After one of the most successful launches in DeFi history, it is time for the DSD economic experiment to advance into the next epoch. Improving on the existing mechanics and setting the cornerstones for a stable, reliable, and scalable store of value for the decentralized economy.

This article lays out the final specs of DSD V2 (DIP-10). It is an extension of our previous write-up on DIP-10. It is structured as follows:

  • Motivation for DSD V2 (DIP-10)
  • DSD V2 (DIP-10) Summary
  • Contraction rewards with CDSD
  • Expansion rewards with CDSD
  • Timeline
  • V2 FAQ

If you are new to DSD, please read up on this FAQ and this launch article to understand the general mechanism underlying the DSD protocol. If you are familiar with the concept of epochs, TWAP, peg, expansion, and contraction, jump to the relevant section immediately.

Motivation for DSD V2 (DIP-10)

The core mechanics of DSD to maintain the 1$ peg consist of supply expansion during a positive price deviation, and supply contraction during a negative price deviation. So far, no non-collateralized algorithmic stablecoin has come up with a method to sustainably hold itspeg.

Coupons have been proven ineffective to recover the 1$ peg. This is mostly caused by the pricing of the coupon being too static due to the fact that the duration they are held is completely neglected. This incentivizes buying coupons once the price re-approaches peg and not when it deviates away, which is when contraction is most needed.

The outcome is that contraction cycles are numerous and protracted. By contrast, expansion cycles are rare and brief. The majority of users are scared away by the complexity of coupon mechanics, so they avoid participation in the debt market. Speculators exert an increasingly strong sell pressure as the price of DSD approaches the peg, making further expansion cycles extremely hard to achieve

This is mainly due to incentives being overly powerful to buy-in above the peg to participate in supply expansions, but fairly weak to re-approach the peg once the asset price has fallen below.

Therefore, with DIP-10 we are going to revamp the entire incentive design of DSD. The new contraction cycle mechanics introduced by DIP-10 are a significant step towards becoming the first non-collateralized algorithmic stablecoin that can sustainably maintain its peg.

DSD V2 (DIP-10) Summary

Inspired by perpetual futures funding rates — the mechanism currently proven to work best for pegging one asset to another — we want to take a big leap forward and achieve (near) mechanism symmetry between expansions and contractions.

To this end, we propose to discontinue the current debt and coupon system and replace it with a surrogate set of contraction incentives in the form of DIP-10.

DIP-10 introduces a brand-new ERC20-compatible token to the protocol. This token — which we will name CDSD — will be obtainable by burning free-floating DSD. Unlike coupons, CDSD will be freely tradable and transferable without expiry. Most importantly, however, users will be able to bond their CDSD into the DAO to receive contraction rewards.

During contractions, rewards will be capped on a per-account basis at 100% of the DSD amount burned by that account. Buying CDSD from the secondary market will thus not increase the size of contraction rewards but instead help participants to earn their rewards faster. Consequently, in order to maximize contraction rewards, participants will be incentivized to continuously buy and burn more DSD.

When the protocol enters expansions, CDSD is partially redeemable 1:1 for DSD for all CDSD bonders pro-rata to their holdings. This means that when the total supply grows and 10% of CDSD becomes redeemable, all participants will be able to redeem 10% of their bonded CDSD (instead of 10% of holders redeeming 100% of their earnings).

Further, we want to ensure that CDSD is traded against USDC and not DSD. During contraction periods this enables that DSD is not the exit liquidity for CDSD. Therefore, there is an incentivized LP-pool for CDSD-USDC. At the target rate of 10% of CDSD supply in the pool, LP-token stakers receive 250% APY in CDSD.

Additionally, this DIP introduces incentives for bonded DSD, even during contractions. This incentive, which is set to a constant 25% APY, is intended to encourage participants to stay bonded and engage in governance even during contraction cycles.

Contraction Rewards with CDSD

At the beginning of each epoch, the TWAP of the Sushiswap pool indicates whether the protocol is going in expansion or contraction. When the TWAP is > $1 (peg), then the DSD supply expands (expansion). When the TWAP is < $1 then the DSD supply contracts (contraction).

During contraction, the protocol aims to reduce the circulating supply of DSD. Therefore, it offers three groups of incentives: (1) rewards to bonded DSD and (2) bonded CDSD and (3) liquidity rewards to CDSD LPs.

  1. Bonded DSD Rewards:

DSD that is bonded in the DAO is rewarded with a 25% APY, even during contraction. Rewards are compounded. The reward intended to encourage participants to stay bonded and engage in governance even during contraction cycles and to limit circulating supply during contraction cycles.

