Whereas most asset trading is done in secondary markets (including exchanges like Quipuswap, and TEZEX), assets generally begin in their respective primary markets. From there, liquidity providers supply the liquidity pools of secondary markets.

For USDtez (USDtz/USDTZ) the primary market is by default, the place where USDtz tokens are minted; the USDtz minting portal. It’s at this juncture where the collateral is deposited so that USDtz can be minted. Likewise, it’s also where USDtz can be deposited and burnt so that the underlying collateral can be withdrawn.

Only enrolled minters of USDtz can operate the minting portal. Minters may enroll as individuals or as institutions (subject to qualification).

What is a Mintery?

A mintery is a baker on Tezos that is also an enrolled institutional minter of USDtz. Minteries serve the USDtez Network as the connective tissue between the USDtz Minting Portal and the USDtz users. Outside of an exchange/secondary-market, users can buy USDtz from these minteries, and sell USDtz to them as well. This is particularly relevant for those seeking to supply liquidity pools on those exchanges (like Quipuswap).

What can a Mintery do?

Minteries are authorized to mint new USDtz and redeem USDtz for the underlying collateral (e.g. USDC, GUSD). Since not every user is able or willing to become a minter themselves, minteries may provide that service to users.

What does that mean for me?

For a user, buying and selling USDtz through a mintery may be a more desirable option than alternatives.

For example, buying on a secondary market could incur slippage fees. This is particularly relevant if a user’s objective in acquiring USDtz is to supply liquidity to such an exchange. Buying from a mintery could avoid slippage (though the mintery may charge its own fee).

Moreover, the decentralized nature of minteries (having many of them) means minteries may be localized, serving users of a particular language or time zone.

Do Minteries charge fees for buying/selling?

That’s up to each of them, respectively. Ask them.

Who can create a Mintery?

Tezos bakers in good standing may enroll as Minteries. To do so, the baker must first enroll through the USDtz Minter enrollment portal. Enrollment is subject to qualification.

These are the same qualifications for general enrollment of qualified individuals and institutions, but additionally, the applicant should have either:

• a baker that’s been running continuously for at least 1-year
• (and/or) a baker with a significant balance of tez (yes, this can change based on the price of XTZ, so this will be determined by the fair market value at the time of application)
• (and/or) a smaller baker that’s new yet nonetheless has significant relevance to the community such as well-established contributions to the Tezos ecosystem

New mintery applications will be reviewed and processed on a case-by-case basis.

Where can I find a Mintery to use?

On the USDtz.com website, you can view a list of enrolled USDtz Minteries, along with a contact email for each of them.

List of enrolled USDtz Minteries + contact info

Where can I learn more about USDtez and Tezos Stablecoins?

Go to USDtz.com for more information about USDtez and the USD Tez Project.

• USDtez Website
• USDtez Twitter

USDtez Telegram Channel

• USDtez Telegram Discussion Group
• USDtez Reddit
• USDtez Github

USDtez (USDTZ) is an open-source ecosystem project from Tezos Stable Technologies (aka ‘StableTech’), which is governed and wholly-owned by a non-shareholder foundation called The Tezos Stablecoin Foundation. For more information on StableTech, visit: https://stable.tech

The Minteries of Tezos Stablecoins was originally published in USD Tez (USDtz) on Medium, where people are continuing the conversation by highlighting and responding to this story.

Borrowing and earning USDtz, BTCtz, XTZ and more

There are many ways for individuals to profit from the USD Tez ecosystem. I’ve previously described an On-Chain Savings account smart-contract that operates like a Savings account that generates returns of 3% APY. This article will present a few new instruments that will be available in Year 1 of USD Tez. First, we’ll take a look at one of the building blocks of many instruments to come — On-Chain Lending.

Soon you’ll be able to take out a loan in USD Tez, either by collateralizing your USD Tez On-Chain Savings position or by collateralizing your Tezos non-fungible tokens (NFTs). You’ll also have a new way to make profits, by buying and flipping seized NFTs from borrowers that had permanently defaulted on their loans.

Scenario: Say you’ve invested in a bunch of non-fungible real-estate tokens (perhaps issued by Elevated Returns), and most of your remaining cash is locked in your crypto-trading portfolio. Your funds are all locked up.

Now let’s say you need some free cash; maybe you need liquid cash to pay your rent or utility bill, or maybe you want to buy more XTZ because you believe it will have a big bull-run this weekend.

How can one borrow money in the Tezos ecosystem? The answer to this is especially important to cryptocurrency traders who spend day and night keeping the veins and arteries of the Tezos financial ecosystem aflow. For traders especially, borrowing in the Tezos ecosystem opens the door to margin trading; enabling traders to take larger positions on their choice investments than they otherwise could with their own available liquid cash alone.

Long-term, these are the building blocks for many other financial instrument possibilities in the Tezos ecosystem. This article will touch on those topics later on as well.

What On-Chain Lending offers are, in principle, are 2 main things:

1. Lender repayment is guaranteed — By the end of the smart-contract, lenders will get paid the money they are owed one way or another
2. Borrowers have no need to complete a credit check—The liquid net value of the collateral pledged by the lender is given a formally verified appraisal through a binding on-chain pre-loan auction

In accordance with our values, we want lending to be free and easy, but we want to avoid the tricky-practices of predatory lending that lead to the subprime mortgage crisis and nearly collapsed the global economy, as well as avoid any magnifications of debt through nebulous investment vehicles that leverage debt and speculation to afford more debt that’s covered by more speculation. (Phew!)

Nay, rather we want a healthy Tezos financial ecosystem built on solid ground, in which the terms of lending practices are publicly readable and in which remittance is guaranteed in arithmetic terms that can be formally verified on the blockchain.

One thing we need to make sure never happens is this:

So, how do we do it?

Introducing: On-Chain Lending

On-Chain Lending enables users to borrow money without a central trusted intermediary nor with an invasive underwriting process; all the terms of the loan are covered/collateralized for automated remittance triggered by contingency mechanisms written into the smart-contract, and thus all risks are hedged no matter who the borrower is. This works even better than the traditional bank method since a bank can only presume remittance, not guarantee it, despite their invasive and expensive underwriting processes.

There are two collateralization methods (and thus, two different smart-contract types) enabling ways to borrow USDtz with On-Chain Lending:

1. Borrower Collateralization
2. Decentralized Collateralization

Either collateralization method can refer to On-Chain Lending since all end-to-end borrowing and lending contingencies are covered within the smart-contract. Borrower Collateralization is the simpler of the two methods and will probably be the most common; it is simply a smart-contract between two parties — the lender and the borrower.

