Reflexer Finance
Wrote in September 2022.
The stablecoins sector of our industry has had quite a year. From algorithmic stablecoins like UST imploding to Tether slashing their exposure to commercial paper to zero. The MakerDAO community voting for approval to have $1.6B in USDC placed in Coinbase's Custody Platform while still making plans against sanctions from USDC exposure.
All these activities have illustrated the strengths and weaknesses of various stablecoins. As a reminder, USDC is vulnerable to regulatory capture and censorship while there’s uncertainty concerning USDT’s reserves. DAI’s reserves are less censorship-resistant since 33.9% of the reserves are collateralized by USDC.
RAI, a stablecoin innovation from Reflexer Finance, has proved to be trustless, fully decentralized and isn’t prone to any regulatory attacks, unlike other stablecoins. RAI was launched in February 2021 with DeFi ethos of censorship resistance, transparency and trustlessness in its design.
It is governance minimized and backed by ETH-only as collateral, meaning a user is exposed to ETH but isn’t affected by its volatility. It is also a free-floating stablecoin meaning, it is not pegged to a fiat currency like the United States dollar or the Sterling pound. It, therefore, offers users freedom from the whims of central bank policy that other fiat-pegged stablecoins are exposed to.
Let’s explore what we mean by RAI being free-floating which enables its non-pegged nature. In order to get RAI, a user has to deposit ETH as collateral in a SAFE. The amount of RAI minted is determined through supply and demand forces while the protocol stabilizes the price of RAI through devaluing or revaluing the token. These forces come from:
a) SAFE depositors who mint RAI through their ETH collateral and sell it on the secondary market.
b) RAI holders who buy it from the market and redeem it for ETH.
The RAI Reflex Index is the engine of the protocol’s free-floating mechanism that determines RAI’s price in USD terms. Reflexer Finance’s monetary policy is based on its redemption rate, global settlement, redemption and market prices. The redemption price is the price at which the protocol redeems the stablecoin while the market price is the price at which RAI is bought on the secondary market.
The redemption rate is the rate at which the token is being devalued and revalued. Its global settlement policy is a scenario whereby in the event the protocol is shut down, both SAFE and RAI users redeem the collateral in the system. It is important to note that settlement uses redemption price to calculate how much collateral each user can redeem.
Reflexer Finance uses the FLX token for governance purposes. The token’s purposes are
- Backstop mechanism: Users who stake FLX are the protocol’s first line of defense if it goes underwater. In the event that the first line is insufficient for protocol defense debt auctions are carried out. New FLX tokens are minted and auctioned in exchange for RAI.
- Ungovernance: The protocol has a governance minimization goal in order to remove control from the remaining components in RAI. Holders of FLX can also continue to manage components that may be difficult to ungovern.
The protocol has come up with three stages of governance minimization that it will undertake. It has set the following requirements for its goal to be met:
- The protocol governance must not plan to add any more collateral types.
- Infrastructure for governance minimization must have been audited and tested in production.
- The protocol must have enough surplus in its treasury to pay for oracle, PID and state management costs for at least 6 months.
According to this dune dashboard, Reflexer has collateral worth $32M with over 2,000 created Safes and 3.5M RAI outstanding. Thanks to how the protocol is designed the following things can be built on top of the Reflexer protocol stacked funding rates, unique money markets, options, pegged coins/synthetic assets, yield aggregators, sophisticated arbitrageurs and portfolio management strategies. If you’ve read this article and you want to mint some RAI head over to their website.