USDtz Whitepaper

by Kevin Mehrabi

Base Implementation

Choice of Token Standard

USDtz is written to the FA token standard, which is the Tezos universal token standard (i.e. the community standard; the token standard accepted by the Tezos community of developers, institutions, and entrepreneurs). The USDtz smart-contract's initial deployment has been under the FA 1.2 standard. Future upgrades of the FA standard are reverse-compatible with FA 1.2.

Although other Tezos token standards exist, those standards are either modified from the FA standard, or they are wholly proprietary.

Minting and Redemption

Minters

Every authorized minter of USDtz is ipso facto an authorized redeemer, and vice versa. That is, only certain people agreed to by consensus of the smart-contract may be authorized to mint new USDtz in exchange for collateral, and to redeem USDtz tokens for the underlying collateral. Once authorized a minter may redeem as much or as little as they want. The amount a redeemer may redeem is not restricted in any way as a function of the amount that they minted — in fact, redeemers can redeem far more than they ever minted should they be in a position to do so. The terms minter and redeemer may be used interchangeably. To become a minter the applicant user must follow the procedures in the enrollment portal at https://usdtz.com/minting.html. Applicants may undergo a process of identity review, the results of which should inspire confidence that they are who they say they are, and that they will be good network participants. The smart-contract network operators will make a determination as to whether or not the applicant may be accepted as an enrolled minter. The qualifications for becoming a minter will depend on legal jurisdictional compliance needs as decided by the consensus, which may refine over time.

Minting Process

To mint new USDtz, an authorized minter deposits collateral (e.g. USDC, GUSD) to a uniquely given [Ethereum wallet] one-time deposit address generated for them in the minter’s portal. The use of the unique address signals to the network that the deposit is authorized and from whom. The sums in those one-time wallets are then ‘swept’ into the collateral wallet of the USDtz Reserve. Upon settlement into the USDtz reserve wallet, an equal amount of USDtz will be minted in the minter’s Tezos wallet.

Redemption Process

Likewise, when a redeemer wants to redeem USDtz, they must send the USDtz to a unique one-time-use Tezos wallet address given to them in the minter’s portal. Upon confirmation that the deposit has been made, the corresponding USDtz will be burned. After a successful burning of the USDtz, the corresponding amount of collateral will be sent from the USDtz reserve wallet to the redeemer’s designated Ethereum wallet.

Core Advantages

Proof-of-Collateral

Accepting only collateral in the form of another USD-pegged (and insured) stablecoin (e.g USDC, USDP, BUSD, PAXD, TUSD), USDtz can provide a degree of accountability to its minting process and reserve claims that would be inexplicably more challenging than if FIAT cash were to be held under centralized custody. The reserve has been audited monthly by Armanino LLP and are published on the USDtz website. To see all past audit reports, including the most recent one, as well as to observe USDtz’s full-solvency directly (on a block explorer) without the use of a trusted 3rd party auditor, users can go to https://usdtz.com/reserve.

Although the hard-collateral (FIAT) accepted by the USDtz reserve is inherently an off-chain component (i.e. off-Tezos blockchain; collateral held on the Ethereum blockchain is considered off-chain), oracle technologies (e.g. Harbinger, Chainlink, OrO from Tezsure) can be utilized to affirm the presence of the collateral on the USDtz smart-contract. The data conveyed by the oracles will be written on the smart-contract and thus subject analysis by use of formal methods.

This provides assurance in real-time that the USDtz reserve is fully solvent and that no USDtz may be minted without a confirmed settlement of hard-collateral deposits to back the to-be-minted amounts.

Formal Verification

An advantage native to Tezos protocol itself, and consequently extended USDtz, is Tezos’ adeptability in formal verification. Independently created tools such as Mic-Cho-Coq (developed at Cornell) may be used to analyze Michelson code in Coq.

Stablecoins only remain stable price-pegs if market participants can agree on the exactness of its supply-to-collateral ratio. The fidelity of USDtz in this regard can be observed and continuously validated with each transaction record on the blockchain using formal methods.

Network Efficiency

USDtz to XTZ swaps (and XTZ to USDtz swaps) are inherently the most real-time and most low-fee means of XTZ trading of any USD-pegged stablecoin.

Other stablecoins (i.e. those stablecoins which do not run on Tezos), if used to swap between itself and a Tezos token (like XTZ) runs the costs of latency, overhead and of operations, as a consequence of having to trade amounts between two different blockchains. Traders not only suffer from the latency of this bottleneck, but are also having the monetary costs passed to them in the form of relatively exorbitant fees.

Until now, purchasing a USD stablecoin in exchange for XTZ has been very expensive for most traders, let alone prohibitively expensive for volatility trading. A current snapshot shows that the most popular exchanges for XTZ to USD-stablecoin trading — Binance (XTZ to USDT), Coinbase (XTZ to USD), OKex (XTZ to USDT) — charge users 10, 50, and 15 basis points respectively (i.e. 0.10%, 0.50%, and 0.15%).