Type 1: Borrower Collateralization

Alice (the ‘Borrower) needs a loan of USDtz from USD Tez Foundation. USD Tez Foundation (the ‘Lender’) sets the terms of the loan, which requires interest payments to make it worthwhile. The Lender also requires Alice to pledge collateral for the loan, to be included in the smart-contract, in case Alice defaults on the loan.

Alice happens to have a USD Tez Savings Bond/smart-contract, which she established the day prior. She decides to pledge the Savings Bond as collateral for her loan.

However, for Alice’s loan request to be approved and then issued as a smart-contract, the Savings bond must be large enough (mathematically) to cover Alice’s potential debt in case Alice default’s on her payments — that is, the Savings bond Alice pledges, if seized by the Lender, must be large enough to cover the principal loan amount, plus the maximum interest Alice owes, assuming the worst-case scenario (in which Alice takes the money and runs).

Assuming Alice’s pledged Savings bond is large enough, Alice’s loan request will be accepted and the Lending smart-contract will be issued.

If Alice returns the borrowed sum with interest to the lender, then the smart-contract completes its duration with all desired conditions satisfied; Alice keeping her Savings bond, and everybody wins.

If, however, Alice defaults on her loan beyond repair, then the lender (USD Tez Foundation) would seize the Savings Bond that Alice pledged as collateral, thereby getting repaid in another way. Pretty simple.

Type 2: Decentralized Collateralization

The simpler form of decentralized collateralization is for the borrower to get the agreement of a 3rd party (friend, or family member) to underwrite the loan in a formal fashion — that is, to lock-in a collateralizing deposit in the same smart-contract; that is, a smart-contract guarantor. The 3rd party would do this based on trust and could end up losing money in the process.

Assuming the borrower does not have a Savings Bond to pledge as collateral (or doesn’t have one that’s large enough to cover the requested loan terms), and has no one to formally underwrite them based on personal trust, a loan can still be issued from the lender to the borrower, through a process requiring another form of on-chain collateral (e.g. a non-fungible-token).

This is where on-chain lending truly starts to demonstrate a revolutionary improvement over prior off-chain practices, which stretch back through the entire history of banking.

The lender still needs assurance from the smart-contract that the lent amount plus interest will be paid in full.

If the lender were to follow traditional (off-chain) banking practices, they would be setting themselves up for an attack. Under a mere ‘blockchain-ified’ version of the old system, to profitably attack the lender, all a borrower would need to do is coordinate an inflated price for an NFT, collateralize that NFT, borrow against it, and intentionally default on their loan. Even though the lender would end up seizing the NFT, the NFT may sell on the open market for even less than the amount lent (and lost). Under this open-ended method, recovery for the lender is not certain, let alone formally-verifiable.

For this reason, even if the lender accepts the NFT of the would-be borrower, the lender must not be the one to collateralize the NFT, because the lender cannot trust the face value of that NFT.

Rather, the borrower would turn to a decentralized collateralization method, in which the NFT is given a formal appraisal, and contingency purchase agreement; free-market-competing 3rd parties collateralize the presumed future seizure of a non-fungible-token. Here’s how it works:

1. 3rd party participants would compete with one another as bidders in a pre-loan auction of the NFT.
2. The winner of the pre-loan auction becomes the Guarantor and commits to purchasing the NFT at the winning price, but only if and when the borrower irreparably defaults on the terms of their loan. This way, not only is the NFT given a fair appraisal, but the lender can have formal verification of their exact amount and timing of repayment before the loan smart-contract is issued.
3. The 3rd party Guarantor is paid a small yet incentivizing monthly fee for their services, even if the Borrower never defaults.

Couldn’t an attacker just scam the 3rd parties? An attacker could try to do so. However, the free-market competitive nature of these auctions will foster an ecosystem of support, resources, and knowledge that will appraise NFT values far more accurately and discerningly than a single party (the lender) ever could. The bidders are financially incentivized to accurately determine good collateralized NFT assets from bad ones, protecting themselves and the ecosystem along with it. In fact, the Guarantor activities of Decentralized Collateralization of on-chain-loans will likely become a large industry sub-sector in and of itself, which will spur capital resources and talented professionals to innovate an ever more competitive arsenal NFT evaluation.

Consider this example: Gary owns a tokenized piece of real estate worth $200,000 and wants to borrow $100,000 in USDtz. Gary needs the $100,000 USDtz for a period of 6-months. USD Tez Foundation would be Gary’s lender.

Earlier that day, Bob locked up his $100,000 USDtz tokens in a USD Tez Savings position smart-contract for a 3% APY for 12-months. (Bob is not the 3rd party in this situation and has nothing to do with the smart-contract; Bob is just an example of someone to whom the Lender has fiduciary obligations.)

USD Tez Foundation knows that Bob won’t be using his $100,000 USDtz USD Tez for 12-months, meaning that that amount can be made available for lending, under the condition that the borrower’s debt is repaid with interest, to be made available to Bob upon the block-time that his Savings smart-contract ends.

The terms of Gary’s Lending smart-contract stipulates that he could borrow the $100,000 USDtz for a 6-month term at a rate of 6% APR. That is, by the end of the 6-month term, Gary would need to have paid at minimum (assuming timely payments and no debt compounded) the initial borrowed sum of $100,000 USDtz, plus interest of $3,000 USDtz, for a total of $103,000 USDtz.

Before the smart-contract is set, Gary would need to provide collateral that is formally verifiable in its ability to cover the terms of his would-be debt. Since Bary has a real-estate token worth $200,000, he could offer the token as collateral on the loan in case of default. This reflects a common practice by banks and homeowners but in smart-contract form. When banks seize collateral assets from borrowers who defaulted on their loans, despite the asset having undergone a pre-loan appraisal in the underwriting process, those seized assets are sold or auctioned off to interested buyers after-the-fact.

For a smart-contract however, a post-seizure auction would introduce many off-chain conditionals. In particular, the value of the NFT could go down to the point that the lender would not recover owed assets, and would perhaps even lose money. On-chain lending precludes this possibility of loss for the lender by staging a pre-loan auction of the asset and integrating the potential for utilization of the results in the smart-contract (this will be clearer soon).

So far we’ve identified 2 parties in this smart-contract — the lender (USD Tez Foundation) and the defaulting borrower (Chuck). There is, however, a 3rd-party included in an On-Chain Lending smart-contract; a party that acts as a Guarantor of sorts who commits money to buy Chuck’s collateral in case Chuck defaults on his loan. The lender is not interested in owning a non-fungible token, let alone the piece of real-estate that the NFT represents. Rather, this type of lender (USD Tez Foundation) much like a bank is only concerned with settling its owed returns of the currency in which it is dealing (namely, USDtz tokens). That’s where Charlie comes in.

