Equilibrium Review: A Stablecoin That Is Overcollateralized Above 170%

April 01, 2019
Equilibrium Review: A Stablecoin That Is Overcollateralized Above 170%

High volatility in cryptocurrency markets is both a salvation and a curse to the blockchain industry. On one hand, no coin over the past three years has been able to avoid significant price fluctuations, even notable examples like Bitcoin and Ether. Despite this, the market has continued to leverage this unique technology to build a range of disruptive financial products, which are in many cases available anywhere in the world.

It's time to make these tools stable, secure, and reliable.

Overcollateralization, multi-collateralization, collateral fluidity, asset-backing — the traditional financial markets have been using these and many other tools for capital security. Equilibrium makes these opportunities available for digital assets and leverages their application with a new breed of stablecoin.

Its principal feature is its ability to stay pegged to USD, an asset that is a robust source of price stability. We have the technology to collateralize digital assets that convert highly volatile cryptocurrency into a stable store of value.

About the project

Equilibrium is a feature-rich framework of smart contracts that generate digital asset-backed stablecoins that are pegged to the U.S. dollar and backed by a user’s own crypto holdings. We call it EOSDT — a price-stable cryptocurrency that participants can put into circulation through a collateralization model that uses their liquid digital assets.

The Equilibrium framework is governed by a bundle of smart contracts built on the top of the EOSIO technology stack. Among other things, these contracts ensure overcollateralization at all times, and maintain EOSDT’s parity with the US dollar: 1 EOSDT = $1 USD.

We expect to issue 70 million EOSDT stablecoins through the framework at inception.

EOSDT stablecoin applications

Using the Equilibrium framework, people can deposit and withdraw collateral, generate stablecoins, pay them back, move their positions, or close them. Besides the collateralization function, EOSDT offers a variety of applications. These include hedging against market turmoil, providing fiat-like quotes for currency pairs on decentralized exchanges, and even making online payments with merchants that accept cryptocurrency.

Why starting with EOS

There is currently no functioning decentralized stablecoin available via EOS. Equilibrium’s EOSDT will be the first one. We chose to start with the EOS blockchain and EOSIO technology because it is faster than Ethereum, has near-zero transaction fees, and boasts an infrastructure robust enough to offer a high-quality experience to lots of users at once. Our aim is to create the basis for asset-backed stablecoins across multiple blockchains that support smart contracts. EOS is our first choice because it offers great infrastructure prospects with the implementation of cross-chain solutions and support for multiple forms of collateral for the EOSDT stablecoin.

How it works

Anyone who holds a digital asset compatible with the Equilibrium framework can leverage it to generate EOSDT stablecoins using a self-service gateway with an intuitive user interface. We will accept EOS collateral at launch, but will be actively working on support for a wide variety of digital assets as collateral.

This position holds the deposited collateral, then a user decides how much EOSDT to generate. These generated stablecoins are backed by deposited collateral within the position, which can be recovered by paying back the equivalent amount of EOSDT plus any accrued fees. Recovered collateral can be withdrawn by the position holder. Active positions are always overcollateralized, meaning the value of the collateral exceeds the value of the generated stablecoins. The framework seeks to maintain the minimum viable ratio of collateral to loan at all times.

NUT token use cases

Our Native Utility Token (NUT) is a core framework token giving users access to a number of the framework’s functionalities. We envision NUT as a strong incentive for the community to operate and develop its whole ecosystem.

1) Decentralized governance. NUT plays an important role in the governance of the entire Equilibrium framework. Thanks to NUT, the community is in charge of finding and discharging positions, voting for risk parameters, changing the applicable fees, interest rates and collateralization level, monitoring the market supply of EOSDT, and implementing other management functions.

Governance happens at the smart contract level through a voting mechanism that closely resembles the native EOS forum contract. In our ecosystem, only NUT owners are allowed to generate proposals and cast votes for different proposals.

2) Paying fees. In order to close their position, users must repay their debts plus an Admin fee that accrues in NUT.

3) Access to discounted collateral. Arbitrators may submit NUT to the liquidator contract to claim liquidated collateral at a reduced price.

NUT tokens are burned in both these cases. This mechanism reduces the total NUT supply, leading to a NUT price increase that rewards Equilibrium’s NUT holders.

4) Block producer voting. EOS cryptocurrency supports risk-free block producer (BP) voting, so the Equilibrium framework lets NUT holders influence decisions related to 30 BPs that may receive a staked portion of the EOS collateral. The approach of a kind will allow leveraging any DPoS architecture further.

