To fellow crypto enthusiasts,

In this post, you will discover a brand-new protocol that allows for issuing a stable coin and a leveraged token in a brilliant way.

If you are reading this article, you should probably be familiar with MakerDAO and may have used the protocol before. You may also have encountered some inconveniences while interacting with the protocol. Below, you will learn how this new protocol compares to MakerDAO in terms of how efficiently it can utilize the fund within the system.

Suppose you have 1 ETH. With MakerDAO, you can borrow the DAI token by sending that 1 ETH to a CDP contract. The DAI token is expected to maintain a stable value (i.e. 1 DAI = $1) and, indeed, the token’s value has been stable around the $1 target for a relatively long period of time. The amount of DAI you can borrow is determined based on the ETH price and the collateralization ratio.

Now, let’s assume the price of ETH is $150. While 1 ETH has the market value of $150, the volatile nature of the token could cause its value to go down to $130 on the next day. Here, if you were allowed to borrow 150 DAI by providing 1 ETH as collateral based on ETH’s initial market value of $150, the collateralized value would also have gone down to $130. In this scenario, it doesn’t make sense to redeem $130 worth of ETH back for 150 DAI, which is worth $150. The value of the DAI token will be worth less than $1 if that were to happen.

For this reason, the MakerDAO protocol is designed to ensure that the amount of DAI you can borrow is limited to 66% of the collateral value; if you put up $150 worth of ETH as collateral, you can only borrow up to $100 worth of DAI, or 100 DAI. In the event that the collateral value goes below the 66% threshold, the collateral (ETH) will be automatically liquidated at a lower price than when it was first provided as collateral. This is done to make sure that the collateral value remains well above the market value of the DAI tokens issued based on the collateral even when the collateral value crashes due to a huge sell-off as observed on March 12. From a practical perspective, you can borrow DAI worth up to about 50% of the collateralized value. This means that you have to have a collateral that is worth about twice the sable coins you want to issue, preventing an efficient use of the fund.

Now, let’s look at the new protocol that was proposed at the beginning of this article.

Based upon the same assumption where you have 1 ETH, you can send the ETH to the LIEN smart contract to have the ETH locked up in exchange of receiving two tokens: Solid Bond Token (SBT) and Liquid Bond Token (LBT). The holder of each of these tokens sets the maturity date for those tokens and receives ETH upon maturity based on the ETH price ($P) and the threshold price ($K) at the maturity date, the latter of which is set when the contract is initialized.

Specifically, the SBT token holder will get the whole 1 ETH if P is less than or equal to K (i.e. P<=K). On the other hand, if P is greater than K (i.e. P>K), the SBT token holder will receive K/P ETH whereas the LBT token holder will obtain 1-K/P ETH(SBT and LBT will effectively self-destruct once ETH is sent). In other words, the SBT token holder can, with very high probability, receive $K worth of ETH when K is sufficiently lower than the current ETH price (e.g. half the current price). For this reason, the value of SBT is expected to stabilize at a level that is slightly below $K. Each SBT can have its own maturity and threshold price (K) and, as long as it satisfies a set of criteria for its price stability, can be used as collateral for iDOL, a stable coin used within this protocol. It is expected to play a role as the “independent dollar” (hence its name), which is designed to maintain a relatively stable value against the fiat dollar while being independent of its economic and political influence.

iDOL is soft pegged to SBT (see the white paper for more details) and you can use the token in whatever way you want. Contrary to MakerDAO, other people can have access to your collateralized asset (SBT) by amortizing, or “burning”, the iDOL tokens, creating a robust price stabilization mechanism. What makes the system unique is that, after you convert 1 ETH into SBT and LBT and use the SBT to get iDOL, you can still retain ownership of the LBT. Without going into the specifics of LBT, it basically functions like a leveraged token.

In this example where K is set to around 50% of the ETH price, you can get iDOL worth 50% of the original 1 ETH provided as collateral as well as LBT which is also worth about 50% of the ETH value and functions as a leveraged token, and you can do whatever you want with both of these tokens. In MakerDAO, you can receive the DAI tokens whose value corresponds to about 50% of the 1 ETH but nothing more. You also need to constantly worry about the collateral being auctioned off should the price fall significantly. With the LIEN protocol, not only do you have access to LBT whose value corresponds more or less to the collateral value, you can rest assured knowing that there is no risk of the collateral being liquidated at a lower price. If you don’t need LBT, you can sell it on a decentralized exchange platform and get iDOL or, conversely, you can buy even more LBT with the iDOL tokens you already have to add to your leveraged ETH position. Either way, the protocol allows for using the fund within the system in a manner that is roughly twice as efficient as MakerDAO.