DXS liquidity backed stablecoins proposal
We direct this proposal at DXS’s current and future insurance pool liquidity providers.
DXS has come so far over the last year. We couldn’t have achieved such a level of success without the support of our insurance pool liquidity providers.
We are now taking the opportunity to express gratitude for your support. We are also taking the opportunity to share the next step of our vision for explosive DXS growth:
DXS liquidity backed stablecoins, or LBS.
Did you change your name recently?
Yes! We used to be TDXP and we’re in the process of rebranding to DXS. We decided to make the change due to TD Bank Group contesting our TDXP EU trademark application.
Read this post if you’d like to learn more.
Please note that this proposal is strictly opt-in. We do not take liberties with your liquidity contributions at DXS.
If you haven’t already, please read our introduction to DXS stablecoins.
At DXS, we are launching BSV backed stablecoins as tokens on the BSV network. They will be called ‘liquidity backed stablecoins’ or LBS.
There will be a separate LBS for each of the fiat currencies that has been requested by our users.
Our motivation to launch LBS on BSV is to accommodate a DXS trading experience with LBS backed settlement. We want to give our traders flexibility to choose which currency to profit-seek in.
We believe launching LBS on BSV represents a huge competitive advantage for DXS as a business. Additionally, we believe that access to reputable LBS tokens on BSV will help grow the wider BSV ecosystem.
What is a stablecoin?
A stablecoin attempts to maintain a value peg to a traditional currency (like USD).
A ‘value peg’ simply means that a $1 USD stablecoin (for example) will represent a value equal to $1 USD. Consequently, a $1 USD stablecoin should trade for $1 on the open market.
There are two (main) types of stablecoin:
- Fiat-backed. Every stablecoin token issued represents an equivalent amount of fiat currency in a bank account
- Crypto-backed. Every stablecoin token issued represents an equivalent amount (in terms of value) of crypto
DXS’s stablecoins will be backed by BSV (crypto-backed)
Where does the BSV backing come from?
DXS’s LBS will be backed by the BSV that is in our trading insurance pool. Please read this post to gain a deeper understanding of our insurance pool mechanism.
At time of writing, there are 26,549 BSV in our insurance pool. At a BSV/USD price of $190, the insurance pool has a USD value of $5,050,000.
We will use the value sitting in our insurance pool to back DXS LBS.
How can I mint DXS LBS?
Below is a USD LBS minting example. Assume the BSV/USD price is $190:
- An individual sends 1 BSV to the DXS insurance pool
- DXS’s insurance pool sends 190 USD LBS tokens to the individual’s wallet
Here are some points to note:
- There are no fees to mint DXS LBS
- DXS LBS are minted at the market BSV/USD index rate
- 100% of the BSV value is used (you receive $190 USD in tokens for 1 BSV deposited into the insurance pool)
- You can continue to mint LBS as long as the insurance pool’s liability-to-asset (LTA) ratio is less than the target (more on this in the next section)
- The BSV you use to mint DXS LBS grows the insurance pool. A larger insurance pool can support more traders and bigger trades
What is the liability-to-asset (LTA) ratio?
Here is our insurance pool again:
The current USD value of our insurance pool is $5,050,000.
Consider an individual wishing to mint $1,000,000 USD LBS. Such an individual would send 5,263 BSV ($1,000,000 / $190) to our insurance pool. This person would immediately be sent 1,000,000 DXS USD tokens.
The insurance pool now contains 31,812 BSV (26,549 + 5,263). At a BSV/USD rate of $190, the insurance pool is now valued at $6,044,280.
The insurance pool has a liability of $1,000,000. This is the amount of USD tokens that can be redeemed back into BSV at any point.
The insurance pool’s liability-to-asset (LTA) ratio is 0.17 ($1,000,000 / $6,044,280). For every $1 of assets in the insurance pool there are 17c of liabilities.
For our DXS LBS we are using a target LTA ratio of 0.33 (more on this in the next section).
What is the target liabilities-to-assets (LTA) ratio?
