Lien Finance: The Global Internet of Value Movement Will Require a Truly Decentralized Independent Dollar (iDOL)
It is with great pleasure to announce that Based.Ventures has led the 5 million USD investment round into Lien Protocol.
Stablecoins and the Price Volatility Problem⌗
Cryptocurrencies typically experience high volatility due to the complexities in valuing them and their smaller market size as compared to traditional fiat currencies. Volatility makes them less suitable for applications, especially those involving financial products and services. Stablecoins are designed as solutions to minimize price volatility relative to other crypotocurrencies. Stablecoins are usually pegged to other currencies and can be easily redeemed for their respective collateral(s).
The Current Landscape for Stablecoins⌗
Centralized fiat-backed stablecoins which are 1:1 backed by fiat offer the greatest security and ease of mind. They are pegged to the US Dollar through regulated financial institutions which hold custody of the backing asset.
USD Coin (USDC), issued by Circle in partnership with Coinbase, is one of the best examples of a centralized fiat-backed stablecoin. This means that for every USDC issued, there is a corresponding 1 US dollar in the entity’s bank account available for redemption.
While this greatly reduces the risk of default as there is a centralized entity liable for the custody of the backing asset, it gives up decentralization and censorship resistance where CENTRE is able to blacklist USDC addresses (just like USDT) and this has already occurred in response to law enforcement requests, freezing sizable amounts of stablecoins.
Crypto-backed stablecoins with collateralization done on-chain without a centralized entity enables permissionless programmable money and complete transparency.
Without a centralized entity issuing a Crypto-backed stablecoin, issuance is done on the blockchain in a decentralized manner through smart contracts.
DAI issued on Ethereum by Maker is one of the best examples. DAI can be issued permissionlessly by anyone choosing to lock up collateral (usually ETH) and receiving DAI for a fee known as the Stability Fee. These loans need to be overcollateralized so that they can be seized and liquidated in the event of severe price drops in the backing asset.
While the Maker foundation has done an amazing job getting DAI adopted, it can no longer call DAI a truly trustless stablecoin amidst the chaos of March 12 2020. As the events unfolded, the Maker foundation reacted by allowing users to mint DAI on Maker from the centralized stablecoin USDC, thereby tainting their reputation of being a “decentralized stablecoin”.
Enter Lien Protocol - Stablecoin Without Governance⌗
On April 1st 2020, the anonymous team behind Lien Protocol dropped their whitepaper documenting a simple and elegant design to split and tokenize ETH into one stable token known as a Solid Bond Token (SBT) and another volatile token known as a Liquid Bond Token (LBT).
With the Lien Protocol, users can create a SBT similar to selling a European Put option and a LBT which functions just like a European Call option.
- No governance parameter tuning: A governance system like Maker depends on MKR holders to adjust the parameters like the stability fee and collateral type which controls supply and demand for DAI. However, Lien Protocol is intended to function without human intervention via governance parameter tuning and is thus less susceptible to whale manipulation.
- Purely ETH-backed collaterals with optionality: MakerDAO accepts USDC and WBTC, thus exposing MakerDAO to the credit risk and security risk of issuers. However, Lien only accepts ETH as a collateral and the stablecoin minted by the Lien Protocol is purely backed by ETH derivatives that gives users much better flexibility with optionality and retains true decentralization and censorship resistance. Users can decide whenever they want to reduce their exposure to ETH by buying and selling LBTs whenever they please.
- Capital efficiency is much better with Lien as you do not require over-collateralization of 150% with platforms like MakerDAO.
Lien FairSwap is a constant product (XYK) automated market maker similar to Uniswap. The following rules are implemented in FairSwap to ensure fair transaction settlements:
When it sees the same buy/sell orders within 2 blocks, it settles these orders at the same price. It doesn’t give preference to one transaction over the other in terms of which transaction is processed first.
When an order with 5%+ slippage is placed, the order might not be filled fully. For example, if a buy order of $100,000 is placed on the platform but the maximum value of order with 5%+ slippage allowed on the platform turns out to be $25,000 on these two blocks, only 25% of the order will be filled, with the remaining amount refunded to you.
Lien FairSwap also has some additional benefits:
1) Front running prevention with frequent batch auction:⌗
The idea of a Frequent Batch Auction has been implemented in traditional financial markets as a way to prevent front-running and combat HFT latency arbitrage.
As we have seen in recent times, IDOs launched by high-profile DeFi projects like UMA and BZRX have not exactly been fair. The Lien Finance team has written an article about this here.
We believe FairSwap is an ideal alternative platform for a fair initial dex offering (IDO).
We believe that FairSwap has the potential to be a better avenue for fair initial dex offerings for projects looking to launch on a DEX.
2) Dynamic Fee Pricing based on volatility⌗
While uniswap charges a 0.30% per trade FairSwap charges variable fees depending on volatility.
Volatility-dependent commission fees are dynamically adjusted for each exchange box to better cater to liquidity providers. This helps to make up for potential changes in time decay to ensure the profit of the liquidity provider.
LIEN Token Value Accrual⌗
The Lien Protocol charges a 0.2% fee when users mint the iDOL stable coin of which 100% goes to LIEN token holders and 20% of all fees on FairSwap when they exchange assets using FairSwap (0.3% — variable of which 80% of all fees go to Liquidity Providers).
Fees are collected in ETH or iDOL and are then distributed proportionally to holders of the LIEN token as discounts/rebates every 28 days.