2. Bonded CDSD Rewards:

The rewards that CDSD holders earn during contraction depend on the amount of DSD they burn for CDSD. Here we introduce the notion of an earnable:

  • Earnable Amount: The earnable describes the maximum amount of CDSD that you can earn from the amount of DSD you have burned. It is equal to the amount of DSD that you have burned for CDSD. If you have burned 100 DSD for CDSD then your earnable equals 100 CDSD. Per DSD that you burn the maximum ‘premium’ would therefore be 100%. If you bond 100 CDSD in the DAO and your earnable is 100 CDSD then you compound with 0.275% per epoch. This means that within 21 days you will have earned 100% interest, doubling your CDSD, reaching your earnable.
  • You can accelerate reaching your earnable amount, by bonding additional CDSD that you have bought or maintained by migrating coupons. All CDSD that are bonded in the DAO receive rewards until the earnable of an address is reached. If you have an earnable of 100 CDSD, but 200 CDSD bonded in the DAO (100 CDSD from burning DSD, 100 CDSD bought), then the 200 CDSD earn the same interest rate, until they have earned 100 CDSD combined.

3. CDSD Liquidity Rewards

CDSD liquidity rewards are given to all bonded LPs of the CDSD — USDC pool. For the rewards, the CDSD supply is increased by 0.029% each epoch. If 10% of all CDSD are in the pool this would equal an APY of 250% for the liquidity providers. If 5% of CDSD are in the pool the APY would be 500% and so forth. Once the mechanism has stabilized we can adjust the rewards through governance going forward.

CDSD has to be bonded to the DAO to be redeemable for DSD during expansion. If you have free-floating CDSD when the protocol enters expansion, you can bond your CDSD in the DAO to participate in the redemption.

Expansion Rewards with CDSD

During expansion, the protocol expands by 1/25th the distance from the $1 peg. For example, when the price is at $1.25, the total DSD supply expands by 1%. The supply change limit per epoch is capped at 2% (1.26x max daily expansion). This means that max expansion is reached at a TWAP of $1.50. The expansion parameters have been put into effect with DIP-8. The expansion cap ensures that the protocol does not expand too fast, which would cause unsustainable inflation and sell pressure after an expansion.

The expansion rewards are split between four groups: (1) DSD bonded in the DAO, (2) DSD-USDC liquidity provider on Sushiswap, (3) bonded CDSD, (4) treasury.

Expansion rewards:

  1. Bonded CDSD: 50%, distributed pro-rata (goes to DAO w/o CDSD outstanding)
  2. Bonded DSD: 12%, distributed pro-rata
  3. Bonded DSD LP: 35%, distributed pro-rata
  4. Treasury: 3%

CDSD that is not bonded in the DAO, will not be redeemed to DSD during expansion.

Please note the significance of pro-rata redemption of CDSD to DSD. It increases the stability of the system, by preventing large individual redemptions and sells. Major holders cannot redeem their entire CDSD holding at once, bidding lots of gas. Everyone can always redeem the same percentage of their CDSD.
Your CDSD that currently can be redeemed in this expansion cycle will be displayed as “redeemable” balance in the DAO. Unclaimed redeemable balances will be reset entering a contraction.

You can migrate all coupons you currently hold 1:1 for CDSD. We have added the function migrateCouponsToCDSD(). You can call the function to migrate all your coupons to CDSD, regardless, whether you have migrated to the updated coupon contract from DIP-13 or not. The migration interface from coupons to CDSD can be found here (after the DIP has been committed).

Timeline

We have just proposed DIP-10 to the DAO. The vote for the DIP will run until 20h UTC April 4th. After the DIP has been approved, it can be committed and go into effect immediately.

While the vote is live, we are going to be all hands on deck to help clarify any questions that you might have. We are aware that this DIP brings lots of new interesting dynamics and opportunities that take some time to digest and understand. Please refer to our V2 FAQ for questions or ask in Discord and Telegram, should you have any open questions.

We are excited about the road that lays ahead for DSD. The new contraction cycle mechanics introduced by DIP-10 are a significant step to becoming the first non-collateralized algorithmic stablecoin that can sustainably maintain its peg. This stability is crucial to our mission of becoming a trusted and adopted reserve asset for DeFi.

So far it has been an amazing ride within this community. Let’s keep riding! 🚀

V2 FAQ

When can I burn DSD for CDSD?

  • At all times!

What are the benefits of burning DSD for CDSD?

  • CDSD receives rewards during contraction. The rewards that you can earn are equal to the amount of DSD that you have burned. If you burn 100 DSD, you receive 100 CDSD and have an earnable of another 100 CDSD. If you bond your CDSD in the DAO they increase with 0.275% interest per epoch during contraction. After 21 days you will have earned your earnable, 100% return, which means you now have 200 CDSD in the DAO. If the protocol enters expansion all your CDSD can be redeemed for DSD.

How do I burn my DSD for CDSD?

  • You can burn your DSD for CDSD here (Interface updated after DIP-10 is committed on April 4th). You receive one CDSD for each DSD that you burn.

What are the benefits of bonding my CDSD in the DAO?

  • To receive rewards during both the contraction and the expansion. During contraction, you will earn 0.275% interest per epoch until you have reached your earnable. During expansion, expansionary DSD supply is rewarded to CDSD that is bonded in the DAO.

When can I bond my CDSD in the DAO?

  • You can always bond your CDSD in the DAO. CDSD that are bonded in the DAO will be redeemed for DSD pro-rata their holdings during expansion.

