In the background of all the DeFi and yield farming commotion, stablecoins have been booming. DAI, USDC, USDT, and countless others have been pouring into DeFi. While it is great to have so many options, each stablecoin has its trade-offs which users must consider. For some, the centralization risk of stablecoins like USDC are simply too great; they desire a stablecoin that is truly decentralized.
Lien, brought to you by an anonymous team of developers, has a solution for these folks: stablecoins backed by ETH derivatives with “governance-less” design which requires no over-collateralization and no manual adjustments to maintain the pegged exchange rate.
Lien Protocol and iDOL
Lien Protocol powers a stablecoin called iDOL backed by ETH derivatives which allows it to utilize tranches or “tranching” to maintain stability. iDOL is designed to be insensitive to the fluctuations in the USD price of ETH, minimizing the volatility by having speculators insure the risk. Instead of being directly backed ETH requiring over-collateralization to maintain its peg, iDOL is backed by a basket of bond tokens.
Lien uses a system where ETH is tranched into two derivative contract tokens: Liquid Bond Token (LBT) and Solid Bond Token (SBT). These two bond tokens are minted at the same time with the same strike price and maturity date.
Upon maturity, SBT holders receive a fixed dollar amount (if possible) and then any remaining ETH is given to the LBT holder. If the price of ETH upon maturity is lower than the strike price, then the smart contract will pay out the entire ETH to the SBT holder and the LBT holder will receive nothing. In this way, LBT holders take on the brunt of the risk through speculation.
Let’s examine Lien Protocol in action
This diagram above can be a bit confusing at first glance but it is simpler than you think once explained. First, you deposit ETH into Lien’s smart contracts which then splits or “tranches” ETH into SBT and LBT that have the same maturity and strike price. The SBT is sent to the iDOL smart contract and used as collateral to mint iDOL. At this point, you hold the LBT and the freshly minted iDOL which can be used and spent like other stablecoins.
As the maturity date approaches, the SBT is auctioned off for iDOL by the protocol. Once it reaches maturity, the smart contract will pay out to the SBT holder, the dollar amount that the holder is entitled to in ETH. And then, the smart contract pays any remaining ETH to you as the LBT holder. As previously mentioned, LBT holders risk receiving nothing if the price of ETH is below the strike price upon maturity.
What makes Lien and iDOL special?
Instead of relying on over-collateralization, iDOL is backed by a basket of SBTs, each with their own maturity date, placing the brunt of risk on those speculating on the value of LBTs. As their whitepaper so eloquently puts it: “The stability of the SBT value is based upon the instability of the LBT value. That is, all the risks related to the price volatility of Ether are undertaken by the LBT holder, which then makes the value of SBT stable. We can think of LBT as a leveraged derivative token, the value of which is associated with Ether but fluctuates much more than Ether.”
Lien Protocol has placed a buffer of sorts between iDOL holders and the volatility of ETH and the wider market. The system can automatically stabilize the price of SBT and subsequently iDOL at target levels using market forces alone without the need for governance.
For those bullish on ETH, LBT functions like a call option on ETH that performs as a 2x leveraged ETH token. This allows you to create leveraged long positions by holding LBT. As with call options, you don’t have to worry about margin calls and liquidation during flash crashes.
Lien FairSwap is an AMM DEX which takes inspiration from Uniswap and attempts to mitigate some of the disadvantages of its design. FairSwap has built-in front-running protection which ensures transactions are settled in “a fair manner” by taking advantage of a frequent batch auction mechanism. FairSwap doesn’t process orders one by one and instead batches orders across a few blocks, called an “exchange box,” and then clears them all simultaneously.
FairSwap provides liquidity for iDOL-related derivative tokens like SBT and LBT. Unlike iDOL’s smart contracts, FairSwap’s parameters can be modified after launch. To learn more about FairSwap, I recommend you check out the whitepaper.
As previously mentioned, Lien Protocol is designed to operate autonomously and “governance-free.” And so, LIEN token is not your typical governance token. LIEN can be considered a utility token that can be used to receive discounts/rebates on protocol fees.
The Lien Protocol charges a fee (0.2%) when users mint the iDOL stable coin and when users exchange assets using FairSwap (0.3% – variable). Fees are collected in ETH or iDOL and are then distributed proportionally to holders of the Lien Token as discounts/rebates at the end of each month. 100% of Lien Protocol fees and 20% of FairSwap fees are attributed to Lien Token holders. See here for more info about LIEN.
Each and every week I get the pleasure of diving into new protocols and Lien Protocol did not disappoint. I can easily see how iDOL fulfills many people’s desire for a stablecoin without centralization or governance risk. I’d be curious to see down the line if there is an iGBP or iJPY because while iDOL is based on the dollar the system can be applied to other assets with sufficient oracles and market forces.
Lien Protocol and FairSwap are live on mainnet
Although the Lien team is completely anonymous, special attention has been paid to smart contract security by the Lien team with initial code audits perform by ConsenSys Dilligence in May and final code audits performed by CertiK. To give you an even better idea of their mindset, the Lien team even imparts users with these wise words in their launch post: “While audits are extremely important in assessing the validity and security of the code, they do not eliminate risks completely.”
Lien Protocol and FairSwap are live as of Friday Sept 4th, 2020. Head over to Lien.finance where you can trade LBT, mint iDOL, bid on SBT auctions, provide liquidity, and more today!
Disclosure: This post is part of our DeFi Pulse Drops promotional series; We’ve been paid by Lien Protocol to inform readers about their platform and iDOL. As always, we’re committed to providing the entire community with quality, objective information, and any opinions we express are our own.