The lender (USD Tez Foundation) needs to make sure that the hypothetical future-seized asset can be liquidated for the USDtz-token returns necessary to satisfy Gary’s debt and for that the repayment to be automated and triggered at the point of default. To accomplish this, USD Tez stages a preliminary appraisal auction for the collateral asset that determines both: a would-be buyer and the amount they will pay (with a reserve-price that must cover default). After the auction, the On-Chain Lending smart-contract adds the collateralized asset’s future-buyer as well. To reiterate, all of this happens before Gary’s loan is issued; before the smart-contract is complete, let alone deployed.

If that’s unclear, let’s continue with our example. Charlie has $1,000,000 locked in a USD Tez Savings smart-contract for 2-years (3% APY). Charlie gets an alert inviting him to participate in a pre-loan auction. Charlie is intrigued and decides to participate. Charlie figures that by participating in this auction, he could get a great deal on some non-fungible tokens and then flip those non-fungible tokens for a profit (assuming the current owner irreparably defaults on their loan). Even if the borrower never defaults, as the winning bidder Charlie would earn 1% APY of the loaned amount in addition to the 3% APY he would already continue to be earning as a holder of a USD Tez Savings bond.

This particular auction is for Gary’s real-estate property NFT (owner names and other sensitive info is kept hidden from Charlie and other bidders though). Gary claims the liquid price is of the NFT he’s offering is $200,000, (which is about the price at which he bought it) and he may be correct, but the auction bidders like Charlie are seeking profit. Bidding will likely be competitive but will not bid so high that the venture becomes not worth their time.

All bidding participants agree that if they win the auction with the highest bid, the according transaction will commence as soon as the loan-default mechanism is triggered in the smart-contract. That is, if and only if Gary defaults on his loan, that then and only then will the winning bidder be purchasing Gary’s NFT; it’s all a contingency.

Charlie wins the auction by offering a high-bid of $130,000. That is, Charlie pays nothing now but if after month-6 of the loan, Gary defaults on his loan beyond recovery after a specified date and time (in this case, 30 days from term-expiry), the smart-contract then and only then transacts a change in possession of his collateralized non-fungible real-estate token, from Gary to Charlie.

If that default event occurs, then simultaneously, $130,000 USDtz tokens held by Charlie in his USD Tez Savings smart-contract are to be transferred to the Lender (USD Tez Foundation). However, if Gary does not default on his loan, then he keeps his NFT, and Charlie continues to earn on his USDtz Savings bond smart-contract. This 3-way set-up and series of contingencies are configured in a single on-chain-lending smart-contract.

Bottom line: On-Chain Lending assures fair and equitable Lender/borrower transactions for any agreement, without the need for a personal credit check nor an invasive underwriting process. A smart-contract can only be referred to as “on-chain-lending” if and only if all terms of contingencies of liquid payment are settled for both lender and borrower by the terms of the smart-contract (end-to-end on-chain).

Future Vision of On-Chain Lending

These basic practices also open the door to many other downstream ecosystems that will emerge, each with their own place for entrepreneurial initiatives, each offering the potential for lucrative returns.

These smart-contracts can become tiered with multiple levels of participants decentralizing yet another aspect of the lending process.

Insurance coverage would be one potential area of extension for the Tezos and Tezos stablecoin ecosystem. There are even companies already entering that space (e.g. Tezsure).

Real estate mortgages are the most frequent and obvious extension of basic monetary lending practices. This is an economic area USD Tez Foundation will probably stimulate as well, directly, and through grants for entrepreneurs.

Payday advances are loans in the form of small short-term loans but are issued with much greater volume than conventional loans.

Continue to follow USDtz as we ready our launch

Go to USDtz.com to sign up for the USD Tez mailing list. You can also follow us on various social media channels, including:

• Telegram
• Riot
• Twitter
• Reddit

On-Chain Lending — with Tezos was originally published in USD Tez (USDtz) on Medium, where people are continuing the conversation by highlighting and responding to this story.

Introducing TZ-bills, a Tezos smart-contract alternative to T-bills

A TZ-bill is a bond token; a digital asset issued through a Tezos smart-contract through a Tezos security token standard, returning an appreciated investment as a lump-sum payment to the purchaser upon the designated day and time defining ‘maturity’.

Of course, the concept is derived from Treasury Bills (more commonly referred to as T-bills). T-bills are a debt instrument issued by the United States Treasury—and for a similar purpose as TZ-bills. The USD Tez Reserve will sell TZ-bills through Tezos.bond to help fill its 4:1 over-collateralization target for its reserve silos — or more specifically, to assist the activities which will fill the silos. TZ-bills (as a smart-contract) will reward its purchasers for their astute foresight in the opportunity.

Here’s a bit more context to show how TZ-bills will help USD Tez fill the reserve to capacity—and to grow from 1:1 collateralization up to 4:1 collateralization—very quickly.

Securities Categories:

• Equity Securities (e.g. Stocks — preferred and common)
• Debt Securities (e.g Bonds, Debentures, Term-Loans)
• Derivative Securities (e.g. Futures, Options, Swaps)

Bonds a major vehicle of the “Debt Security” family. T-Bills are a type of Bond. There are several types of bonds, though it should be noted in Tezos staking, baking bond deposits have a very specific association (nonetheless rooted in the general concept of a bond).

Types of Bonds:

• Treasury Bonds « — (just focus on this one for now)
• Municipal Bonds
• Corporate Bonds
• Convertible Notes

Treasury Bonds are issued by governments, whenever they need to generate more funding. Money raised from Treasury Bonds serves to collateralize the FIAT money that governments print, by giving them a lendable reserve that can generate interest. That interest enables these respective treasuries to pay back their bond purchasers upon the date of maturity and profiting to expand their own activities in the future, ideally less dependent on bonds. Effectively, they are borrowing money from the citizen purchaser of the bond and paying that citizen back with interest over time.

The U.S. Treasury issues T-bills (the most common and well-known type of Treasury Bond in the world) as well as other debt instruments, including:

Treasury Bond Types

• Treasury bills « — (just focus on this one for now)
• Treasury notes
• Treasury bonds
• Treasury Inflation-Protected Securities (TIPS)
• Floating Rate Notes (FRNs)

TZ-bills, purchasable with USD Tez (USDtz), will pay return rates that will likely end up far better than the return rates of T-bills, making it a more attractive investment opportunity without the significant downside of risk. TZ-bills are not just simply offered with the “full faith and credit of USD Tez Foundation” (as T-bills are offered with the “full faith and credit of the United States government”), but with something much stronger — a smart-contract executed through the Tezos blockchain.

To see the current return rates of newly issued and historically issued T-bills, visit this link from the United States Treasury auction.