BP Voting scheme

Framework advantages

Stability

The Equilibrium framework’s soft price peg to the US dollar is the core of its stability, which ensures 1 unit of EOSDT is always equal to $1 USD. An external price feed values the collateral, and the system constantly monitors the ratio of collateral to the total EOSDT supply, ensuring that it always meets the minimum threshold.

Overcollateralization

Overcollateralization has become an industry-accepted way to manage risk, in many cases due to lessons learned from unsecured lending in the aftermath of the financial crisis. Equilibrium maintains a collateral backing of 170%, ensuring that there is always enough collateral in the system to cover all the outstanding positions. The project has high liquidity support in order to provide the sufficient deposit holds for the highly volatile, unpredictable crypto market, as well as the high overcollateralization level.

Low fees

The project has two types of fees — Admin fee and Equilibrium fee.

The Admin fee governs the supply of NUT tokens, thus affecting its ROI. Whenever a position holder pays down a position, he or she is required to pay the equivalent amount of EOSDT plus the accrued Admin fee in NUT tokens. This fee will be set to 1% when the framework launches.

The Equilibrium fee is applied every time a user takes a market action against a stablecoin position. This fee is based on an annual percentage rate defined by Equilibrium’s governance smart contract. At the launch time, the Equilibrium fee will be set to 0% APR. These fees are subject to change through the applicable governance mechanisms.

Real-time monitoring

The Equilibrium framework requires real-time information about the collateral’s market price, so the system knows when to trigger margin calls for undercollateralized positions. We use Oraclize (now Provable) for this purpose, and we are the first project on the EOS to have this partnership, delivering external data to the EOS blockchain.

Risk mitigation

We focus on the market’s highest risk standards and have a full range of mechanisms to prevent potential risks facing the development, deployment, and operation of the Equilibrium framework. We have worked on mitigating the risk of smart contract bugs, malicious attacks, collateral price shocks, pricing and data feed errors, and failures of centralized infrastructure.

The mitigation mechanisms include a simulation system for tracking the ecosystem’s general behavior, smart contract policies to protect a user in risky situations, real-time supply-demand monitoring to ensure minimum threshold support, and regular security system audits. But in the Equilibrium ecosystem, the community is actively involved in mitigating risks. The system stability and scalability are the main factors, which will provide more upside to NUT holders. It’s in their best interest to govern and monitor the system accordingly.

A fully tested product

The Equilibrium framework is NOT a prototype or a MVP: it’s a fully tested ready-to-use product. The core system logic and all the smart contracts already have the full coverage with unit and integration tests.

Our plans

We will support only the EOS cryptocurrency at launch. But we are actively developing cross-chain solutions to support other possible collateral for EOSDT stablecoins and to make it easy for treasuries and custodies to use EOSDT on a wide variety of blockchains.

For example, we’ve done a lot of work to support swap transactions as a tool for providing a wrapped-ETH and ERC-20 token for EOS community. One major achievement, which significantly differs us from other projects in this field, is that we will provide a decentralized solution for converting ETH to EOS wrapped tokens, while other projects use centralized gateways similar to what we’ve seen in the BitShares blockchain. We will apply the same approach for BTC to EOS proxy via HTLC transactions.

Our focus is on enriching the EOSDT holders with new financial tools and options. The most important upcoming features in this field are the auction mechanism for liquidating collateral, opening up a whole new field for risk management within the framework, and financial derivatives. The EOSDT stability allows a stablecoin broad applicability in the field of on-chain derivative contracts, e.g., on-chain EOSDT deliverable futures on an array of traditional financial indices or CFDs for US stocks.

We are additionally developing a sophisticated simulation engine in a Jungle testnet. We can feed random prices to multiple accounts and generate random positions with different collateralization levels to see how the system reacts to different market events, price shocks, and black swan events. This lets us analyze system response during market turmoil.

More features and options are on the way in our roadmap, and we will present these to our audience soon.

Game-changing blockchain infrastructure projects are one of the best ways for the blockchain market to become more robust. Providing access to different protocols, assets, and platforms, we support the diversification of stable assets for crypto holders.

That’s why this blog will be a place for detailed, technical descriptions of the variety of blockchains supporting smart contracts. We’ll include how-to guides, developer tutorials, and recommendations for those who build on EOS and other blockchains. We are also on our way to delivering you stablecoin market research and reviews.

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