Fractionalized Stablecoins and Capital Efficiency
In traditional markets, the term “capital efficiency” is often used to refer to the ratio of money that a company must spend to receive a certain return. It speaks to the return on investment a company receives for a certain investment, product or service. This term is often used in reference to marketing. For the crypto market — particularly for stablecoins — the way we think about capital efficiency is entirely different. In this article, we’re going to discuss capital efficiency in crypto, and why fractionalized stablecoins like IRON are more efficient than their over-collateralized alternatives like USDC, USDT, DAI and others.
Definition 1: The Funds Required to Keep Peg
Most stablecoins require a certain amount of capital to collateralize their assets and keep them close to the desired $1 peg. For example, DAI is an over-collateralized stablecoin that requires an issuer to post 150% collateral. In other words, if a user wanted to mint 100 DAI, they would have to send $150 in Ethereum to the CDP contract. If the value of the collateral were to fall below a certain threshold, this position could be liquidated. The value of this collateral is what maintains the value of DAI pegged.
In the case of USDC — a centralized fiat-collateralized stablecoin — Coinbase holds $1 in a vault for every USDC issued. USDC is always mintable and redeemable for $1 worth of USD. In this example, USDC is more capital efficient than DAI because it only requires $1 of collateral to mint 1 USDC. A similar procedure applied for other centralized stablecoins such as BUSD (Binance), USDT (Bitfinex/Tether) and others.
Algorithmic (non-collateralized) stablecoins don’t use any capital reserve. In general, they purely rely on an algorithm or mechanism that will burn tokens when supply is too high (to increase the price) or mint new tokens when supply is too low (to decrease the price). Non-collateralized stablecoins require continual growth to be successful. In the event of a price crash, there is no collateral to liquidate the coin back into, and the holder’s money would be lost, as seen with many past projects trying to utilize such design.
For fractionalized or partial-collateralized stablecoins, the capital required to mint is only partially denominated in other stable assets. The remaining portion is denominated in a volatile asset, which is required as collateral. This requirement creates both a natural demand for the volatile asset, as well as a value capture. In the case of IRON, this volatile asset is TITAN. The nature of this value capture means that there is a direct relationship between the value of TITAN and the circulating supply of IRON. Additionally, the collateralization ratio for IRON is a floating number — meaning that if the peg performs well, it is a more effective value capture for TITAN. A better insight into our pegging and collateral ratio mechanics can be read in our Documentation.
Definition 2: What You Get For Your Money
Whereas some stablecoins only goal is to maintain the peg, IRON does so while producing yield for governance token holders. It accomplishes this by investing idle collateral into a yield-producing vault that feeds the Treasury contract. The Treasury then pays out the yield to stakers via a profit-sharing function. At the time of writing, the profit share pays over 400% APY on Polygon to TITAN stakers!
IRON is progressing the stablecoin landscape by maximizing capital efficiency. By implementing a floating collateralization ratio, IRON not only maintains peg in the most efficient manner possible, but it also captures value for TITAN holders and produces yield for its community of holders across the whole network! The combination of these factors makes IRON the most capital efficient stablecoin on the market as we look forward to deploying many more use cases over the coming weeks.