TZ-Bill Auctions

Likewise, TZ-bills will be issued through an auction format—more specifically, a descending auction format (specific choice of ‘descending auction’ format was inspired by Arthur Breitman’s NYC talk on Checkers).

The bond’s price is measured in its discount from $1.00 so expressively a descending auction would be the most appropriate alternative to the U.S. Treasury’s auction structure of T-bill auctions.

That is, the auction of a TZ-bill will start with a minimal amount of return by the date of the TZ-bill’s maturity. For example, the auction will begin at offering a sale price of $0.99 for each dollar that will ultimately be returned to the purchaser by maturity date. If there are no takers, then the price would lower to $0.98 cents, and if there are no takers still, then the price would lower to $.97, so on and so forth.

Eventually, an individual participant will stop ‘holding out’ and make the purchase since FOMO will kick-in, as the auction’s competition-factor increases in an inverse relationship to the TZ-bill’s offer price, and each participant knows this.

Risk Premium

When you buy a TZ-bill, it’s because you believe you will get the value promised of you by the underlying token—USD Tez—which has its own sources of underlying value and an engine for growth.

People’s confidence in a digital asset will vary. The way this plays out in the market for TZ-bill auctions is, first, there is an added risk premium to TZ-bills relative to T-bills. Therefore, we can foresee the descending auction being less competitive, and therefore landing on a better price for discount and yield.

For example, a 6-month T-bill for $100 dollars at maturity was recently auctioned for $99.18. For most people, that sounds like its not worth it, but if ‘safe’ is what you’re looking for, a T-bill is a solid investment. After all, it’s backed by the U.S. Treasury.

Naturally, a 6-month TZ-bill would inspire less confidence (at first) because USD Tez Reserve is very much not the United States Treasury. Although this should not be a shock to the reader, and while this may sound self-deprecating, I bring it up because (as the keen observer may have already realized), it’s actually an advantage to the purchaser.

How to make money from TZ-bills

The first TZ-bill auctions will be so non-competitive relative to T-bill auctions that the buyers will lock-in great deals. Once TZ-bills start producing fantastic returns for their purchasers (as will be evidenced through the blockchain record, and formally verifiable for soundness), it will only a matter of time before the rest of the market catches on, leading to more competitive TZ-bills auctions, resulting in more competitive outcomes. This increase in competition will perpetuate forward-confidence in the USD Tez Reserve, enabling more “treasury bond” inspired offerings to be proliferated.

Therefore, the people who have the most to gain will be the earliest adopters — that is, the earliest participants in TZ-bill auctions, because the TZ-bills they end up purchasing will be the TZ-bills that have the highest returns maturing in the shortest amount of time.

If you haven’t already, be sure to check out the preceding article:

USD Tez — Collateral² (squared) Model

Coming soon: USD Tez Whitepaper

To stay up to date on the USD Tez project and to participate in our discussions, you can visit the official USD Tez website:

USD Tez (USDtz) Official Website — USDtz.com

Also, be sure to join our social media channels:

Telegram — USD Tez

Twitter — USD Tez

TZ-bills — from the USD Tez Reserve was originally published in USD Tez (USDtz) on Medium, where people are continuing the conversation by highlighting and responding to this story.

USD Tez (USDtz) stable-coin 4:1 [over]collateralization Model

This article

1. Background
2. ‘The 4-Silos’ of the USD Tez Reserve
3. Surplus Collateral (‘The Harvest’)
4. Filling the Reserve: from 1:1 to 2:1 to 4:1

TL;DR

There are 4 parts to a stablecoin’s design: Collateral, Mechanism, Price Info, Peg. This article focuses on the Collateral model. Basically, The USD Tez Reserve (which harbors the collateral) is composed of 4-silos of collateral (2 are FIAT, and 2 are XTZ), which (when full) comprise a 4:1 backing of all USDtz in existence. The first FIAT silo and first XTZ silo comprise the “Base Layer” ensuring redeemability either form (FIAT or XTZ). The second layer (2nd FIAT silo and 2nd XTZ silo) is the Growth Layer, which, effectively collateralizes the Base Layer. Whatsoever exceeds the 4:1 collateral maximum is surplus called the ‘Harvest’.

The Harvest is distributed into 3 main areas: dividends, recapitalization (scaling the reserve), and ecosystem projects. Harvest distribution plans are decided upon by the USD Tez ‘Trustees’, which will eventually become a token-based on-chain DAO, reflecting Tezos’ own on-chain-governance. Trustees also have the power to amend/evolve the USD Tez system over time. The reserve is grown through growth activities, which can be explored in more detail in our other articles. These include TEZEX.io and Tezos.Finance

1. Background

Why does a collateralization model matter for a stablecoin?

What is a ‘stablecoin collateralization model’?

How a stablecoin is collateralized defines the structure of the stablecoin and consequently its total value both as a measurable store of value (which should be stable at a 1–1 parity with the USD), as well as value in a broader sense — that is, for users, backers, merchants, and anyone affected by the coin. From stability to liquidity to governance — both in the short-term and in the long-term — the collateralization model demonstrates the backbone and the spirit of the stablecoin.

The diagram below (Cornell) taxonomically presents an influential context for the role of the collateralization model in the overall design of a stablecoin. Effectively, the collateral model defines, determines, or is dependent on every other aspect of a stablecoin’s design.

In this article, I’ll explain the “Collateral” (type and amount) portion — which will imply aspects of “Mechanism,” “Price Info,” on which I will expound in subsequent articles (as necessary). “Peg” is obviously the United States Dollar (USD).

TL;DR

• Collateral
  Type: FIAT and XTZ Combination
  Amount: Overcollateralized 4:1 (2x FIAT + 2x XTZ); ‘Collateral-squared’
• Mechanism
  Reserve of Backed Asset
• Price Info
  Oracles (source: external + distributed on-chain from DEXs)
• Peg
  FIAT (USD-value)

(Also in this article, I will be using the term “Trustees” to describe those charged with managing the USD Tez reserve. Who the “Trustees” will be will change over time — at first it will be the USD Tez Foundation, and then it will be the DAO which will ultimately be a decentralized on-chain community.)

Values: What matters in stablecoin’s collateralization model?

Designing USD Tez, we’re ascertaining specific mission goals; a stablecoin in its foundation must reconcile the needs of each and every party interacting with the stablecoin (from backer to user to developer).USD Tez’s Values dictate that a stablecoin must always:

1. Be Redeemable (to the peg) — To maintain 1–1 (USDtz–USD) stability 100% of the tokens in circulation must be backed and redeemable for all users, for their USD-value and under all market conditions
2. Meet Demand — the amount of liquidity provided by the stablecoin’s minted supply must continue to meet market demand as the serviceable market grows
3. Balance Incentives — align investor/trustee/DAO financial incentives to that which leads to the betterment of stablecoin and to the public good which it serves, so that what’s good for the coin is good for profits, and what’s good for profits is what’s good for the coin–inseparably

Regarding Balance Incentives, what we don’t want is for the stablecoin to start strong and then degenerate into a workaround hedge fund for the backers who would parasitically strain users and the reserve for their own financial gain and nothing else. Rather, the financial success of the backers should be dependent and proportional to the strength of the service provided.

