What is the Foundry?
Scheduled to launch on 24 March 2021 at noon UTC, the Iron Finance Foundry is our latest innovation where STEEL holders can earn seignorage income. If you are familiar with other (fully uncollateralized) algorithmic stablecoins like Basis, bDollar, MidasDollar and others, you might already understand that the Foundry will operate in an almost same way, at least from a user’s perspective.
However, from a technical perspective, there are differences in our approach and the mechanics. The key differences between our Foundry and boardrooms of other algo-stablecoins is that the rewards you earn from other algo-stablecoins are minted out of thin-air during its expansion phase, whereas the rewards you earn from the Iron Finance Foundry are collateral assets (BUSD — to be more specific) which represent the profit accumulated by the protocol. Let’s get into more details.
Where does the profit of IRON protocol come from?
First of all, the profit structure of IRON protocol will come from multiple sources. Secondly, the variety and flexibility of sources will keep growing as the adoption and use cases of IRON further develop. For now, we consider a few sources of profits as below:
- IRON Minting and Redemption Fees
This a fundamental source of profits for Iron Finance. Minting and redeeming IRON currently costs a 0.3% fee. This fee can be adjusted via community voting but for now we believe it is fair and standard.
- Excess Collateral Management
This feature is specific to Iron Finance and does not appear with any uncollateralized stablecoin. The purpose of having a partial-collateralized stablecoin is the ability to maintain the $1 peg of IRON without it having to be backed 100% by collateral. As the project matures, this will become more and more obvious. Therefore, with an increasing demand for IRON, the Target Collateral Ratio (TCR) can be gradually reduced below 100% — which will bring the protocol in an excess- or over-collateralized state (ECR>TCR). This enables STEEL holders to profit from the collateral by simply staking their STEEL in the Iron Finance Foundry.
- Passive Income Strategies — utilizing idle collateral
Beside excess collateral, there will be huge amount of collateral sitting idle in the IRON protocol to back for IRON supply and price peg. The collateral is needed when users want to redeem IRON and receive back their collateral. However, only a fraction of this idle collateral is always actively needed for redemption. This leads to another use case: the idle collaterals can be used to gain extra incomes — such as by lending BUSD on Venus, providing liquidity on Belt.Fi, Alpaca or participating in vSafe and bEarn BUSD vaults. This is comparable to traditional fractional-reserve banking in a way but has many advantages over it so let’s highlight the main ones. While in the traditional banking system it would normally take a longer period of time to recall or withdraw particular investments, the beautiful thing in DeFi is collateral can be made available for redemption in a matter of seconds (or blocks ;). Also, while the traditional banks use client’s deposits to profit themselves (and mostly in a very untransparent manner and with unclear risk/reward profile and maturity), IRON will distribute 100% of profits back to STEEL holders.
The particular details regarding how and under what criteria we can implement these passive income strategies will require a voting decision from STEEL holders.
How are the rewards distributed?
Similar to other algo-stablecoin protocols, the rewards will be distributed based on epochs. STEEL holders will need to stake STEEL in the Foundry. After each epoch, our Treasury will distribute an amount of BUSD to the Foundry. These BUSD tokens will be distributed proportionally, based on the number of STEEL being staked during that epoch by each user. STEEL tokens will be locked for a number of epochs before they can withdraw their STEEL. The earned BUSD however can be claimed immediately. More details will be revealed very soon!
Will the APY be high and what determines it?
The APY (return rate) depends on a number of factors. Most importantly, it depends on how many STEEL are being staked during a particular epoch and how big are the rewards allocated by Treasury for distribution to the Foundry. During the first epochs, 1% of excess collateral will be allocated to the Foundry each epoch. We will then adjust the ratio in real-time based on the APY and all other parameters. Similar to other algo-stablecoin protocols where there will be no rewards during the contraction phase, soIRON protocol will also not distribute rewards for epoch where it is under-collateralized.
Thank you for reading about the Foundry. We are incredibly excited about sharing this innovation with our community! Given the complexity of the Foundry reward mechanism, we are looking forward to engaging our community in determing the best Foundry parameters, aimed at sustainable returns and minimal risk exposure.