SYLIUM: Dynamically-Backed Stablecoin Protocol Matthias Sylla matthiassylla21@gmail.com November 2022 abstract SYLIUM is the 2-token protocol behind the SYLI stablecoin, which is pegged to the US dollar. The aim of the protocol is to let users mint SYLI with any existing token, at a 1:1 ratio. To achieve this, SYLIUM deploys an automated dynamic backing system for the SYLI, that constantly adapts the price of the assets provided for the minting and the redemption. The deflationary and adaptive supply of SYLIX (the governance and utility token) is used to automatically overcollateralize the SYLI stablecoin. SYLIUM intends to solve the stablecoin trilemma by letting user mint SYLI with any stable or volatile token (decentralization), at a 1:1 ratio (capital efficiency), while providing strong resilience (stability). 1 Contents 1 Introduction 2 SYLI, a dynamically-backed stablecoin 2.1 The dynamic backing 4 2.2 The stabilization equation for SYLI minting 4 2.3 The stabilization equation for SYLI redemption 6 2.4 The decentralized expansion of SYLI 7 3 SYLIX, the governance and utility token 3.1 A minimalist governance token 7 3.2 The SYLIX’s adaptive and deflationary supply 8 3.3 The stablecoin’s management 8 4 The reward system 4.1 The SYLI’s comparative advantage 9 4.2 The pool’s share system 10 4.3 SYLIX staking 10 5 Conclusion 11 6 Appendix 12 2 Introduction Whether it is the lack of transparency and censorship issues (fiat-backed stablecoins), the lack of capital efficiency (crypto-backed stablecoins), or the difficulty to adapt to the market uncertainty (algorithmic stablecoins), all of the paradigms and mechanisms at the core of the stablecoin ecosystem have shown their limits somehow. When trying to build a stable asset, the protocol has to embody an authority, which is the basis of its stablecoin intrinsic value. However, the current stablecoin ecosystem is missing this authority. On one hand, the authority of fiat-backed stablecoin issuers relies on that of the central banks, on the other hand, the one of the crypto-backed stablecoins issuers suffers from their lack of capital efficiency. Although algorithmic stablecoins initiatives have emerged to build a true decentralized authority, that only relies on the protocols, as the market has shown, with the downfall of several stablecoins (Terra USD, HUSD...), their authority relies on their ability to keep their peg, that is to say, their ability to adapt demand in a very moving and unpredictable market. Moreover, we are witnessing the centralization of decentralized stablecoins. Currently, FRAX is mostly backed by USDC, most DAI stablecoins are minted with USDC, and many other decentralized stablecoins rely on DAI (e.g. the fallen FEI stablecoin). UXD protocol proposed an innovative mechanism by 100% backing its stablecoin with delta-neutral positions. However, with such a mechanism, the protocol had to fully rely on a third-party DeFi platform (all the supply of UXD had to rely on the Mango Markets protocol, which made the UXD stablecoin fragile after the platform got hacked). A protocol that claims to issue a truly decentralized and capital-efficient stablecoin should be able to let users mint its stablecoin, by providing any token as collateral (even the most volatile ones), and at a 1:1 ratio. This is the challenge that SYLIUM intends to face with the SYLI stablecoin, whose decentralization and authority will come from the variety of tokens that can mint it, without price variations of the provided assets being an obstacle to the issuing and buyback capabilities of the protocol. 3 SYLI, a dynamically-backed stablecoin The dynamic backing What is the dynamic backing? Let’s assume that ETH is worth $1400 and Charles holds 1 ETH. He wants to create a stable and fungible currency from it, pegged to the US dollar. He is able to create 1400 stable tokens backed by his ETH. 1 𝑡𝑜𝑘𝑒𝑛 = 1 1,400 𝐸𝑇𝐻 = 0. 