In essence, the strength of a collateralization model’s long-term prosperity outlook is all about: maintaining balance in all things.

Collateral Types

The simplest way to collateralize a stablecoins (and our first step) is a dollar-for-dollar approach:

FIAT-collateral: The logic in using FIAT-collateral can be best summarized as, “You give me a FIAT $1 dollar, then I give you a $1-token stablecoin of the same value, and I hold on to your dollar. If you give me back the stablecoin, I’ll redeem it by giving you back the dollar.” That way no matter what happens to the price of crypto (any crypto), the stablecoin will always 100% collateralized. Sadly, there are too many drawbacks to this method of collateralization alone. For one thing, by keeping FIAT-only collateral, the stablecoin cannot grow with the market, whereas crypto-collateral has the potential for inestimable growth (but also for inestimable loss).

Crypto-collateral: Collateralizing the stablecoin in crypto-collateral (XTZ) alone would enable us to grow the USD Tez reserve with the growth of the market. For example, (assume XTZ is priced at $1) if we sell 100 USDtz for100 XTZ and the price of XTZ grows to $10, then suddenly we are 10x (1000%) collateralized overnight. However, if the price of XTZ sinks to $0.90, then we are under collateralized and cannot redeem the purchasers, so the stablecoin would destabilize becoming worth $.90/piece.

This underlies the quintessential challenge that the designers of stablecoin collateralization models must delineate for their own respective purposes.

Our purposes are defined by the values stated above. By starting our reserve with FIAT-collateral accepted in the initial transactions, we avoid the possibility of under-collateralization ever no matter what happens to the XTZ market; USD Tez will always be redeemable for its USD equivalent. This is the safest, smartest, strongest way for any stablecoin to begin collateralization, even if they are to move off of FIAT later and embrace a completely algorithmically-maintained crypto-pegged approach.

Having said that, FIAT collateral is not enough, and neither is ‘double collateralization’ model of FIAT and Crypto for a total of a mere 200% backing (as stated in the Version 1.0 article). While a 2:1 over-collateralization ratio sounds nice, in practice it’s not enough. This article supersedes the previous USD Tez collateralization article.

2. ‘The 4-Silos’ of the USD Tez Reserve

Rather, if the 2:1 over-collateralization sounds nice but isn’t sufficient, a more robust system is needed—one that will assure all goals are met, despite extreme market scenarios. This system can be defined by a method we’re calling the “4-silos” of the reserve.

1. Silo-1: USD Base Reserve (Base FIAT)
2. Silo-2: XTZ Base Reserve (Base Crypto)
3. Silo-3: USD Growth Reserve (Growth FIAT)
4. Silo-4: XTZ Growth Reserve (Growth Crypto)

Silos 1 and 2 comprise the ‘Base’ layer previously discussed as ‘double collateralization, while Silos 3 and 4 comprise the ‘growth layer’ which protects the reserve from the aforementioned pitfalls.

Is there a Silo-0?

Technically, the supply of USD Tez, both in-and-out of circulation, would comprise ‘Silo-0’, but that’s more obvious so we’ll keep that out of sight going forward. For rhetorical purposes, Silo-0 isn’t quite part of the reserve, as the reserve and its respective 4 silos are the things that collateralize Silo-0. So when referring to “the Silos” we’re referring to the Reserve Silos (Silos 1, 2, 3, and 4). Capiche?

The reserve silos (1, 2, 3, and 4) are such that each individual silo alone is capable of backing—100% of the minted supply of USD Tez. This means that when all 4-silos are at full-capacity the minted supply of USD Tez will be backed 400% (i.e. a 4:1 ratio).

Silo-1 — “Base FIAT”

The first collateralization method follows the simple model described above; $1 USDtz for $1 USD. FIAT collateralization enables 100% redeemability (unlike crypto) because no matter when happens to the price of XTZ, the price of $1 FIAT will always remain $1.

Why FIAT?

• The FIAT serves as a safety fallback so that no matter what happens to the price of crypto, the coin will always be stable and fully redeemable.
• The price of XTZ could drop 99%, and still, all USDtz issued will be 100% redeemable; the price of XTZ could grow 100x, and still all USDtz issued will be 100% redeemable

This is the easiest, fastest, and the most rock-solid way to begin collateralizing a stablecoin. We could just stop there and have a 100% backed stablecoin, growing with the growth of the reserves. However, if the price of XTZ grows say from $1 to $10 and the trade volume would grow with it, and the serviceable liquidity that USD Tez could provide would be very little compared to the demand. Effectively, a FIAT collateral reserve alone for USD Tez is like shorting XTZ (not a good idea in the long run).

Silo-2 — “Base XTZ”

The base collateral needs to be in FIAT as well as XTZ—double-collateralizing the stablecoin. Silo-2 (the XTZ silo) starts empty, but with the help of lending activities from Silo-1, it can start to fill. Silo-2’s baking activities will commence as soon as some seed XTZ is deposited. Eventually, Silo-2 will be independent and be able to meet its own growth needs strictly from baking activities.

Imagine just 2 silos— Silo 1 and Silo 2. The value of each bucket must independently match the value of all minted USDtz in circulation. In other words, for every $1 USDtz-token issued, there must be $1 USD in a FIAT bucket as well as (assume the price of XTZ is $1) 1 XTZ coin in a crypto bucket; 1–1–1.

Why XTZ?

• The XTZ reserve silo enables the stablecoin’s collateral to grow with the market since keeping just FIAT collateral while XTZ grows perhaps 10x would not enable USDtz to keep up with liquidity demands.
• Secondary reason includes keeping the collateral “on-chain” so that we can stake the XTZ held and thereby contribute to the ecosystem on which USD Tez thrives

Together Silos 1 and 2 comprise the Base Layer of the USD Tez reserve. Although we’re starting with Silo-1 alone, and although Silo-1 alone is sufficient, upon the point in which Silo-2 is definitively filled, neither Silo-1 nor Silo-2 should be considered better than the other and at that point, the reserves should never fall under 200% collateralization.

This complete-hedge actually enables us to maintain the full-confidence either polarity of the market confidence spectrum:

“I don’t care for crypto-backing. Are you fully-collateralized by FIAT?”

Yes, 100%

and

“I don’t care for FIAT-backing. Are you fully collateralized by Crypto?”