All USDtz to XTZ (and XTZ to USDtz) swaps between parties, be they private or through a marketplace intermediary (e.g. a decentralized exchange), are pure network-to-network transactions, which merely run the cost of network gas of any transaction (let alone, fees which are generally lower than Ethereum’s network fees).

Low-fees are a highly attractive advantage to high-frequency traders (HFT), and the trading platforms seeking to support that market. This can be particularly useful for exchanges in increasing engagement with Tezos trading. As Curve Finance has demonstrated with their liquidity-optimized stablecoin exchange, having achieved over 20,000,000 in volume daily in just a few short months, traders are very much attracted to low fees on stablecoins.

dApp Programmability

Traditional securities (be they equity securities like stocks, or debt securities like bonds and debentures, or derivative security offerings like futures, options, and swaps) all entail programmatic terms (if/then conditionals relating to time, money, and events).

Security token smart-contracts, would not only implement such terms into code, to be enforced by the blockchain, but with automation and trustlessness, can offer a degree of complexity that would not be possible off-chain.

USDtz provides a programmable building block conducive to the needs of DeFi dApps, including securities tokens. Future directions and adaptations of the USDtz smart-contract will advance to add more capabilities for use by 3rd party developers as a programmable element.

Expanded Implementation Proposals

Activities proposed for implementation as the USDtez DApp expands scope and scale.

Use of FA 2.0

The FA 2.0 smart-contract standard upgrade will enable further decentralization of permissions, as well as the collectivization of a 'stablecoin network'. The FA 2.0 standard will enable the USDtz smart-contract to be instantiated by a governing smart-contract, that will have its own token supply, and which will instantiate other stablecoin smart-contracts. This will provide that USDtz is both a sovereign smart-contract, capable of autonomous decision making (and even cessession), and yet under the shared umbrella of a larger network, receiving the benefits of a collective standard.

Staking and Rewards

Staking and rewards have also been proposed. Staking USDtz entails that a USDtz holder ‘locks’ their USDtz tokens in a time-lock smart-contract for a chosen period of time. This activity prevents the USDtz from being transferred at any point before the expiry of the time-lock.

USDtz staking effectively provides resources to the system overall in that it ‘frees up’ the underlying collateral of the staked USDtz for lending and borrowing on platforms native to the collateral type (e.g. USDC can be lent on Compound; swapped for growth-seeking cUSDC tokens). These lending activities will accrue interest earnings that in turn provide a net gain of capital for the USDtz reserve. This gain of capital is used to support the network’s operations.

As a reward for staking, stakers are given StableTez governance tokens (SABZ). SABZ will have an intrinsic value in and of itself, is transferable to other users, and can be traded on secondary markets at a market-set price.

The StableTez governance smart-contract, DAO, and SABZ token are written to the FA 2.0 standard, which will be used to instantiate the USDtz smart-contract as well as the smart-contracts of the future stablecoins to be added to the network (e.g. BTCtz, ETHtz, EURtz, GLDtz).

SABZ Token Supply and Numbers

For example, suppose that in total 2,000,000,000 (2 billion) SABZ will ever be minted. Staking of USDtz (and/or other StableTez coins) will enable users to collect up to 50% of the total end supply of SABZ token.

The initial 50% (1,000,000,000 SABZ) are minted and distributed at genesis to backers, developers, founders, and the non-profit Tezos Stablecoin Foundation.

Completing all minting of SABZ through staking may take many years (like Bitcoin) and yield rates will depend on the length of lock-up and amount locked-up.

Baseline measure of USDtz staking expected SABZ yield:staking $1 USDtz for 1-year would yield 2 SABZ tokens

Therefore, under this example, with a 2,000,000,000 SABZ supply (and with 1,000,000,000 minted and distributed at genesis), the fastest way in which the total supply of SABZ token can be terminally minted is under the hypothetical that $500,000,000 USDtz begins staking for a full year as soon as staking goes live.

Post-SABZ Rewards

Continuing on this proposed example model, if all SABZ tokens will have been minted that will ever be minted (i.e. the total minted supply has reached 2,000,000,000 SABZ), the rewards that stakers will earn will be in the form of the stablecoin itself. That is, in exchange for staking USDtz, stakers earn more USDtz. It is intended and expected that these return rates be competitive.

Use of SABZ

By nature of this proposal: SABZ is a governance token; when staked, SABZ holders use SABZ to command proportional voting power. StableTez governance is modeled after Tezos on-chain governance. Proposals will not only include concerns for upgrades and changes to the smart-contract, but also budgetary proposals and signatory assignments for the logistical tasks of the platform.

