Preface
As the overall crypto market recovers in 2024, the narratives of different tracks are also different from the explosive posture of diversified crypto assets promoted in the previous bull market.
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The changes in the market are very obvious. Crypto users are no longer blindly focusing on various conceptual profit expectations. They are also paying more and more attention to the current real-time returns. The narratives in many fields are also quietly changing. Among them, many new participants have emerged in terms of returns based on mainstream crypto assets, such as USDe, Bouncebit, Solv and USDX mentioned in this article.
For a long time, the stablecoin ecosystem in the crypto market has been one of the focuses of the industry and the market itself. Among the top ten cryptocurrencies by market value, USDT and USDC have grown into widely recognized universal stablecoins, and their market value has continued to increase in the past two years.
Investing in the crypto market is always accompanied by various risks. The mature stablecoin track has always been an effective way for users to avoid investment risks. At the same time, stablecoins themselves are also one of the most effective circulation certificates in the market today. Various reasons have provided a huge amount of market stock funds for the stablecoin track.
Correspondingly, the derivatives market based on stablecoins has become one of the hot tracks at present. At the same time, the Delta neutral position of up to 40 billion US dollars is currently mainly concentrated on BTC contracts, but BTC is limited by its own network limitations and the supporting infrastructure is not perfect. Other mainstream networks also show a similar state in this regard, that is, they are unable to provide investors with corresponding strategic returns under the premise of truly avoiding currency price fluctuations. This provides certain opportunities for participation in stablecoins based on Delta neutral positions.
There are already many players in the market, and the distributed synthetic stablecoin project usdx.money, which has recently participated in this track, has attracted some attention.
It is reported that USDX is a new type of synthetic stablecoin that anchors the value of the US dollar and captures funding rate income by hedging the exposure of various collateral held by the protocol. The total TVL of the project has exceeded US$180 million.
This article will explain and introduce the relevant features of USDX, which is an emerging stablecoin project with a very different style at first glance, and has the potential to spread like a MEME coin. The project has completed the Pre-launch goal and has opened the DApp and points ranking entrance to users. It is expected that there will be more market dynamics in the future.
What is USDX?
USDX is an emerging synthetic USD stablecoin protocol that adopts a multi-chain and multi-currency strategy, which makes the protocol have a higher comprehensive return than adjacent track products. Compared with various income methods or products such as re-pledge and LSD, USDX has chosen a track where users can earn income by holding stablecoins. The risk curve corresponding to its protocol is also different from existing products on the market, thus avoiding the relatively crowded mainstream currency income strategy.
USDX provides a crypto-native stablecoin solution that does not rely on traditional banking infrastructure and is censorship-resistant, scalable, and highly stable. Compared to the existing mainstream but single USD stablecoin projects such as BTC, USDX is more in line with the new concept of crypto savings. It provides a savings tool based on multiple currencies and available globally.
Currently, USDX has provided a full set of minting and redemption mechanisms, supporting the interaction of multiple stablecoins, and will gradually connect to other mainstream crypto assets in the future to support over-collateralized minting methods.
USDX maintains the stability of USDX’s peg to the U.S. dollar by adopting a Delta hedging strategy for derivative positions, offsetting the risk of fluctuations in the value of the collateral held by the protocol, thereby achieving the stability of USDX’s value and providing pricing returns to USDX holders or ecosystem participants.
“Delta” represents the reaction rate of the derivative value to the price fluctuations of its underlying assets, and is an important parameter for maintaining the stability of USDX value.
Overall, USDX maintains the stability of its peg to the U.S. dollar by adopting a Delta hedging strategy for derivative positions, offsetting the risk of fluctuations in the value of the collateral held by the protocol, thereby achieving stability in the value of USDX.
USDX Stability Mechanism
USDX ensures the value stability of USDX by implementing an automatic Delta neutral hedging strategy on the target assets to achieve value stability under all market conditions, thereby offsetting the risks brought by price fluctuations.
"Delta" represents the reaction rate (or sensitivity) of the derivative value to the price fluctuations of its underlying asset, and is an important parameter for maintaining the stability of USDX value. Delta neutral hedging is a strategy that balances the risk of potential price changes by establishing opposing investment positions, thereby avoiding the impact of market fluctuations on the value of the portfolio.
In the context of USDX, this means that if the price of the collateral asset changes, the program automatically adjusts the hedge position to maintain the stable value of USDX.
This strategy aims to ensure that the value of USDX remains relatively stable regardless of how market conditions change, providing crypto users with a high-quality investment risk hedging strategy while further unlocking the huge potential liquidity of BTC and other crypto assets themselves.
Delta Neutral and Market Making Strategies
The Delta involved in USDX represents the sensitivity of the derivative value to changes in the price of its underlying asset. When Delta is zero, the portfolio is called "Delta neutral", indicating that it is insensitive to changes in the underlying asset price. This is also the benchmark condition for USDX to maintain a stable value.
Taking BTC as an example, USDX generates a positive Delta due to the underlying BTC asset. The protocol will hedge by shorting BTC perpetual contracts to keep the protocol's Delta neutral.
In other words, the Delta Neutral Strategy ensures that the USD value of the protocol asset portfolio is not affected by market price fluctuations, so that the value of USDX is relatively stable, and does not change due to fluctuations in cryptocurrency market prices, except for short-term differences between spot prices and derivatives markets. Of course, the gains from rising crypto asset prices will also be offset by the losses of matching short perpetual positions, thereby ensuring the stability of USDX.
usdx.money trades on various exchanges through market making, does not use leverage, and maintains Delta’s neutral stability by ensuring that the short position in the perpetual contract matches the size of the underlying asset.