Yes, 100

Though this is still not the perfect system.

Why 200%+ [over]collateralization is not-good-enough: As the XTZ silo (Silo-2) grows in value beyond the value of the FIAT silo (Silo-1), the USD Tez Foundation can mint more USDtz tokens to meet the new—greater—value of the XTZ in Silo-2). However, there cannot be more USDtz than there is FIAT to back it. This means that some XTZ would have to be liquidated to feed Silo-1 if it were to mint more USDtz.

Despite actually ‘double-collateralizing’ all USDtz by a combined 200% collateralization ratio, these 2 silos alone will hinder growth prospects. In other words, if our goal with Silo 2 is to grow our serviceable liquidity offering over time, then the double-collateralization method (namely, the servicing Silo 1) would hurt that effort.

Even if XTZ were to grow again and again over time, the XTZ silo’s size as a proportion to the overall XTZ market would otherwise be virtually cut in half with every new minting period.

A similar problem emerges if the price of XTZ were to crash. Then part of Silo 1 would need to be used to purchase more XTZ. Since FIAT is the first Silo, the actual supply of USDtz would need to be reduced in order to even make that purchase so that the token isn’t under-collateralized (first rule).

These are the reasons for Silo-3 and Silo-4, which together comprise the ‘Growth Layer’ of the USD Tez reserve.

Silo-3 — ‘Growth FIAT’

Silo-3 is a FIAT reserve designed to match Silo-1 and act as its backup, incase Silo-2 needs replenishing.

If the price of XTZ crashes, then the difference will need to be made up for by a FIAT reserve to purchase more XTZ. We cannot use FIAT funds from Silo-1 without ending up under-collateralizing the USD Tez supply unless we were to slash the amount of USD Tez, which is something to avoid. After all, our goal is to grow our liquidity offering, not shrink it. In a sense, if Silo-2 is the base that collateralizes USD Tez (just as Silo-1 does), then Silo-3 is what provides cover for Silo-2.

It is critical that Silo-1 and Silo-2 become full as soon as possible and to remain that way in perpetuity, whereas, Silo-3 can be more flexible. After all, the purpose of Silo-3 is to be an active reserve that can be used to replenish Silo-2. It’s a “growth” reserve which will have times where it’s at capacity and times in which it is less than capacity. Ideally, it need not break from full-capacity at all (how that would work will be described later) but it’s not a cause for alarm if it does.

For Silo-3’s reserves to go down from 100% to a fraction of that if need be, should just be seen as Silo-3 doing its job, and that it will rise up to 100% over time with further growth activities.

However, this only covers the balance if the price of XTZ were to crash. If the price of XTZ were to skyrocket, say 10x, then Silo-3 would not be very helpful.

For that reason, there’s Silo-4

Silo-4 — ‘Growth Crypto’

In a state of XTZ growth, the dollar value of Silo-2 will have outgrown the value of all FIAT in Silo-1 and of course, all USDtz in circulation. At the same time, it will likely be of great interest to all stakeholders that the occasion is used to increase the liquid supply of USDtz available.

To validly increase the USD Tez supply after an XTZ growth spurt, at the very least, the amount of FIAT in Silo-1 must be increased making Silo-1’s liquid dollar value match that of Silo-2’s liquid dollar value. This cannot be done by liquidating any XTZ since that practice would lead to a halving of its proportion to the overall market supply of XTZ in the market (very bad in the long run).

Instead, Silo-4 will provide the solution. Silo-4’s reserve is designed to match that of Silo-2 to act as a backup for Silo-1. If Silo-1 collateralizes all USDtz in circulation (as does Silo-2), then Silo-4 is a source of coverage for Silo-1.

Just like 2-keys needing to be turned to launch missiles from a submarine, so too should Silo-1 and Silo-2 be of equal size before new minting of USDtz tokens is to occur. However, if the Trustees decide that USD Tez’s liquidity offering must grow at full speed, then they can decide to spend all available funds to recapitalize Silo-1 alone. This is because Silo-1 backing all USD Tez in circulation is the absolute minimum requirement.

Together at full-capacity, all 4 silos will be collateralizing USDtz 400%. This is the maximum reserve ratio allowable. After that, all other funds earned from baking and lending activities enter the surplus chamber, which we call the “Harvest.”

III. Surplus Collateral — ‘The Harvest’

At the end of each designated fiscal cycle — any growth earnings from the reserve management beyond 400% collateralization of the USDtz supply (i.e. when the 4 silos are already filled and we have extra earnings left-over) will be considered a surplus, which we call “the Harvest”

A surplus is what trustees intend on achieving. Without a surplus, the trustees cannot collect a profit (issued as a dividend through a smart-contract).

The trustees can decide to divvy the harvest in 3 main ways:

1. Mint more USDtz-tokens — equally distributing the surplus amongst the 4 different silos, maintaining equilibrium and growing the reserve size overall
2. Transact a dividend payment — issuing the surplus as a reward to the Trustees as early backers of the project
3. Earmark ecosystem projects — research and development should be conducted in a manner that does not disrupt the 4-silos of the Reactor Core, and thus should come from the surplus

If the Trustees are the ones to decide when to take a dividend for themselves, and when to grow USDtz-supply and thereby serve the USD Tez ecosystem, wouldn’t they just ultimately act out of greed and take a dividend always?

USD Tez has a trade-off measure installed that would force (an otherwise parasitic) greedy person to reconcile the broad-ecosystem interests before acting in a parasitic manner. This is the “400% rule.”

The 400% rule (or 4:1-ratio rule) is what balances incentives for the USD Tez trustees (Foundation and DAO)

Balancing the Trade-offs — the 400% rule in action

Here are some case examples which will illustrate the psycho-social economic games at work. These decisions would follow the governance logic of the Tezos itself as a model.

Assume the most extreme possibility: If the Trustees use 100% of the surplus to take a dividend and 0% for recapitalization (and 0% for ecosystem development), they will benefit financially at the moment, but the cost of that action is that they will preclude themselves from greater earnings in the future. The dividend they take is ultimately a function of the size of the reserve as a whole since it’s growth earnings from lending and baking that are producing the surplus.

Alternative: If the trustees who are tempted to take a dividend payment instead decide to use the surplus to entirely recapitalize the Reserve, enabling expansion of the USD Tez supply, they are opening the door for greater gains in the next fiscal cycle since the larger reserve would effectively mean a larger ‘principal investment’ size for future surpluses. Furthermore, to keep USD Tez competitive, the liquidity supply must be robust enough to meet demand, putting a further incentive on the Trustees to reinvest the surplus in areas outside of their own dividend payments.