007 𝐸𝑇𝐻 = $1 However, ETH is a very volatile token, and its value can quickly increase or decrease. Let’s say that ETH’s value drops by 20%. Now, Charles’s ETH is only worth $1120, but he still wants to issue his stablecoin. Now, he can only create 1120 tokens with the ETH he holds. 1 𝑡𝑜𝑘𝑒𝑛 = 1 1,120 𝐸𝑇𝐻 = 0. 008𝐸𝑇𝐻 = $1 This is the dynamic-backing. A backing system that constantly adapts to the price of the token that backs its stablecoin. Charles’s system has obvious shortcomings: his issue and buyback capabilities fluctuate constantly with ETH’s price going up or down, and that prevents him from building a viable monetary system. However, this system has the merit of being fully transparent (if I have one of Charles’s tokens I know exactly what it is backed by, and what I would get if I give him back my stablecoin). In the rest of the paper, I will explain how SYLIUM extends the concept of « dynamic backing » and how the protocol intends to build a robust and viable monetary system from it. The stabilization equation for SYLI minting SYLIUM extends the concept of « dynamic-backing » by letting users mint SYLI at a 1:1 ratio by providing an amount of stablecoin (e.g. USDC, FRAX, DAI...), an amount of volatile token (e.g. CRV, AAVE, ETH), and an amount of SYLIX, in accordance with the minting stabilization equation. Minting stabilization equation: (refer to the appendix) 1 𝑆𝑌𝐿𝐼 = (1 − α) [(𝑟𝑒𝑔 𝑣𝑜𝑙 − 𝑣𝑎𝑟 𝑣𝑜𝑙 )𝑟 + β] + α = $1 4 To illustrate the minting stabilization equation, let’s consider that someone wanted to mint 1,000 SYLI from the CRVxUSDC pool on 21st November 2022 at 10AM. We consider that 20,000 SYLI have already been minted from the pool The reference price for CRV is $0.5144 (price at midnight), and the price of CRV at 10 AM was $0.5014. We give an arbitrary value of 0.1 to (means that demand for α SYLI has globally increased by 10%). According to the stabilization equation, at 10AM, 𝑣𝑎𝑟 𝑠𝑜𝑙 = 0.5144−0.5014 0.5014 = 0. 0259 𝑟 = 28,096−20,000 28,096 = 0. 2881 β = 1 − (0. 1 − 0. 0259) × 0. 2881 = 0. 9786 Thus, for one SYLI, 𝑎𝑚𝑜𝑢𝑛𝑡 𝐶𝑅𝑉 = (1 − α)(𝑟𝑒𝑔 𝑣𝑜𝑙 − 𝑣𝑎𝑟 𝑣𝑜𝑙 )𝑟 = $0. 019 𝑎𝑚𝑜𝑢𝑛𝑡 𝑈𝑆𝐷𝐶 = (1 − α) × β = $0. 880 𝑎𝑚𝑜𝑢𝑛𝑡 𝑆𝑌𝐿𝐼𝑋 = α = $0. 1 Thus if someone wants to mint 1,000 SYLI at 10AM, from the CRVxUSDC pool, he needs to provide: $19 of CRV, $880 of USDC and $100 of SYLIX. The role of the protocol is to automatically maximize the safety ratio with SYLIX’s supply (refer to 3.2 page 8) so that the volatile amount inside the SYLI’s composition becomes more prominent. With the stabilization equation, the protocol optimizes SYLI robustness. Indeed, conversely to all crypto-backed and algorithmic stablecoins, SYLI’s peg doesn’t depend on the adaptation to demand with different mechanisms (minting and burning incentives, arbitrage...). Rather than depending on demand, SYLI’s peg relies on a mathematical formula that adapts to the protocol reserves, and to the collaterals’ 5 prices to always match the US dollar peg. The result of it is that SYLI is able to receive a very large demand, or conversely resist a brutal drop in it, while still remaining pegged. The stabilization equation for SYLI redemption The stabilization equation for SYLI redemption respects the same principle of “dynamic backing” as the one for SYLI minting. The difference is that the minting equation translates the risk that a pool of the protocol can take while remaining fully solvent. The equation for redemption translates the transfer capabilities of the pool, so that price fluctuations of the volatile held by the pool don’t affect its transfer capabilities. Redemption stabilization equation (refer to the appendix) 1 𝑆𝑌𝐿𝐼 = (1 − α)[𝑤 𝑣𝑜𝑙 + (1 − 𝑤 𝑣𝑜𝑙 )] + α = $1 To illustrate the redemption stabilization equation, let’s consider that someone wants to redeem 1000 SYLI to the CRVxUSDC pool on 21st November 2022 at 10 AM. The reserve of the pool remains the same as in the minting example. We give again the same arbitrary value to α 𝑤 𝑣𝑜𝑙 = 14,632 14,632+28,096 = 0. 342 Thus, for one SYLI, 𝑎𝑚𝑜𝑢𝑛𝑡 𝐶𝑅𝑉 = (1 − α)𝑤 𝑠𝑜𝑙 = 0. 9 × 0. 342 = $0. 3078 𝑎𝑚𝑜𝑢𝑛𝑡 𝑈𝑆𝐷𝐶 = (1 − α)(1 − 𝑤 𝑠𝑜𝑙 ) = 0. 9 × (1 − 0. 342) = $0. 5922 𝑎𝑚𝑜𝑢𝑛𝑡 𝑆𝑌𝐿𝐼𝑋 = α = $0. 