USX is a fully-collateralized stablecoin within the dForce ecosystem, offering financial access that focuses on openness, interoperability, composability, and decentralization. USX's over-collateralization design enables users to mint USX by staking supported assets within approved Loan-to-Value (LTV) ratios, akin to the mechanics of DAI. ^[1]

Overview

dForce entered the DeFi scene in late 2019, aiming to ensure stable prices and broaden its applications beyond self-incentivization. The platform provides flexible ways to mint new tokens, such as using collateral in vaults, borrowing directly from lending platforms, and swapping with stablecoins at a 1:1 ratio. It manages liquidity to enable credit issuance and supports various use cases, fostering connections between different protocols and providing liquidity for USX bridges and stablecoin swaps.

The protocol employs a hybrid interest rate approach, allowing fixed rates for minting through Vaults and adjustable rates for different collateral types through governance voting. The Protocol-Direct-Liquidity-Provision (PDLP) module controls market interest rates by managing the supply of USX in the secondary market. The Liquid Stability Reserve (LSR) module enables 1:1 swaps between USX and different stablecoins, helping to maintain USX's value pegged to the US dollar. In a multi-chain environment, USX facilitates seamless token creation on different blockchains through cross-chain liquidity bridging. This, combined with swap and lending features, allows users to transfer crypto assets across various chains without facing liquidity constraints.

Main Functions

Price Stability

USX is designed to always stay close to a 1:1 value with the U.S. dollar. This is achieved through a hybrid interest rate policy that adjusts automatically to balance supply and demand. There are two key methods: first, DF holders vote to set fixed interest rates for Vaults through governance. Second, the PDLP module manages USX's interest rate in the secondary market. If the USX price goes above $1 due to market forces, interest rates for Vaults can be lowered or more USX can be supplied to lending protocols, bringing the price back to $1. Conversely, if demand decreases, interest rates can be raised or USX liquidity withdrawn to decrease supply and restore the $1 peg. The Liquid Stability Reserve (LSR) module, added in July 2022, allows 1:1 trading between USX and other stablecoins, making peg maintenance more efficient. ^[3]

LSR

LSR, or Liquid Stability Reserve, enables users to utilize supported stablecoins, such as USDC, USDT, and DAI, as collateral to mint USX tokens or redeem USX for these stablecoins at a 1:1 rate. The introduction of LSR was endorsed through a governance approval process. It was introduced in an improvement of Maker's Peg Stability Module (PSM). LSR channels all the stablecoins obtained from LSR into dForce Lending, where they are put to work, generating yields. ^[4]

Designed as an extension to the existing minting mechanism, the LSR was made to ensure that USX maintains its dollar peg efficiently. Users can mint USX against or redeem USX for supported stablecoins at a 1:1 exchange rate. However, it is worth noting that since most of the stablecoin reserves are deployed in lending protocols to earn yields, the smart contract will automatically manage fund withdrawal from these protocols to facilitate the swap when requested by the user. If the LSR pool lacks the necessary balance to support the swap or when liquidity for the desired stablecoin is depleted from the supported lending protocols, users may experience a slight delay. In such cases, users have the option to trade USX on supported decentralized exchanges. ^[4]

Key Features

• No Additional Fees: Using LSR comes with zero additional fees, although users are still required to cover the gas fees associated with executing the 'swap.'
• Collateral-Specific Minting Cap: Each collateral stablecoin is associated with a specific 'Minting Cap.' This cap determines the total quantity of USX that can be minted against a particular collateral stablecoin.
• Unlocking New Revenue Streams: Importantly, all the stablecoin reserves amassed through the LSR module are automatically channeled into lending protocols, including dForce Lending and Aave. This aims to unlock additional revenue streams for the dForce Treasury, enhancing the sustainability of the ecosystem.^[4]

Minting and Redeeming

Pool-based Minting

The PDLP (Protocol-Direct-Liquidity-Provision) module empowers pool-based minting by allowing supported lending protocols to use USX's yield tokens (i.e., iUSX) as collateral to mint USX. This mechanism ensures USX remains over-collateralized, maintaining stability. USX's borrowing interest rate is regulated, anchored within a capped range, and determined by its utilization rate. For example, when demand surges and the interest rate exceeds the target, PDLP provides additional USX liquidity to lending protocols, adjusting the rate to remain within the desired range. This approach enhances capital efficiency by directly supplying USX liquidity to lending protocols, expanding collateral options, and providing adaptive, market-driven interest rates. ^[5]

Vault-based Minting

The Vault model offers tailored support for different collateral types and use cases, each with unique risk profiles. It accommodates interest-bearing tokens, LP tokens, PoS liquid staking assets, DeFi staking tokens, and other assets. Vaults enforce distinct risk parameters based on the specific collateral type supported, including borrowing Annual Percentage Yield (APY), debt cap, supply cap, loan-to-collateral ratio, liquidation fee, and borrowing fee. Compared to the Pool-based model, Vault-based minting caters particularly to long-tail assets, bolstering isolated risk models and offering a fixed interest rate structure. ^[6]

