Introduction

UXD Protocol offers a fully-collateralized dollar-pegged stablecoin that passes strategically generated yield back to its holders. UXD tackles all three parts of the stablecoin trilemma with its stable, fully decentralized, and capital efficient $UXD stablecoin.

The protocol is currently live on Solana but also has a highly anticipated launch on Cosmos’s Sei network. As a whole, UXD aims to establish itself as a go-to stablecoin protocol not just for Solana but the broader Cosmos IBC ecosystem too (and even more chains soon).

The Problem

The general lack of decentralized stablecoins has been apparent since the collapse of Terra’s $UST. However, this collapse ignited a wave of new protocols iterating on the decentralized stablecoin design, many of which struggle to address all three pillars of the stablecoin trilemma.

Although a large influx of developing protocols have come to light lately, the Cosmos IBC ecosystem still lacks a strong and decentralized dollar-pegged stablecoin. While some solutions do exist, the ecosystem would benefit from a broader market of decentralized stablecoin protocols for Cosmonauts.

The Goal

The UXD Protocol introduces a stablecoin which satisfies all facets of the stablecoin trilemma. With its launch on Sei, the $UXD stablecoin will also be interoperable with exciting potential in both Cosmos interchain accounts and the Sei Nitro layer 2 ecosystem.

$UXD will be stable with a unique collateralization model powered by its newly proposed “ALM”, and it will exist on several different chains. The stablecoin protocol will not rely on any centralized entity or collateral to operate, and $UXD will be backed 1:1 allowing users to get the most out of their collateral thanks to the protocol’s innovative infrastructure.

How Does it Work?

The $UXD stablecoin is fully-collateralized with a basket of assets deposited by users. Currently all $UXD collateral is hedged with a derivatives short position when deposited, creating a delta-neutral backing and passing yield from the funding rate back to holders. Over $14 million worth of $SOL collateral is currently deployed on Solana’s Mango Markets.

Now, UXD is moving towards a more comprehensive collateralization model that uses multiple different automated yield strategies, rather than just a single strategy. The Asset Liability Management Module (ALM) will generate yield via delta-neutral derivatives positions, lending stablecoins, over-collateralized $UXD loans, investing in RWAs, and other miscellaneous strategies.

With UXD’s delta-neutral strategy, $UXD collateral is hedged with an onchain short position any time it is deposited by users. The protocol currently uses the Mango derivatives market on Solana to hedge collateral, and $UXD benefits from positive funding rates in the process.

In the same way Maker DAO deploys newly minted $DAI on Aave to earn interest, UXD will deploy stablecoins from the insurance fund to lending markets and earn more yield for $UXD holders. The protocol itself will also offer over-collateralized $UXD loans alongside its 1:1 mint and redeem model, which will effectively allow users to “leverage up” and the protocol to collect interest and/or fees from borrowers. UXD can even invest in and lend against Real World Assets (RWAs) in order to add yet another source of yield for $UXD and $UXP.

The protocol’s “equity” is its insurance fund, which is currently valued at $56,419,319. This insurance fund grows by taking a portion of the cashflow earned from all yield strategies, and covers the protocol when necessary (e.g. negative funding rates or $UXD under-collateralization).

With this design, $UXD remains completely decentralized and stable all while incredibly capital efficient, generating yield for $UXD holders who don’t have to constantly worry about liquidation thanks to its 1:1 collateralization. The protocol will leverage the Mercurial Vault for its stablecoin reserve, aggregating yield used to buy back $UXP.

To mint $UXD, users can collateralize their stablecoins with any supported collateral. There is no mint fee collected by the protocol currently, but borrowers do incur slippage and external derivatives market trading fees on their collateral. Similarly, slippage and external trading fees also apply when redeeming $UXD for collateral.

Partnerships

UXD has several notable partnerships specifically on the Solana blockchain. The protocol has worked closely with Solend Protocol and other native protocols, mostly involving its $UXD stablecoin.

UXD also has its exciting launch anticipated on the Sei mainnet, joining an upcoming IBC-enabled ecosystem which could benefit from the $UXD stablecoin alongside the broader Cosmos network of app-chains. With exciting developments like interchain accounts, UXD has endless possibilities to integrate $UXD with other protocols and ecosystems.

Tokenomics

$UXP Price: $0.01

Market Capitalization: $8,290,280

Circulating Supply: 461,911,989

Total Supply: 7,000,000,000

$UXD Price: $1.00

Market Capitalization: $15,019,901

Circulating Supply: 14,999,999

Read more about the token distribution here.

Before the ALM is implemented, the protocol collects yield from the derivatives market(s) it uses to hedge collateral. $UXD holders are passed back yield when funding rates are positive, and they are covered by the insurance fund when funding rates are negative. Once the ALM is integrated, $UXD holders will earn from this on top of several other strategies like deploying the insurance fund, over-collateralized loans, RWAs, and more.

$UXP is the governance token of the protocol. Governance decides on features such as using new derivatives markets, new $UXD collateral, yield distribution, managing yield strategies for the insurance fund, and any other new additions to the protocol. $UXP stakers also earn a portion of all the yield passed back to $UXD. In the event that the insurance fund runs dry and is needed for coverage, $UXP stakers will have their stake auctioned and liquidated.

Conclusion

The UXD Protocol is yet another innovative approach to the decentralized stablecoin with its fully-collateralized $UXD. By offering a multitude of ecosystems its censorship-resistant money, $UXD positions itself to be a a new dominant and growing decentralized stablecoin protocol serving the broader DeFi ecosystem with its product.

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DISCLOSURE: I have no exposure to UXD or $UXP. I was not asked to write this article and have not been compensated in any way. The information provided in this article is solely for educational purposes and should not be considered as financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. Readers should always conduct their own research before making any financial decisions.