DXS LBS will use a target LTA ratio of 0.33. A LTA ratio of 0.33 means that for every $1 of assets in our insurance pool, there are 33c of liabilities (value of LBS minted).
We will allow LBS to be minted up until an LTA ratio of 0.33. If the insurance pool’s LTA ratio exceeds 0.33, the ability to mint additional LBS will temporarily cease.
As an example, imagine that DXS enabled USD LBS minting today. Let’s look at the insurance pool again:
There are 26,549 BSV in the insurance pool and the BSV/USD price is $190. There are no LBS minted:
Liabilities = $0
Assets = $5,044,310
LTA ratio = 0
13,076 BSV are sent to the insurance pool and $2,484,440 DXS USD LBS tokens are minted:
Liabilities = $2,484,440
Assets = $7,528,750
LTA ratio = 0.33
Because the LTA ratio is now 0.33, the ability to mint LBS will close until the ratio drops below 0.33.
The LTA ratio will decrease in the following circumstances:
- LBS tokens are redeemed for BSV
- LBS tokens are contributed to LBS insurance pools (more on this further down)
- The BSV/USD price increases (for example BSV/USD going from $190 to $200)
- The insurance pool accumulates more BSV, either from liquidity contributions seeking returns or from excess trading losses accumulating in the pool (there is already a surplus of over 1,000 BSV in the pool from excess trading losses)
The LTA ratio will increase in the following circumstances:
- LBS are minted as BSV is deposited into the pool
- The BSV/USD price decreases (for example BSV/USD going from $190 to $180)
- The insurance pool disperses BSV either from liquidity contributors withdrawing BSV from the pool or from trader’s profits exceeding losses in any given trading session
How can I redeem DXS LBS for BSV?
Below is a USD LBS redemption example. Assume the BSV/USD price is $190:
- Individual sends 190 DXS USD LBS tokens to the DXS insurance pool
- DXS’s insurance pool sends 1 BSV to the individual’s wallet, less the redemption fee (more on this in the next section)
Here are some points to note:
- You redeem LBS at the market BSV/USD rate
- You can redeem LBS for BSV whenever you want.
- The redemption fee (more on this in the next section) fluctuates depending on the LTA ratio
What is the redemption fee?
The redemption fee is the fee that is required when redeeming DXS LBS back into BSV.
The redemption fee is a mechanism to protect the DXS insurance pool from large crashes in BSV’s value relative to USD and other fiat currencies.
The redemption fee will start at 0.04% and gradually increase as our insurance pool’s LTA ratio increases.
The redemption fee table is shown below. All numbers are relative to the starting BSV/USD rate of $190:
Here is an explanation of the redemption table:
When the LTA ratio is at its target value of 0.33, there are 33c of LBS that have been issued for every $1 in the insurance pool.
The redemption fee required to redeem LBS back into BSV is 0.4%. DXS USD LBS are trading at $1 (actually 99.6c) on the open market.
If the price of BSV in USD is $190, and you redeem 190 DXS USD LBS tokens in the insurance pool, you will receive 0.996 BSV into your wallet.
[(190 / 190) * (1–0.004)] = 0.996
Here is another explanation of the redemption table:
The price of BSV (in USD) drops from $190 to $133. This is a 30% decline.
The LTA is now 0.47, there are now 47c in LBS issued for every $1 of assets in the insurance pool. The redemption fee is now 2.74%. DXS USD LBS are trading at 97.26c on the open market. Two scenarios:
- The price of BSV in USD is $133, you redeem your entire $190 balance of DXS USD LBS tokens in the insurance pool. You receive 1.3894 BSV into your wallet. You have successfully shorted BSV/USD:
[190 / 133) * (1–0.0274)] = 1.3894
- The price of BSV in USD is $133, you redeem $133 DXS USD LBS tokens in the insurance pool. You receive 0.9726 BSV into your wallet:
[(133 / 133) * (1–0.0274)] = 0.9726
What does the redemption fee curve look like?
Consider the scenario where the the BSV/USD price goes from $190 to $2:
The graph shows that up to around a 30% decline in the price of BSV, the redemption fee remains low. Beyond this point, the redemption fee increases rapidly (100% redemption fee at 50% BSV price decline).