Liquidity Modules

PDLP (Protocol-Direct-Liquidity-Provision)

PDLP is a system that helps optimize the efficient use of capital and addresses liquidity shortages for USX and EUX. It allows users to mint new tokens and provide liquidity at the same time. For example, it uses yield tokens as collateral, enabling users to mint USX and provide liquidity in a single step. This eliminates the need for primary market issuers to supply liquidity in secondary markets. PDLP supports various protocols, extending USX liquidity to lending markets, decentralized exchanges (DEXes), bridges, and different blockchains. In lending, it offers safe strategies for the principal amount, and in bridges, it facilitates smooth network transitions with minimal slippage. PDLP also enables stablecoin swaps with lower exposure to impermanent loss and supports third-party lending protocols. ^[7]

POO (Protocol-Owned-Operator)

POO, an iteration of PCV (Protocol-Controlled-Value), utilizes treasury assets to mint and control USX and EUX, providing yield generation and liquidity. It collaborates with PDLP to maximize organic use and protocol revenues through yield-carrying trades. This module augments capital efficiency, revenue generation, and liquidity, including support for AMM pools and cross-chain expansion. In particular, it offers Protocol-Controlled-Staking-Assets, allowing sustainable borrowing for underlying staking tokens, and Protocol-Controlled-Treasury for lending, borrowing, and trading assets. POO features a pilot program allowing USX to fund and own real-world assets with non-crypto correlated yields, furthering the integration of DeFi with tangible assets and global liquidity. To manage risk, a cap of 50 million USX is initially set for POO, subject to governance adjustments. ^[8]

Positive Feedback Loop

PDLP and POO are integrated to lower liquidity retention costs, enhance capital efficiency, diversify revenue, reduce inflation pressure, and distribute fee income to DF holders. These liquidity and yield-generating mechanisms create a positive feedback loop by reducing DF supply, increasing staking yields, and fostering protocol-owned liquidity, all contributing to the overall growth and sustainability of dForce and DF holders' benefits. ^[9]

Lending

PDLP and POO work together to lower liquidity retention costs, improve capital efficiency, diversify revenue, reduce inflation pressure, and distribute fee income to DF holders. These mechanisms create a positive feedback loop by decreasing the supply of DF tokens, increasing yields for staking, and promoting protocol-owned liquidity. This contributes to the overall growth and sustainability of dForce and enhances the benefits for DF holders. ^[10]

Asset Classification

Assets available on dForce Lending are grouped into five categories, each defined by distinct interest parameters based on the asset's risk profile and liquidity test results. ^[11]

Liquidation

Adequacy Ratio serves as the liquidation point on dForce Lending. If a borrower's debt falls below the minimum Adequacy Ratio, part of their collateral is liquidated at a discount to protect lenders from financial loss. ^[12]

Dealing with Loan Default

To secure a crypto loan, borrowers must lock up supported assets as collateral. In the event of loan default, a portion of the collateralized assets is auctioned, with a liquidation penalty applied to ensure timely repayment. The ability to participate in the liquidation process is open to everyone, offering a bonus for facilitating solvent operations. ^[13]

Risk Methodology

To maintain robust security and adaptability, dForce employs a multifaceted, quantitative model that evaluates smart contract risk, financial risk, and counterparty risk. This model is used for assessing new assets and their suitability as collateral. ^[14]

Non-Ethereum Blockchain Deployment and Asset Onboarding

dForce's expansion to non-Ethereum blockchains involves a policy that supports assets automatically accepted from Ethereum Lending to other protocols. Additionally, the top 50 market capitalization tokens, as per CoinGecko rankings, are eligible for listing, subject to on-chain voting. ^[15]

Risk Factors

Risk assessment factors include smart contract risk (e.g., code maturity and audit history), financial risk (e.g., market and liquidity risks), and counterparty risk, with an emphasis on centralization and intermediary risks. ^[16]

Trading

dForce Trade functions as a decentralized exchange (DEX) aggregator integrated with Celer's Inter-Chain Messaging framework (Celer IM) to enable cross-chain swaps. Using algorithms, it identifies the best rates and pools liquidity from various platforms and blockchains to facilitate optimal trades. dForce Trade also focuses on enhancing user experience by sourcing the best rates across different blockchains and splitting trades into efficient routes to minimize gas fees and slippage. ^[17]

Cross-Chain Swap Mechanism

dForce Trade enables users to convert tokens across different blockchains in a single transaction. For instance, users can swap Ethereum (ETH) for Binance Coin (BNB) across Ethereum and the Binance Smart Chain (BNB Chain). dForce Trade simultaneously sources liquidity and ensures the best price on both chains. It handles the swapping process efficiently, bridging assets if needed. ^[18]

Fee Structure

For cross-chain swaps, there is an estimated fee to cover the cost of using Celer's cBridge and the gas fees on the destination blockchain. dForce Trade does not charge any additional fees. For non-cross-chain swaps, dForce Trade imposes a 0% fee for trades executed within the same blockchain. ^[19]