interact with the liquidity pool.

Taking MakerDAO as an example, borrowers first open a position on Maker, determine the amount of DAI they want to generate from the CDP, and then over-collateralize and borrow DAI. When repaying, borrowers return the DAI to the Maker platform, redeem the collateral, and pay interest based on the amount of DAI borrowed and the duration. The borrowing interest can only be paid with MKR, which is one of MakerDAO's sources of income.

The price anchoring mechanism of DAI relies on "Keeper". The total supply of DAI can be viewed as constant, consisting of two parts: the DAI in the MakerDAO funding pool and the DAI circulating in the market. Keeper arbitrages between these two funding pools to maintain the stability of DAI's price.

Stable++ also adopts CDP in its mechanism design and partially inherits the security of Bitcoin through RGB++ isomorphic binding technology. The main functions of Stable++ include:

1. Users can over-collateralize BTC or CKB to borrow the stablecoin RUSD, and can also use RUSD to redeem the collateralized BTC or CKB. These operations will incur handling fees.

2. Users can re-stake the borrowed RUSD into Stable++ to earn governance tokens STB as rewards, while also gaining the right to participate in asset liquidation. This is the main deflationary scenario for RUSD. Users can also stake STB to share the collateral and redemption fees according to their weight.

3. RUSD supports isomorphic binding and Leap functionality. Through Leap, RUSD under the BTC account can be securely and efficiently transferred to a Cardano account without the need for a traditional cross-chain bridge.

4. Stable++ has an LSD section, where NervosDAO users can stake CKB to receive wstCKB. This way, NervosDAO users can earn CKB staking rewards while maintaining asset liquidity.

The key to the success of the CDP stablecoin protocol is:

• The reliability of collateral
• Efficient settlement mechanism
• Can it empower the ecosystem it belongs to

Next, we will focus on analyzing the clearing mechanism design of Stable++.

![Interpreting Stable++: First Stablecoin Protocol of RGB++Layer Using CDP Mechanism])https://img-cdn.gateio.im/webp-social/moments-5624c7f433be2a23bf42ead19fb29db9.webp(

The Rationality and Efficiency of the Clearing Mechanism

The liquidation component is key to the normal operation of lending protocols. Stable++ has innovated its liquidation mechanism design, avoiding the issues of traditional liquidation mechanisms. In Stable++, when users collateralize assets to borrow stablecoins, if the value of the collateral decreases and causes the collateralization ratio to drop below the threshold, and the user fails to top up in time, liquidation will occur.

The purpose of liquidation is to ensure that every RUSD in the system is supported by sufficient collateral to avoid systemic risks. During the liquidation process, the lending platform needs to recover a portion of RUSD from the market to reduce the circulation, ensuring that the RUSD issued by the platform is backed by adequate collateral.

Most lending protocols use a Dutch auction format for liquidation, where the platform sells the collateral to the highest bidder ) liquidator (. For example, if the ETH price is $4000, with a collateralization ratio of 2:1 for DAI, a user can mint up to $2000 DAI with 1 ETH. If the user mints 1000 DAI and the ETH price falls below $2000, the collateralization ratio of less than 2:1 will trigger liquidation, and the collateralized 1 ETH will be automatically auctioned.

The Dutch auction starts at the highest price and lowers until a buyer is willing to take over. Assuming the collateral starts at $1500 and ultimately sells for $1200, the liquidator pays 1200 DAI to obtain 1 ETH, making a profit from this. MakerDAO will then burn or lock these 1200 DAI, reducing the circulating supply of DAI.

This process can be automatically executed under the control of smart contracts, ensuring that the supply of stablecoins in the system is always sufficiently backed by collateral, eliminating overly leveraged positions. However, in practice, MakerDAO's liquidation mechanism has two issues:

1. Auctions take time, and during severe market downturns, it may not be possible to promptly clear bad debts. The original intention of automatic liquidation is to attract liquidators by selling collateral at a discount, but if the value of the collateral continues to decline, the willingness of liquidators will significantly decrease, and the platform may not be able to find suitable liquidators.

2. During extreme network congestion, the operations of individual liquidators may not be able to be timely recorded on the chain, affecting the liquidation process. The event on May 19, 2021, confirmed this, as the severe market fluctuations led to extreme congestion on the chain, preventing many liquidators and liquidated parties from executing their operations in a timely manner.

These issues are reflected in mainstream lending protocols such as MakerDAO and AAVE, where low liquidation efficiency ultimately causes losses for both the platform and users. In response to these problems, Stable++ has designed a dual insurance mechanism of "Stability Pool" and "Redistribution" to ensure the efficiency of the liquidation process. This is the biggest highlight of the Stable++ mechanism design.