Here is what DXS USD LBS will trade at on the open market as the BSV/USD price declines from $190 to $2:
The graph shows that up to around a 30% decline in the price of BSV, DXS LBS will trade very close to their pegged currency. Beyond this point, DXS LBS will trade much lower than their desired peg.
There are other factors that influence the LTA ratio that should be taken into account. They are addressed in the next section.
How stable will DXS LBS be?
As discussed in the above section, DXS LBS will track their desired currencies very well up until an LTA ratio of 0.5.
Beyond an LTA ratio of 0.5, the redemption fee is high enough that the peg can be considered ineffective. Most holders of DXS LBS will choose not to redeem their LBS for BSV when the LTA ratio is greater than 0.5.
What happens next? The best course of action is to wait for the LTA ratio to recover such that DXS LBS are trading close to their desired peg again.
What causes the LTA ratio to recover?
- LBS tokens are redeemed for BSV. Most holders will choose not to redeem at an LTA ratio greater than 0.5
- LBS tokens are contributed to LBS insurance pools (more on this further down). LBS tokens that are minted and subsequently locked into LBS insurance pools (as liquidity contributions) are no longer considered a liability in the LTA ratio assessment (a favourable effect on the LTA ratio)
- The BSV/USD price increases (for example BSV/USD going from $190 to $200). Naturally, an increase in the value of BSV will improve the LTA ratio
- The insurance pool accumulates more BSV from liquidity contributions seeking returns. See below graph that shows BSV contributions to the DXS insurance pool over time. Alternatively the insurance pool accumulates more BSV from excess trading losses accumulating in the pool. The DXS insurance pool experiences most of its growth during periods of extreme market volatility. The introduction article covers this action
The below graph shows how the DXS insurance pool has grown since inception:
If you want to understand the incentives behind why the DXS insurance pool has grown consistently since inception, please read this post.
What will I be able to do with DXS LBS?
DXS LBS will be an open ecosystem:
- Buy and hold to hedge BSV price volatility
- Send directly to other BSV user’s wallets
- Trade on secondary markets and exchanges
- Trade on DXS’s LBS-settled CFD markets
- Invest in DXS’s LBS insurance pools
How will DXS LBS insurance pools (and liquidity fundraising) work?
This section of the DXS FAQ describes our BSV insurance pool and how it works.
Each DXS LBS launched will follow the exact same mechanism.
As with the original BSV insurance pool, LBS liquidity provisioning will be open to the public. There will be 28 funding rounds with returns as shown in the below table (note that the ‘limits’ for each round will be defined in the LBS in question):
LBS that are contributed to insurance pools will decrease the LTA ratio of the BSV insurance pool (they will no longer be considered liabilities in the LTA ratio assessment).
As an example, imagine you contribute liquidity to the DXS USD LBS insurance pool:
Your contribution increases the DXS USD LBS insurance pool balance.
You will receive your proportional share of 3% of the losses that are generated on the DXS USD LBS CFD market as well as on other LBS markets and the BSV market. You will receive these amounts in DXS USD LBS tokens.
You will continue receiving payments until your interest and principal amounts are paid in full.
There is only one key change to DXS’s insurance pool and session liquidity mechanism that needs to be covered:
BSV session liquidity will be shared across ALL markets.
Meaning, whatever the BSV insurance pool’s session liquidity is at any given time, is also the session liquidity in each of the LBS markets. If we look at the DXS insurance pool again:
We can see that session liquidity for this particular trading session (which is 43 min away from closing) is 73.45 BSV ($13,980 USD).
We can interpret this as meaning there are 73.45 BSV available to be captured as trading profits within the next 43 min. This is true irrespective of whether you are trading on the BSV backed CFD market, or any of the USD, EUR, JPY, CNY or INR LBS CFD markets.
The amazing benefit to this is that USD, EUR, JPY, CNY and INR LBS markets will have immediate liquidity. They will not have to be bootstrapped.
What token protocol will DXS LBS use?