1 6 Thus, if someone gives back 1,000 SYLI to the protocol, she will receive $307.8 of CRV, $592.2 of USDC, and the protocol will mint $100 of SYLIX for her. The decentralized expansion of SYLI Anyone can deploy a new minting and redemption pool for SYLI, and can earn rewards with the pool fees. The system behind the minting and redemption of SYLI is dynamic, adaptive, and highly scalable. SYLIX holders can decide which tokens to add to the protocol. Once tokens have been accepted by the governance, anyone can create a pool with these tokens, as long as the new pool is unique and incorporates a stable token, and a volatile one. For a finite number of volatile tokens and a finite number of stable ones, the number of possible combinations is: 𝑛𝑢𝑚 𝑐𝑜𝑚𝑏𝑖𝑛𝑎𝑡𝑖𝑜𝑛𝑠 = 𝑛𝑢𝑚 𝑣𝑜𝑙𝑎𝑡𝑖𝑙𝑒 × 𝑛𝑢𝑚 𝑠𝑡𝑎𝑏𝑙𝑒 For example, if the governance of the protocol accepts USDC, BUSD, FRAX, DAI as stablecoins and UNI, SUSHI, Illuvium as volatile tokens, then 12 differents pools can be created: UNIxUSDC, SUSHIxUSDC, SUSHIxFRAX, IlluviumxDAI.... This system incentivizes users to participate in the expansion of the SYLI stablecoin, and diversify the way the stablecoin is minted. SYLIX, the governance and utility token A minimalist governance and utility token Aside from just being part of the SYLI’s composition, in order to build a fair financial system, SYLIX has been designed to be a minimalist governance and utility token. SYLIX should only give the right to decide which tokens to add to the protocol (e.g. add BUSD, open the protocol to GameFi tokens...). Features such as the minting and redemption fees, SYLIX burning and minting system, and rewards, have to remain automated and uninfluenced. SYLIX has the potential of synthesizing SYLIUM’s expansions and contractions. When someone mints SYLI, all the provided SYLIX are burned. Conversely, when someone redeems SYLI, the protocol mints SYLIX to the user. Thus, in periods of expansion, we expect more SYLIX to be burned, and less during contraction periods. The variable , which governs the amount of SYLIX minted or burned during α minting or redemption, is intrinsically linked to the protocol expansions and contractions. Every hour, the protocol automatically updates the alpha accordingly to SYLI demand: 7 Let’s denote the global supply of SYLI on hour t, and the global 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 supply on hour t+1 Alpha equation: 𝑖𝑓 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 < 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 , α = α + 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 −𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 𝑖𝑓 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 > 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 , α = α − 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 −𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 Thus, during periods of expansion, the system maximizes the burnings of SYLIX, and during periods of contractions, the system minimizes the minting of SYLI. This mechanism leads to a deflationary supply for SYLIX. SYLIX adaptive and deflationary supply SYLIX’s supply is designed to be adaptive, while still remaining deflationary. Each block, 36 SYLIX are minted: 27 SYLIX for pools’ funding, 2 for staking rewards and 7 for minting rewards. Thus, approximately 258,048 SYLIX are minted each day. The 27 SYLIX allocated to pools’ funding are used by the protocol to automatically buy more stablecoins in order to overcollateralize SYLI and thus increase the safety ratio inside each pool. Each day, approximately 193,536 SYLIX are allocated to the funding of the pools. The funding of the pools is separated into two different types of funding: first step funding, and second step funding. The aim of the first step is to reach an amount of stablecoins equivalent to the amount of SYLI minted inside each pool, (e.g. if $100,000 of SYLI has been minted from the AAVExDAI pool, then this pool should hold at least $100,000 of DAI). Then, if the first step has been reached for all the pools, the second one can