Maintaining Delta’s neutral state is essentially the market-making strategy adopted by usdx.money. In essence, the protocol itself can generate long-term profits by operating in this way.
It is worth mentioning that maintaining a Delta neutral position is a common strategy for institutional market makers to avoid risks associated with price fluctuations. This practice is already very mature in both traditional finance and the cryptocurrency market.
Protocol Arbitrage Mechanism
Since USDX needs to be minted using crypto assets, and short-term market fluctuations will affect the prices of corresponding tokens, users will gain a certain arbitrage space.
Whenever the price of USDX deviates from its peg of $1, arbitrage can be made by using the protocol’s minting and redemption contracts to buy or sell USDX.
The protocol allows authenticated users/whitelisted users to mint or redeem USDX to earn profits during short-term price fluctuations. For example, when the price of USDX in the external market is lower than 1 (for example, 0.995), users can use 0.995 USDT to buy 1 USDX, and then redeem 1 USDT through the protocol to earn a profit of 0.5%.
Conversely, if the price of USDX on the external market is higher than 1, users can interact with the protocol to deposit USDT to mint USDX, and then sell the newly minted USDX at a price higher than 1 to make a profit.
Since there is a difference between the minting and redemption of the USDX protocol and its trading price in the external market, this gives users long-term arbitrage space.
Yield Token sUSDX
USDX holders can obtain sUSDX by staking USDX to earn returns. This is a native application provided by the USDX protocol in the early days. It adopts the ERC4626 Token Vault standard and has strong scalability.
The accumulation of staking rewards depends on the funds and basis income obtained by the protocol from the Delta hedge derivative position, and also includes the subsequent incremental staking income. Since the funds and basis income of Delta hedge derivatives are subject to change at any time, the user's staking income is a floating income.
When no protocol income is transferred to the pledge contract, the usdx.money insurance fund will ensure that the underlying protocol collateral is not affected, ensuring the asset security of the user's USDX principal.
When unstaking, users will receive the staked USDX principal and their proportional share of the deposited protocol earnings at the time of unstaking.
In essence, sUSDX does not fall into the category of protocol governance tokens. It is more of a utility token that ensures that users’ profit-sharing rights are guaranteed in the protocol.
Feature Summary
In general, the USDX protocol has the following characteristics:
1. Obtain without permission and purchase on the AMM platform through other stablecoins.
2. Stable token staking income. The USDX used by users for staking will not be used for other purposes. The protocol adopts a token vault strategy, similar to Binance’s strategy for WBETH.
3. Minting and redemption at any time. USDX can be minted by simply depositing crypto assets allowed by the protocol, and can be redeemed at any time.
4. Clear arbitrage mechanism. The protocol has been connected to multiple AMM platforms. When market fluctuations occur, arbitrage can be carried out through the minting and redemption mechanism.
5. Delta neutral market-making strategy can ensure that the protocol generates profits in the long term, maintain the stability of USDX value, and ensure the health of the protocol.
6. A secure and scalable staking contract that uses the ERC4626 Token Vault standard to facilitate the deployment of more use cases in the future while ensuring the security of collateral assets.
Of course, in terms of the security of the protocol itself, USDX has also taken a series of measures to ensure the integrity and expansion of deployed contracts. These measures are mainly to ensure the security of user assets, while achieving reasonable governance effects and maintaining the overall health of the protocol.
Subsequent planning of the agreement
Currently, USDX has been deployed on Ethereum, Arbitrum, and BNB Chain. In the future, it will connect to multiple external markets, including centralized and decentralized spot markets, including USDX/USDC, as well as mainstream AMM platforms such as Uniswap or Curve.
In the future, the protocol will be connected to more use cases and different network ecosystems. The ultimate goal of USDX, a synthetic US dollar stablecoin based on multiple crypto assets, is to become one of the mainstream general stablecoin protocols in the crypto market.
Currently, the protocol has opened a points invitation system as a source of whitelist users. USDX is currently in its early stages, and non-whitelist users cannot directly purchase USDX. You can keep a certain eye on its follow-up.
Conclusion
Looking at the development of different tracks in the crypto market today, it is obvious that stablecoins will continue to play a more important infrastructure role in these fields. The demand for synthetic stablecoins based on multiple currencies will also become a very important part of various ecological infrastructure constructions, which is also the market segment demand targeted by USDX.
However, unlike other solutions of US dollar stablecoin protocols based on a single mainstream crypto asset, USDX's attempts and models regarding multiple currencies are still the first. At the same time, the overall visual style is very MEME-oriented, which may bring more changes to the market.
Compared with other stablecoin protocols that use over-collateralization, LSD and other models, USDX emphasizes the security of users' assets. It is relatively conservative in terms of risk response and profit model design. This is due to the Delta neutral market-making strategy adopted by the protocol. Undoubtedly, this design is more user-friendly and safe.
If USDX and sUSDX can gain more use case support and venture capital scenarios in the future, the more stable stablecoin solution promoted by the protocol itself will undoubtedly have greater development prospects.
After all, the upcoming BTCFi will undoubtedly have a very clear prospect for general demand for stablecoins such as USDX.