‘Bob’ Example’— Bob is an individual USD Tez Trustee, about to vote on surplus distribution. The growth of XTZ was especially great that period and the surplus is 100% above the value of the full-reserve. If the full amount of the surplus is issued as a dividend, Bob alone would take a $1,000,000 dividend for that period.

Alternative— Bob considers that if that surplus amount were to recapitalize the reserve, perhaps by pouring all of it into Silo-1, then the amount of minted and issued USD Tez could potentially double. With an expanded market from the growth of XTZ’s price, this may be a critical juncture in which to take such a step. Not to mention, expanding the pot to play with, and taking a dividend next time around can leave Bob with a dividend of $2,000,000 on the flip side — something much less likely to occur if the surplus is accepted as a dividend alone right now.

IV. Filling the Reserve — from 1:1 to 2:1 to 4:1

The way in which USD Tez’s Reserve grows to meet full-capacity (400% collateralization over the amount of USD Tez minted and in circulation) is through a combination of growth activities. The Trustees are incentivized then to achieve 400% collateralization as fast as possible.

Filling the Base Layer — Silos 1 and 2

Automatically, Silo-1 will always be full from the start, as USD Tez may not be minted without an equivalent USD value in Silo-1. Silo-1 is not allowed to lose value relative to the amount of USD Tez in circulation.

The first goal then is to fill Silo 2, which will be a combination of growth activities. We can fill Silo 1 with another friendly-neighbor stablecoin; USD Coin, and accrue interest on it from our lending partners. The interest accrued will be exchanged for Tezos XTZ and set in Silo-2.

The Tezos XTZ in Silo-2 will then be baked using an equitable syndicate made from bakepool.org technology.

After Silo-2 is full, it should not be left to contain a value amount that is of lower value to Silo 1. Therefore, in the long-run, we should consider Silos 1 and 2 as equally full and keep them in harmony with one another.

The real pursuit then is to fill Silo-3 and Silo-4, respectively.

Filling the Growth Silos (Silos 3 and 4)

After the Base Layer (Silos 1 and 2) are full and assuming the price of XTZ remains the same through the duration of the growth period, the time to achieve full-capacity (4:1 collateral) can be projected by computing “doubling time”. In other words, we are at 200% collateral, and now we need to get to 400%.

N(t) = the number of objects at time t
Td = doubling period (time it takes for object to double in number)
N0 = initial number of objects
t = time

(Assuming, however, a major growth spurt in Tezos occurs after the Base Silos are full, the doubling time would be accelerated significantly by redistributing the newly over-collateralized Silo-2.)

Silo-3 will grow from a combination of growth-overflow from Silos 1 and 2. Once Silo-3 has been seeded with capital it can also help support its own growth to capacity from its own growth activities.

Once Silo-3 is full, a 3-pronged growth machine emerges to support the growth of Silo-4. Silo-4 will, therefore, be filled quicker than Silos 2 and 3 were filled. Silo-4’s growth will be seeded by growth activities from the FIAT silos (Silos 1 and 3), as well as from from the other XTZ Silo (Silo-2).

Additional growth activities employed by the Trustees to grow the USD Tez Reserve will increase ‘r’ thereby helping us achieve a lower doubling time Td.

Growth activities are rooted in “Savings & Loan” discussed in other articles.

Coming soon: USD Tez Whitepaper

To stay up to date on the USD Tez project and to participate in our discussions, you can visit the official USD Tez website:

USDtz.com

and join our social media channels:

Telegram — USD Tez

Twitter — USD Tez

USD Tez — Collateral² (squared) Model was originally published in USD Tez (USDtz) on Medium, where people are continuing the conversation by highlighting and responding to this story.

How USDtz tokens are made fully-backed and fully-redeemable

THE SYSTEM AND METHOD FIRST OUTLINED IN THIS ARTICLE HAS BEEN REFINED AND SUPERSEDED BY:

• USD Tez — Collateral² Model USD Tez (USDtz) stable-coin 4:1 [over]collateralization Model

I urge you to read the Collateral² article first, as a primary resource since many of the details in the article you’re currently reading have been updated since then. This article will remain listed on Medium for historical reference.

In this article, I’ll be explaining:

• How USDtz tokens maintain their redeemable $1 value
• USDtez’s collateralization method and pathway
• Other collateralization methods considered and dismissed
• How to earn interest on USDtez (better than a FIAT savings account)

USDtez’s promise is that every USDtz token can be redeemed for the value of 1 US-dollar. There are different schools of thought on how a stablecoin should approach secure collateralization, each with respective reasonings—philosophical, technological, financial, mathematical—and trade-offs pertaining thereto. What we propose is a solution that we believe achieves the best of approaches for users, backers, and most importantly, for the Tezos ecosystem at-large.

The knowledge that the stablecoin is collateral-backed in full provides assurance to users, and it is a key ingredient in maintaining stability for the stablecoin even in the wake of extreme market scenarios.

For example, in case of a bank run, triggered by a black swan event or another event reflective of catastrophic market scenarios, that all USDtez can be for US$1 dollar. Even if that amount were to be paid directly in XTZ, the XTZ must be worth the USDtez equivalent.

What a stablecoin needs to avoid is ending up like George Bailey (see clip).

Or, if you prefer (as I do), the Simpsons parody.

The USDtez Counter — The 1-1 Stability Guarantor

Although USDtez will be available for purchase across many exchanges, the USDtez Foundation will offer a central Counter (as in ‘over-the-counter’ sales) for users to buy and sell USDtez for the corresponding redeemable $1 amount that will ensure the stability of the coin. That way, even if the price slips underneath $1 on one particular exchange or another, that difference will not last very long as someone will notice the arbitrage, buy the USDtez for cheap, and then sell it to the USDtez Counter for a profit, thereby restoring the equilibrium.

The duty of the USDtez Counter is to be capable of redeeming USDtez with full solvency and to do so even in the case of extreme market conditions. Every single USDtz token sold must be redeemable for $1 (USD), even if all USDtez owners suddenly showed up to bring 100% of their tokens to the Counter for redemption. Period.

Methods of Collateralization

I will explain 2 different collateralization options considered, followed by an overview of the USDtez approach.

Method 1 (we rejected) — Pure FIAT collateralization

First, we considered pure FIAT collateralization. This is most closely associated with models such as Tether (USDT), USD Coin (USDC). The easiest and most concrete way full collateralization can be achieved, no matter what happens to the price of XTZ, is by settling all exchanges for the initial USDtz-tokens for FIAT and keeping that money in a secure FIAT account.

With a 100% FIAT account, even if on day 1, USDtz is issued, and then on day 2 the price of XTZ crashes 99%, and even if 100% of initial USDtez holders now suddenly want to buy XTZ, there are full FIAT reserves available to do that. Effectively, keeping 100% of reserves in FIAT is like shorting the crypto-asset being addressed.

