DYAD: 100% Collateral Stablecoin | TKX Weekly
by @uuwagyuu
sponsor TKX CAPITAL
Since January, DYAD has steadily increased its Total Value Locked (TVL), signaling a growing interest in decentralized stablecoins that do not rely on heavy overcollateralization. DYAD offers a different approach, allowing stablecoin minting with lower collateral requirements, which could indicate a shift in user preference towards more capital-efficient options. As of now, DYAD’s TVL has surpassed $5 million, according to Defillama.
Introduction
DYAD brings a new approach to the stablecoin sector by addressing inefficiencies in decentralized stablecoins. It allows users to mint stablecoins with collateral like ETH, with the option to achieve a collateral ratio as low as 100%. This is made possible by Kerosene, a utility token that leverages surplus collateral in the system.
DYAD aims to reduce the high cost of overcollateralization required by many decentralized stablecoins. While it starts with an overcollateralization requirement of 150%, users can lower this requirement through Kerosene, potentially reducing their capital costs.
How it works
DYAD’s operation starts with a straightforward setup: users deposit collateral, such as ETH, to mint DYAD stablecoins. The protocol initially requires a collateral ratio of 150% to protect against market volatility. However, DYAD differentiates itself with its collateral optimization mechanism, where the Kerosene token plays a key role.
Kerosene is not additional collateral but a claim on the surplus collateral within the protocol. When users hold Kerosene, they can use a portion of this excess value to lower their required collateral ratio from 150% to as low as 100%, provided they maintain the minimum collateral requirements.
The system is also designed to handle volatility dynamically. If collateral values fall and a user’s position becomes undercollateralized, the protocol allows for partial liquidations. This feature enables multiple participants to liquidate portions of a position, mitigating systemic risk and avoiding the disruption of a large-scale liquidation event.
Flywheel Effect
A central feature of DYAD’s design is the “flywheel effect,” a self-reinforcing cycle that supports growth and stability in the ecosystem. This flywheel revolves around the interaction between DYAD’s Total Value Locked (TVL), the supply of DYAD stablecoins, and the utility of the Kerosene token.
The dynamics work as follows: As more users join the DYAD protocol and lock collateral, the TVL increases. This increase boosts the supply of both DYAD and Kerosene, as Kerosene’s deterministic value is tied to the surplus collateral in the system. When the value of Kerosene increases, it becomes more attractive for users to acquire it, either by buying it directly or by providing liquidity.
The demand for Kerosene grows because it allows users to reduce their effective collateral requirements and offers protection against liquidation. This heightened demand leads to more deposits and the minting of additional DYAD, which further increases TVL and the value of Kerosene. This cycle continues: higher TVL leads to more DYAD and Kerosene in circulation, increasing the overall value of the protocol and reinforcing the ecosystem’s growth.
Challenges and Considerations
While the flywheel mechanism supports growth, it also introduces certain complexities and risks. The stability of the system relies heavily on the value of Kerosene, which assumes there will be consistent demand and a well-managed supply. If market conditions cause a sharp decline in the value of collateral or if confidence in Kerosene weakens, the flywheel effect could slow down or reverse, potentially triggering a series of liquidations and a drop in value.
Moreover, the protocol’s effectiveness depends on timely and well-informed governance decisions. Each new type of collateral must be approved through governance, and introducing less stable or less liquid assets could compromise the protocol’s overall stability.
Kerosene’s role also brings in a dependency on market dynamics, particularly the assumption that arbitrage opportunities will always be used to keep Kerosene’s value stable. In periods of high volatility or when liquidity is low, these arbitrage opportunities may not function as intended, leading to possible mispricing and destabilizing effects on the system.
Conclusion
DYAD offers a unique model in the decentralized stablecoin space by focusing on capital efficiency and flexible collateral management through its use of Kerosene. By allowing users to mint stablecoins with a collateral ratio as low as 100%, DYAD reduces the economic barriers typically associated with decentralized stablecoins. This approach could make DYAD appealing to users looking for a more efficient way to engage in DeFi.
However, DYAD’s reliance on the Kerosene token and its surplus collateral introduces certain risks. The system’s stability depends on maintaining a strong market demand for Kerosene and effective governance to manage collateral types. The ability to dynamically handle volatility through partial liquidations is a strength, but it also requires robust market participation to function effectively.
Ultimately, DYAD’s success will depend on its ability to balance these elements — capital efficiency, market stability, and governance. As it grows, DYAD will be a critical case study in how decentralized stablecoins can evolve to meet the needs of a changing DeFi landscape.
Reference
https://dyad.gitbook.io/docs
https://defillama.com/protocol/dyad#information