occur. The aim of the second step funding is to overcollateralize the SYLI minted from each pool with stablecoins too, in order to maximize their safety ratios. This funding only occurs if the SYLIX’s supply remains deflationary. When the minted SYLIX are not used to fund pools, they are sent to a burning address in charge of burning the SYLIX it receives every week. The stablecoin’s management At this point, the protocol is able to manage the risk coming from the volatility of unstable tokens without asking users to provide excess funds. However, no protocol is 8 exempted from black swans and stablecoins held by SYLIUM could lose their pegs. Firstly, even if the stablecoins held by SYLIUM deviate from their peg, the protocol is still able to provide stability to SYLI. Indeed, stablecoins are not used by the protocol because they are pegged to a certain currency, but because their price variation rates are much lower than that of volatile tokens. A stablecoin’s price could drop by $0.90 and the stabilization equations for the minting and the redemption of SYLI would remain functional. However, as the market has shown, once a stablecoin starts to lose its peg, its value can go to 0 in a very short time (Terra USD...). When a stablecoin held by one of the protocol’s pools loses its peg, the pool can automatically exchange it with another stablecoin via Uniswap or 1inch dexes. As long as the pool’s total reserve (volatile and stable) exceeds the amount of SYLI minted from it, the pool can keep the stablecoin. As soon as the SYLI supply exceeds the reserves of the pool, the protocol swaps the depegged stablecoin for another stable token, which allows the pool to remain functional. Afterwards, if the supply of SYLI exceeds the reserves of the pool, the SYLIX’s funding system will automatically compensate for the difference. For example, if there is an AXIExLUSD pool and LUSD loses its peg, if this is a threat to the pool’s buyback capabilities, the protocol can exchange it for DAI and the pool will become an AXIExDAI one. When users want to redeem the previously minted SYLI, they will get DAI instead of LUSD, and the total amount of collateral given back will still match the value of the minted SYLI in dollars. With this model, the protocol doesn’t have to depend on the tokens that it holds, which enables an automated flexible and adaptive risk-management. Many DeFi protocols have fallen because of the Domino Effect and the inter-dependence that existed between them, which is pretty paradoxical for a decentralized ecosystem. The rewards system The SYLI’s comparative advantage Because of volatility risks, pools that gather most of the liquidity in DeFi protocols are the ones in which users can deposit stablecoins to get yield. Given that stablecoins protocols don’t propose rewards for the minting of their stablecoins (only rewards for the governance token staking), most of the stablecoins supply is locked in third-party protocols, inside a relatively small number of pools, which naturally leads to relatively small A.P.R.s compared to those in pools for volatile tokens. Firstly, with the stabilization equations mechanism, SYLIUM can propose an alternative to risk-averse users who want to deposit their volatile tokens. When users mint SYLI, part of the provided funds are volatile (volatile token of the chosen pool, 9 and SYLIX). However, when they redeem their SYLI, users get back the exact same value in dollars, as they deposited (in accordance with the stabilization equations). Secondly, with the pool’s share mechanism of SYLIUM, users can get daily yield, while keeping their positions fully liquid. The pool’s share system Each day, approximately 50,120 SYLIX are minted to pay for the pools’ rewards. This amount of SYLIX is equally divided between all the pools, so that users are incentivized to diversify the tokens they use to mint SYLI, which allows the protocol to diversify the tokens it has to rely on. We denote provided the value in dollars of the funds provided by the user, total provided the