DXS LBS will use the STAS protocol, for the following reasons:
- STAS are a miner-validated token. Zero consideration needs to be given to scalability, vendor lock in, service downtime, data redundancy or any secondary-layer infrastructure (BSV miners and token issuers are the only counterparties). This manifests as lower business risk. Longer term, this will manifest as lower cost (overheads) in general
- STAS can be programmed at the level of the miners (smart contracts). Eventually we desire our trading and liquidity mechanisms to be automated within smart contracts. This manifests as lower costs (overheads)
- STAS uses satoshis to represent the LBS, a concept known as “coloured coins”. This significantly simplifies the wallet integration process, and makes STAS particularly well suited for fungible Tokens like the DXS LBS.
Which wallets will support DXS LBS?
STAS is a relatively new protocol, but since it’s managed by TAAL we can say with a high degree of certainty that most of the BSV wallets will support it. Centi is one of the first wallets to officially announce its intention to support STAS.
I’m a DXS liquidity provider. How does this affect me?
If you’re already a liquidity provider with DXS, you need to assess whether the potential reward of DXS’s proposed LBS mechanism outweighs the risks.
Let’s start with the potential rewards. Consider the below from the perspective of a BSV liquidity provider:
- Every USD, EUR, JPY, CNY or INR minted as a DXS LBS requires an equivalent amount of BSV to be locked into DXS’s insurance pool
- More BSV locked into DXS’s insurance pool means more session liquidity for traders, which allows for bigger trades, bigger profits and more users (we can continue expanding our reach)
- Bigger liquidity payouts for DXS liquidity providers. More trades mean more losses, meaning liquidity providers get their interest payments faster
- LBS allows for Dollar, Euro, Yen, Yuan and Rupee backed trading on DXS. Liquidity can be provisioned to each of these markets in the LBS in question. The only way to mint these LBS tokens is to lock BSV into our insurance pool. Return to step 1!
As you can likely see, DXS LBS feeds back into the incentive structure of DXS. This massively promotes the growth of the insurance pool, stimulating increased trading demand.
What about the potential risks?
DXS launching LBS tokens backed by BSV in the insurance pool introduces more risk to our liquidity providers.
Simply put, we expose the insurance pool to BSV downside price risk.
With this in mind, we have designed our LBS mechanism in such a way that the maximum risk (relative to the status quo of not launching DXS LBS) is capped at 25%:
You can access the model used here.
The table above works through the scenario where DXS USD tokens have been minted at a BSV/USD price of $190 until the LTA ratio of 0.33 is reached.
Each row of the table shows the BSV/USD price dropping by $1, and the effect this has on the LTA ratio and redemption fee.
We compare the DXS LBS scenario against the status quo of not launching LBS. We consider the worst case scenario in each row — that all LBS are redeemed back for BSV.
The relevant KPI is the value of the insurance pool in USD. The ‘USD issuance variance to status quo’ shows that under our parameters, the maximum variance is 25.25%. Further explanation:
Status quo scenario (DXS does not issue LBS):
- Price has declined from $190 to $112 (a 41.05% drop)
- The insurance pool contains 26,549 BSV and is now valued at $2,973,488
- 22,949 BSV ($2,570,288) of this amount are contributions from existing liquidity providers
- 3,600 BSV ($403,200) of this amount are from surplus trading sessions accumulating in the pool
DXS LBS issuance scenario (all LBS redeemed back for BSV):
- Price has declined from $190 to $112 (a 41.05% drop)
- The redemption fee is 10.84%
- The insurance pool contains 19,847 BSV and is valued at $2,222,815
Assessing the comparative risk of DXS LBS issuance:
- The DXS LBS scenario exposes the insurance pool to a maximum comparative erosion of 25.25%:
[19,847 / 26,549–1] = -0.2525
- The DXS LBS scenario exposes the liquidity providers to a maximum comparative erosion of 13.5%:
[19,847 / 22,949–1] = -0.1352
Given the above workings, the additional risk to the DXS insurance pool is 25%. The additional risk to a DXS liquidity provider is 13.5%.
Once again, you need to consider if the proposed benefits of DXS LBS issuance outweigh these additional risks.