The use of a unit of debt as a stablecoin has its roots in the earliest forms of banking. In a simplified form, a bank would take deposits and issue paper notes in return, which represented the bank’s obligation to pay the depositor the amount of the deposit upon request. These banknotes, effectively units of debt, were used as a medium of exchange and eventually evolved into modern forms of money.

Fast forward to the era of cryptocurrency, this principle was carried over into the design of some of the earliest stablecoins. Projects like MakerDAO and Liquity have essentially digitalized this centuries-old banking practice. They take in collateral in the form of cryptocurrencies, issue their own stablecoins as units of debt, and use smart contracts to automate the enforcement of these obligations.

However, a fundamental challenge arises when a unit of debt is also expected to serve as a stablecoin. While the value of a unit of debt is tied to the underlying collateral and the system’s debt mechanics, a stablecoin is intended to maintain a peg with a specific value, such as the US dollar. Market trading activities can push the stablecoin’s price away from its intended peg due to factors such as supply and demand dynamics, market sentiment, and broader economic conditions. This dual role of the stablecoin as both a unit of debt and a medium of exchange can lead to a conflict between its intrinsic value and its market value.

This is where Xloop Finance brings in a significant innovation. Recognizing the challenges presented by conflating the concepts of debt and stable value into a single instrument, Xloop Finance has separated these two roles. In our system, we have the $IOU token representing the internal accounting token or the ‘debt’ and the $XDC serving as the stablecoin.

This clear separation allows for the independent adjustment of systemic and market mechanisms for each token, resulting in more precise responses to changes in market conditions. In addition, the standalone nature of the $XDC provides a robust tool for arbitrage, improving price stability and creating a favorable environment for traders.

While we acknowledge that both Liquity and Frax have made tremendous contributions to the evolution of DeFi, we believe that Xloop Finance’s unique model takes these innovations a step further. By identifying and addressing the fundamental challenge of conflating debt and stable value into a single instrument, we have crafted a system that brings increased resilience and flexibility to the decentralized finance ecosystem.

Stay tuned as we explore and share more about our unique approach to stablecoin design in upcoming posts.