total amount of funds provided to the pool, reward , the daily amount of SYLIX allocated to the rewards of this pool, and the amount of 𝑑𝑎𝑖𝑙𝑦 𝑟𝑒𝑤𝑎𝑟𝑑𝑠 𝑡 rewards on day t 𝑑𝑎𝑖𝑙𝑦 𝑟𝑒𝑤𝑎𝑟𝑑𝑠 𝑡 = 𝑝𝑟𝑜𝑣𝑖𝑑𝑒𝑑 𝑡𝑜𝑡𝑎𝑙 𝑝𝑟𝑜𝑣𝑖𝑑𝑒𝑑 × 𝑟𝑒𝑤𝑎𝑟𝑑𝑠 After having minted SYLI, the user’s position remains fully liquid: as long as the deposited funds stay in the pool, he could exchange all of his minted SYLI and keep receiving all of his rewards because the protocol uses a mapping system between the wallet address and the amount of the provided funds in dollars. Furthermore, the funds provided are not locked, the user can redeem his SYLI anytime he wants. Because there is no locking system, to incentivize users to keep their funds in the pool, the rewards are progressively claimable during a 30 days lapse, and then 100% of each daily reward is claimable. Let’s denote t the number of elapsed days since the user has minted his SYLI, and the amount of rewards claimable on day t 𝑐𝑙𝑎𝑖𝑚𝑎𝑏𝑙𝑒 𝑡 𝑖𝑓 𝑡 < 30, 𝑐𝑙𝑎𝑖𝑚𝑎𝑏𝑙𝑒 𝑡 = 𝑡 30 × 𝑑𝑎𝑖𝑙𝑦 𝑟𝑒𝑤𝑎𝑟𝑑𝑠 𝑡 𝑖𝑓 𝑡 > 30, 𝑐𝑙𝑎𝑖𝑚𝑎𝑏𝑙𝑒 𝑡 = 𝑑𝑎𝑖𝑙𝑦 𝑟𝑒𝑤𝑎𝑟𝑑𝑠 𝑡 On the 30th day, the users receive all the rewards that he couldn’t claim before 𝑡=1 30 ∑ 𝑑𝑎𝑖𝑙𝑦 𝑟𝑒𝑤𝑎𝑟𝑑𝑠 𝑡 − 𝑐𝑙𝑎𝑖𝑚𝑎𝑏𝑙𝑒 𝑡 10 SYLIX staking To limitate the number of circulating SYLIX, the protocol proposes a staking service. Approximately 14,320 SYLIX are minted each day to pay for the staking rewards. The protocol has no right on the SYLIX provided by users and there is no lock system To incentivize users to keep their deposited SYLIX inside the protocol, the rewards are sent progressively, during a lapse of 90 days. Naturally, the staking rewards system obeys the same rules as the pool’s share system, but with a 90 days lapse. Conclusion With the SYLI stablecoin, SYLIUM intends to bring a new paradigm to the DeFi ecosystem: stability thanks to a peg mechanism insensitive to demand variations, decentralization with minting and redemption mechanisms that work with any of the existing tokens, capital efficiency by enabling a 1:1 purchasing ratio, and transparency thanks to the dynamic backing system. 11 6 Appendix Stabilization equation for minting: 1 𝑆𝑌𝐿𝐼 = (1 − α)[(𝑟𝑒𝑔 𝑣𝑜𝑙 − 𝑣𝑎𝑟 𝑣𝑜𝑙 )𝑟 + β] + α ● : Each day the protocol picks a reference price from the Chainlink Data 𝑣𝑎𝑟 𝑣𝑜𝑙 feed for the volatile token. is the variation rate between the reference 𝑣𝑎𝑟 𝑣𝑜𝑙 price and each price update ● : regulator of the volatile token. 𝑟𝑒𝑔 𝑣𝑜𝑙 𝑖𝑓 𝑣𝑎𝑟 𝑣𝑜𝑙 < 0. 1, 𝑟𝑒𝑔 𝑣𝑜𝑙 = 0. 1 𝑖𝑓 𝑣𝑎𝑟 𝑣𝑜𝑙 > 0. 1, 𝑟𝑒𝑔 𝑣𝑜𝑙 = 𝑣𝑎𝑟 𝑣𝑜𝑙 Concretely, in a day, users can use volatile token as long as its price variation doesn’t exceed 10% ● r: The safety ratio of the volatile token. Let’s denote the stablecoin 𝑟 𝑠𝑡𝑎𝑏𝑙𝑒 reserve of the pool, , the total number of SYLI minted from the pool 𝑠𝑢𝑝𝑝𝑙𝑦 𝑆𝑌𝐿𝐼 𝑟 = 𝑟 𝑠𝑡𝑎𝑏𝑙𝑒 −𝑠𝑢𝑝𝑝𝑙𝑦 𝑆𝑌𝐿𝐼 𝑟 𝑠𝑡𝑎𝑏𝑙𝑒 This ratio ensures that even if the price of the volatile assets drops, the pool will always be able to buy-back the minted SYLI. ● : Governs the amount of the stable token inside the SYLI’s composition. β β = 1 − (𝑟𝑒𝑔 𝑣𝑜𝑙 − 𝑣𝑎𝑟 𝑣𝑜𝑙 )𝑟 ● : Governs the amount of SYLIX inside the composition. Varies according to α the protocol contraction and expansions periods. We denote the global 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 SYLI supply on day t , and the global supply on day t+1. 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 𝑖𝑓 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 < 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 , α = α + 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 −𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 𝑖𝑓 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 > 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 , α = α − 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 −𝑠𝑢𝑝𝑝𝑙𝑦 𝑡+1 𝑠𝑢𝑝𝑝𝑙𝑦 𝑡 12 Stabilization equation for redemption: 1 𝑆𝑌𝐿𝐼 = (1 − α)[𝑤 𝑣𝑜𝑙 + (1 − 𝑤 𝑣𝑜𝑙 )] + α ● : the reserve ratio of the volatile held by the pool 𝑤 𝑣𝑜𝑙 𝑤 𝑣𝑜𝑙 = 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 𝑣𝑜𝑙𝑎𝑡𝑖𝑙𝑒 𝑟𝑒𝑠𝑒𝑟𝑣𝑒 𝑣𝑜𝑙𝑎𝑡𝑖𝑙𝑒 +𝑟𝑒𝑠𝑒𝑟𝑣𝑒 𝑠𝑡𝑎𝑏𝑙𝑒 ● : same as in the stabilization equation for minting α 13