Can I exchange CDSD for DSD?

  • CDSD will only be exchanged for DSD during phases of expansion. During expansion, 50% of the supply increase will be distributed pro-rata to all CDSD that are bonded in the DAO.

Why are CDSD redeemed pro-rata for DSD?

  • The pro-rata redemption makes CDSD redemption fair and increases the stability of the system, by preventing large individual redemptions and potentially sells. Major holders cannot redeem their entire CDSD holding at once bidding lots of gas. Everyone can always redeem the same percentage of their CDSD.
    Your CDSD that currently can be redeemed in this expansion cycle will be displayed as “redeemable” balance in the DAO. Unclaimed redeemable balances will be reset entering a contraction.

What is the ‘earnable’?

  • The earnable describes the maximum CDSD you can earn during contraction for bonding your CDSD in the DAO. The earnable is equal to the amount of DSD you have burned for CDSD. The earnable does not reset if we enter expansion.

Does converting coupons increase my earnable?

  • No, earnable can only be increased by burning free-floating DSD.

Is there a premium for burning DSD?

  • Indirectly, yes. The classical static premium that you received for coupons is replaced by a dynamic reward system. You receive 1 CDSD for burning in 1 DSD. By bonding CDSD in the DAO you receive rewards up to 100% of the CDSD that you have bonded. Therefore, your ‘premium’ could be anywhere between 0% (if expansion happens the epoch you bond) and 100% (if expansion happens after you have reached your earnable).

When should I bond by CDSD?

  • As early as possible to receive more earnable. If you bond your CDSD on the day the protocol enters expansion then you do not receive any contraction rewards. If you burn your DSD immediately for CDSD, once the protocol enters the contraction

Can I accelerate the speed at which I earn my ‘earnable’?

  • Yes. If you bond more CDSD the speed at which you reach your max earnable increases. For example: If you burn 100 DSD for CDSD, you have 100 CDSD and your earnable is 100 CDSD. If you buy another 100 CDSD of the market you have 200 CDSD and your earnable stays at 100 CDSD. Now, if you bond the 200 CDSD in the DAO, you receive contraction rewards for the 200 CDSD, until you reach your earnable of 100 CDSD.

What is the benefit of buying CDSD?

  • Buying CDSD has two benefits. (1) Accelerated contraction rewards and (2) high rewards should DSD enter expansion. Read above for how bonding additional CDSD accelerates contraction rewards. When DSD supply expands, CDSD is redeemed for DSD.

When can I migrate my coupons to CDSD?

  • As soon as DIP-10 has been approved and committed. The vote will last for 36 epochs/3 days until April 4th at 10 pm UTC. You are encouraged to vote and can follow the status of the vote on the Governance page. You need to migrate your coupons to DIP-13 before DIP-10 in case they are already expired.

Does CDSD expire?

  • No, CDSD does not expire. CDSD is an ERC-20 token, just as DSD, and can be transferred and traded freely.

I cannot follow DSD daily. How do I maximize my return?

  • If you believe in the long-term viability of DSD, you would be best advised to bond your DSD in the DAO. You receive compounding rewards during both contraction and expansion.

Can I still buy coupons?

  • No, the debt cycle mechanism of coupons will be replaced by CDSD. Coupons can be migrated to CDSD. No new coupons can be minted.

I have bought coupons, what does DSD V2 (DIP-10) mean for me?

  • Under DSD V2 you can migrate your coupons to CDSD. Originally, coupons were designed to expire. CDSD does not expire, receives rewards during contraction, and is an ERC-20-compatible token that can be freely traded. You have to migrate your coupons to DIP-13 before DSD V2 launches.

Do I have to migrate my coupons to DIP-13?

  • In case they are already expired, you can convert 50% of your coupons into principal migrating to DIP-13.

Until when do I have to migrate my coupons to DIP-13?

  • Before the code of DSD V2 (DIP-10) is committed. The vote is live until April 5th 24pm UTC. If you have not migrated your expired coupons to DIP-13 before we commit DIP-10, then your expired coupons cannot be migrated to CDSD.

When does DSD V2 (DIP-10) launch?

  • The vote is currently live here. If the proposal is approved, it can be committed on April 4th at 24pm UTC.

What was DIP-13?

  • DIP-13 changed coupon expiry. Originally, coupons were designed to expire worthless within 30 days. Under DIP-13 only the premium of your coupons expires.

Why do I have to migrate my coupons to DIP-13?

  • Under the original coupon design, your coupons are already expired, so they cannot be converted to CDSD. The migration function to DSD returns 50% of your coupons to you, a little less than your original coupons. This ‘reinstated’ principle can then be converted to CDSD.

What are the principle and the premium?

  • The principal is the number of DSD that you have burned for coupons. The premium is the number of coupons you receive in addition to the number of DSD you have burned. For example, if you have burned 100 DSD at a 45% premium for coupons, then your principle is 100 DSD and your premium is 100 * 0.45 = 45 DSD.

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