Budgetary proposals will include distribution of growth earnings for continuing network operations, ecosystem development grants, as well are rewards to SABZ holders themselves.

Signatory assignments for logistical tasks will include the permission-granting authority (and in signature to the smart-contract) by the consensus of a smaller designated committee of 3 or 9 individuals instead of alerting the entire SABZ holding community for a vote on every individual operation such as every single time someone mints or redeems USDtz.

Growth / Reserve Management

The collateral which underlies the total amount of USDtz being staked by the network is referred to as Leasable Collateral.

SABZ Governance will decide which parties to delegate signatory assignments, including those assignments related to the management of the reserve. Reserve management will conduct supply and reward activities with the collateral amounts that underlie the USDtz staked by the network. In other words, USDtz’s own governance will decide by consensus whom to lease collateral.

At first, collateral will be leased only to supply liquidity to platforms like Uniswap and Compound Finance, with the expectation of rewards. Over time, leases may be granted to portfolio funds, wealth management entities, and even repuable indiivdual borrowers. This may sound similar to the management of an endowment of a non-profit organization or similar.

Decentralizing reserve management by leasing collateral amongst more trusted parties is preferable. However, more leases require proper scaled oversight to be in place first. This inclues collateral deposits from leasees to cover their potential default, as well as underwriting from insurance companies to make-up for any difference.

Without proper oversight to satiate market confidence, the coin will destabilize, and that would defeat the purpose altogether.

Other Proposed Future Implementations

Currently the reserve is backed 1-1 by FIAT collateral, and its growth earnings do not have a maximum size. This will change as the reserve starts to scale.

Over-collateralization

Over-collateralizing the reserve 2:1 benefits both the stability and the scalability of USDtz.

Added Stability Assurance

Stablecoins destabilize and lose their price peg to their target asset if for whatever reason the market begins to panic and believe that the stablecoin reserve is insolvent — that is, that the reserve wouldn’t have enough to provide redemptions for all minted and circulating supply of the token. USDtz should not suffer this issue since all collateral can be read through a blockchain in real-time. However a mere 1:1 backing is ‘cutting it close’ — inviting risk of questioning whether at any given time the collateral amounts meet or fail to match the amount minted.

Overcollateralization can provide an extra layer or ‘cushion’ of comfort to participants. That is, from 1:1 (current) to 2:1 collateral will insulate such concerns for public sentiment, and will increase the stability of USDtz.

Scaling

A 2:1 FIAT overcollateralization ratio will also provide for more working capital for further collateral leasing activities as well. The leasable collateral that comes from the overcollateralized amounts of capital are not necessary to maintain solvency (since the reserve is already backed 1:1), and thus can be applied to more aggressive earning activities than the base leasable collateral.

Multi-Asset Overcollateralization

The choice in the type of collateral a stablecoin keeps in its reserve can be polarizing to many; participants of the crypto market (and thus, the stablecoin market) often have strong preferences for one type or the other.

FIAT Collateral

FIAT is naturally the first type of collateral to accept. Unlike crypto-based collateral (like XTZ), it is price-immune to market fluctuations (obviously, since $1 of FIAT always equals $1 of FIAT). It is also immune to oracle attacks in which an attacker will manipulate oracle readings to buy low and sell high on an asset.

However, many market participants are not trusting of FIAT collateral, nor are they trusting of other stablecoins that are backed by FIAT. Some have voiced that FIAT collateral ultimately relies on trust of central parties, and that the underlying instrument itself (the FIAT cash) comes from a central governmental party.

XTZ Collateral

XTZ collateral, however, is an inherently on-chain store of value, and thus fully decentralized and not subject to the mere whims and fancies of central operators. With XTZ collateral custody can be decentralized, and minting could become a function of imaginative programmatic contracts as opposed to a mere transfer of one type of coin in exchange for another. As a basic example, users would be able to delegate their XTZ as they would for baking, and receive payouts in either XTZ or USDtz.

Collateral Super-positioning

Upon the point in which XTZ trading volume becomes insurmountably high that it would be prohibitively expensive for an attacker to attempt to manipulate its oracle readings, tez (XTZ) can become an accepted part of the USDtz collateral body as well. This would raise the maximum collateral ratio from 2:1 to 4:1 (since, like the FIAT collateral, the goals of the XTZ backing would benefit from a 2:1 overcollateralization system as well in terms of stability assurance and scaling).

4:1 Maximum

Likewise, by the same logic of overcollateralizing a single reserve as explained earlier, for USDtz to satisfy all market participants real-time indecision and apprehension about feeling confident in one form of collateral or another, USDtz would need to over-collateralize both horizontally and vertically (that is, overcollateralize each form of collateral) — in terms of amount of any single form of collateral (2x), and in terms of type of collateral (2x). That would render an overcollateralization ratio of 4:1 maximum.