How UST Could Have Been Saved
The cryptocurrency market has faced unprecedented times. At DAFI, we feel for those impacted, and wish to share a proposal to prevent such an event from happening again, like it did with the Luna Foundation Guard and Anchor.
The solution that we propose involves an improved staking model.
DAFI is a Staking 2.0 protocol. Its first product, Super Staking, enables the ability to create a consensus of rewards. But first, let’s explain what this means! It is simply the ability to economically align users and stakers for the long-term success of the network.
In other words, Super Staking creates a reward economy where there is a greater incentive for those that choose not to exit the network and for those that choose to support the network when the demand has declined. Both of these issues have severely impacted UST, the algorithmic stablecoin backed by LUNA and LFG’s reserves.
Before we dive deeper, let’s explore what Super Staking is, and how it is vital for the continuous growth of the cryptocurrency industry.
DAFI Protocol creates synthetic rewards that are pegged to network demand. These rewards fluctuate and change in quantity depending on the market conditions. Essentially, staking rewards decrease when the market demand declines to prevent rewards inflation and multiply when market demand increases to promote long-term commitment.
Super Staking establishes a peg between the protocol’s growth and the token inflation. It offers a higher yield when users stake during periods of turmoil, by multiplying rewards when the network grows.
An algorithmic stablecoin, like UST, relies heavily on market participants (and some collateral) to maintain a peg. By implementing Super Staking, market participants who wish to buy, use, and stake UST are better incentivized even in the most precarious market conditions because they are rewarded for their commitment through their synthetic (dUST) multiplying in quantity.
As UST lost its peg, the immediate dUST rewards would decrease for the whole network, releasing less tokens to be sold on the market. So the network goes into ‘protection-mode’ and would greatly reduce sell pressure and destabilization of the stablecoin peg.
UST was used by many due to its ability for a ~20% yield on staking via Anchor. This was a more simple and primitive staking system, which offers a high risk and low reward to those who would choose to support the network and stake in the system.
The solution here would be built using DAFI technology, where UST stakers earn dUST which is pegged to $1.00. Therefore, users will earn dUST, which as a reward, can change in quantity based on UST price. It also means that a reward tax is applied to those users who wish to exit. The fee is redistributed to those staying in the network and actively committing their UST to the staking pool.
For example, if you have 100 dUST rewards at $1.00, you would only receive 75 dUST with the remaining 25 dUST redistributed to active stakers.
Now, let’s talk about the events of the UST depegging. When a bulk amount of users first started selling their UST, they first unstaked from the protocol in order to liquidate their rewards. It became a game of “who can get out the fastest”.
With Super Staking, the one user who withdrew his 75 dUST at $1.00 would have contributed some of his rewards to the users staying in the pool. When the depegging occurred, initially at $0.90, other users who initially had 100 dUST rewards will now have 90 dUST plus a share of the 25 dUST that the exiting user paid.
The reward tax is frozen and converted to UST and it is not subject to changing quantity, this incentivizes those who missed timing the top of the market as their earned tax rewards will be at peak multiplication still.
Under the dUST standard, when the depegging is occurring, users have less reason to exit the pool, as their rewards have decreased dynamically with the price of UST. It also means that if others do not choose to exit, they will earn a share of all of their rewards, frozen at the time of unstaking.
The price of UST at the time of writing is at $0.50. Users who previously had 100 dUST at $1.00 now will have 50 dUST plus all the reward taxes from the users exiting the system. This approach makes it so that those who wish to liquidate, have fewer rewards to do so, protecting the network when it is unstable. And for those who unfortunately did not sell their UST, will receive extra incentives for staying committed to the network during stress, via Super Staking.
The key thing here is enticing market participants to use UST and also stake it by providing them with a SuperPool where dUST rewards will later 2x in quantity if UST returns back to its peg of $1.00. By inviting users to support the peg, they are entitled to earn more for the risk. This makes it a fair system which is far more robust, and the incentives are aligned around the hodler.
An example of Super Staking in action, is within the DAFI Protocol itself. DAFI is still new to Super Staking, and its true benefits are harder to see when the market participants are fewer, like all newer projects. Regardless, DAFI has sustained a positive TVL of supply being staked, especially during periods of uncertainty.
This was evidenced when breaches to Ascendex and Chainswap triggered loss of TVL and token sell offs from the communities of many of the protocols affected. Still, DAFI saw a continued increase in tokens being locked, showing users commitment to the network and high user retention achieved despite the turbulent conditions.
UST is an algorithmic stablecoin that relies on market participants to maintain the peg. We believe that for this to truly work, the staking protocols also need to be built on market game-theory, such as DAFI.
DAFI aims to become the Internet of Staking, by building rewards that will last. To stake your own DAFI, visit stake.dafiprotocol.io. To adopt Super Staking as a fellow cryptocurrency project, contact us on Twitter at @DAFIProtocol
DAFI — The Internet of Staking.