In Stable++, users can deposit stablecoins into the Stability Pool ), referred to as the insurance pool (, as a "standing army" ready to liquidate bad positions at any time. When a liquidation event occurs, the protocol first liquidates bad positions through the insurance pool and then distributes the collateral to the LPs of the insurance pool as rewards. This design transforms liquidators from "temporary searchers" into a "standing army," adding an efficient buffer for the protocol, eliminating the need to temporarily find liquidators when a liquidation occurs.

Two points need to be noted:

1. The Stability Pool currently accepts RUSD itself as the stablecoin. Some may be concerned: if the reserve assets of the insurance pool are RUSD issued by the platform itself, does this create a self-reinforcing issue, and is this reasonable?

It is important to emphasize that the RUSD in the insurance pool will be directly destroyed when participating in the liquidation. For example: suppose the collateralization ratio of RUSD is 110%, and there are 100 RUSD in the insurance pool from one LP. Now, there is a position that has minted 100 RUSD, with collateral worth 109 dollars, which has triggered the liquidation condition.

During the liquidation, 100 RUSD in the insurance pool was directly destroyed, the LP lost 100 RUSD but received 109 dollars in collateral, resulting in a profit of 9 dollars. The liquidated party no longer needs to repay the 100 RUSD debt.

This means that the circulating RUSD in the market has decreased by 100 coins, and there is also 109 dollars less in collateral on the platform. The bad positions that touched the 110% collateral rate red line have directly disappeared, while the collateral rate of other positions on the platform remains healthy.

Summary of the Stable++ insurance pool design: The essence is to allow some borrowers to lock up their RUSD. During liquidation, the platform needs to destroy part of the RUSD and remove bad collateral to maintain health. In the MakerDAO liquidation model, the destroyed DAI is provided by random liquidators in the market, while Stable++ directly provides the RUSD to be destroyed from the insurance pool. Therefore, the Stability Pool model can use only the stablecoin issued by Stable++ as reserves, without worrying about the self-sustaining issue.

The above example also illustrates the method for calculating the collateral discount rate obtained by LPs in the Stability Pool, which is related to the collateral ratio set by the system )CR(. Based on a collateral ratio of 110%, LPs participating in liquidation receive 109U in collateral for 100U, resulting in a discount rate of about 9%, which is comparable to the regular liquidation discount. ) Note: This is for illustrative purposes only and does not represent the actual parameters of Stable++ (.

Stable++ adopts a permanent insurance pool, which outperforms traditional methods in terms of liquidation speed and efficiency, eliminating the need to temporarily find a liquidator. However, ensuring sufficient liquidity in the Stability Pool to cope with liquidations is also a key issue that needs to be considered.

![Interpretation of Stable++: Adopting CDP mechanism, RGB++Layer's first stablecoin protocol])https://img-cdn.gateio.im/webp-social/moments-010e4594ee04c5b66f42d398c29e5137.webp(

2. If the Stability Pool does not have enough stablecoins to participate in the liquidation, the Redistribution mechanism will be activated, and the debt and collateral of the liquidated positions will be redistributed proportionally among all current positions. For example:

Assuming there are 100 borrowers, a certain liquidating position has 100 RUSD bad debts, Redistribution will make each borrower bear an additional 1 RUSD debt while receiving a corresponding share of collateral as profit. This is different from the redistribution mechanism of established DeFi platforms like Synthetix, which only allocates debt without distributing profits.

With this double insurance, Stable++ ensures quick handling of liquidation events, effectively solving the bad debt problem of traditional lending protocols. This efficient liquidation method allows Stable++ to adopt a lower collateralization rate, such as within 110%, significantly improving capital utilization.

In summary, CDP is essentially a loan, and inevitably, bad debts will occur due to the decline in collateral value leading to "insolvency" ), which requires liquidation. There are advantages and disadvantages to the two liquidation methods:

Traditional auction liquidation methods like MakerDAO and Aave have been validated over a long period without the need for maintaining a large "insurance mechanism". As long as the liquidity of the collateral assets is good and the market acceptance is high, large-scale liquidations can be achieved. However, they are not efficient in extreme market conditions, and besides a few assets like ETH, the liquidity of other collateral is insufficient, making it difficult to quickly find enough liquidators to restore the protocol to normal debt levels.

The "liquidation pool" models such as Stable++ and crvUSD essentially use an asset pool controlled by a protocol as the liquidator, quickly liquidating through placing reverse orders, which restores the overall debt level of the protocol to a healthy state. The specific approaches vary. Interestingly, AAVE's latest Safety module -- umbrella also employs not selling insurance pool assets, but rather reducing them through burning.