However, even if the price of XTZ raises, 100% of USDtz is still covered because the only amount minted has been the amount accepted for USD.

Although this sounds ideal, therein lies the trade-off; if the price of XTZ raises, no matter how much it raises, USDtz will only be 100% collateralized; it would be very difficult to adequately grow to keep up with demand; no further USDtz would be able to be minted.

Pros of Pure FIAT Collateralization

• XTZ-price impervious solvency
• Can collect interest from custody partners

Cons of Pure FIAT Collateralization

• Reserve does not grow with the price of XTZ
• As XTZ gains in price, liquidity potential shrinks
• No XTZ staking; hurts, doesn’t help the Tezos network

Method 2 (we rejected) — Pure Crypto (XTZ) collateralization

We then considered collateralizing in pure XTZ. This is closer to projects like DAI (DAI). To some, there is a purism of pure crypto-asset collateralization. In this method, the stablecoin is pegged to the underlying cryptographic asset (in this case, Tezos XTZ), reformulating value associations as the price of the underlying asset changes.

If the stablecoin project is bullish on the underlying asset, and if those bullish sentiments can be assumed to be realized in the future, then would be the best option. Pure crypto collateralization effectively takes a long position in the underlying asset.

For example, assuming the price of XTZ is $1.00, and 100,000,000 USDtz could be sold for 100,000,000 XTZ, with 100% of USDtz collateralized. If the price of XTZ then moves to $10, then USDtz becomes 1000% collateralized.

Overcollateralization of any type is a surplus and opens up great options. With an overcollateralized amount of USDtz in circulation (owning more XTZ than needed to back it) the Foundation could then choose to mint more USDtz, enabling the asset to grow with the market and maintain its service as a liquidity instrument. It could also choose to expand operations by investing in Tezos-based projects, or offering grants to worthy projects. It could move assets to other financial growth vehicles such as an autonomous fund that would diversify the USDtez portfolio and grow the reserves in other ways as well. Finally, it could offer some of the surplus funds as a dividend to early backers.

The problem with this option is, that the price of XTZ is not guaranteed to go up after the point of minting, and if it goes down immediately, then the USDtez ends up undercollateralized. Returning to our example, if the price is cut in half to $0.50, and then every USDtez buyer would rejoice! They did a brilliant thing. They shorted XTZ at the perfect time, and now the price of XTZ has been cut in half. Their next move is to come to their exchange or the USDtez Counter and buy XTZ twice the amount of XTZ that they sold yesterday. If we assume 100% of USDtez buyers returning on day 2 to buy twice the amount of XTZ they sold on day 1, then USDtez would only be 50% collateralized.

The only main way to get around this is to start charging fees and/or restricting liquidation/redemption options on users until the Counter becomes solvent—the mechanisms for which are triggered through some algorithmic process which incorporates price movements and collateral supply. Doing so however chips away at the stability of the price, as the immediate value of USDtez goes down while the cost of owning it may go up. MakerDAO/DAI has been facing this problem. Users become hesitant to use the stablecoin as the option, exchanges are forced to start selling it for less than a dollar, and without the central Counter able to redeem the value, arbitrage traders won’t work to maintain the equilibrium (the whole thing unravels).

Hybridization can be a good reconciler. If the reserve held full FIAT to back all of the USDtez issued and then held an overcollateralizing amount of XTZ, we could have the best of both worlds.

Under the full-crypto collateralization method, hybridization should only be achieved from a (wishful) scenario. For example, if on Day 2 the price of XTZ goes up to $2.00, at which point 50% of the 100,000,000 XTZ (worth $200,000,000) can be liquidated for USD FIAT. That way, XTZ becomes double-collateralized in both $100,000,000 FIAT (most secure) and 50,000,000 XTZ. Then, even if the price of XTZ returns to $1.00, and thus only $25,000,000 (or 25%) of the 100,000,00 issued USDtz can be covered through XTZ collateral, that’s okay because there’s still enough FIAT in the bank to achieve 125% collateralization overall.

If however, the prize of XTZ falls on Day 2, the token would be under collateralization and liquidation, of course, cannot be afforded.

In other words, collateralization of a stablecoin is a zero-sum game. There are no prizes for ‘near’-full collateralization nor for minimizing the blow of under-collateralizing market movements. Thus it’s better to err on the side of caution.

Pros of Pure Crypto Collateralization

• Purist-friendly as all assets are on the blockchain
• The highest growth potential of any method
• Could lead to a quick hybridization of collateral

Cons of Pure Crypto Collateralization

• An extremely risky way to start
• Only works if the price of XTZ grows from the start

Method 3 (WINNER) — Organic Growth Collateralization

Double-backing (hybridization) of collateral methods must be the end goal, to get the best of both worlds without the sacrifices. However, it would be unnecessarily risky and irresponsible, to begin USDtez reserve with pure-XTZ collateralization, no matter how bullish we are when it comes to XTZ (and we are extraordinarily bullish on XTZ).

Assuming 100,000,000 USDtz tokens are minted, USDtez will source a $100,000,000 US dollar backing by creditors, to be used in case of a bank run. Like any loan or mortgage, this line of credit is a calculated risk by the lenders, who would need to see both another form of collateral as well as a means of income to pay interest premiums (if it ever comes to that).

However, we will not convert any of the lent FIAT into XTZ for baking. The intent of the FIAT option is that it remains static and ideally untouched so that even if the price of XTZ drops 99% in 1 second followed by all USDtez owners coming to the Counter to redeem their holdings, should they choose to immediately exercise that right, we’d be guaranteed to meet that demand.

Rather, every USDtz token sold, for whatever medium of exchange used, must settle into a 100% XTZ reserve. All XTZ accumulated and settled from that sale will be baked, and will achieve an annual return of the blockchain minimum; at least—5.51%.

Conservatively estimating, if the ꜩ100,000,000 XTZ reserve baking activities return 5.51% growth annually, and assuming that the price of XTZ remains the same, a lender could assume that the USDtez Foundation can pay interest at the rate of $5,510,000/year. Of course, if the FIAT credited to the USDtez Foundation isn’t touched, then any account fees are relatively negligible then the $5,510,000 can be used to initiate the internal USDtez FIAT reserve, which would reduce the amount of credit needed to be made available from the would-be lender. Over years of compounded interest, and accrued rewards liquidations, the internal FIAT reserve can replace the credit account entirely by around 10 years.

Though, this is a highly conservative estimate. More likely the rewards rate of XTZ will hover around 7%, which will expedite the process (though there will be other divisions of returns such as labor expenses and backer rewards). Furthermore, if the price of XTZ reaches $3.00 at any point (which is not a terribly speculative assumption when it comes to how cryptomarkets behave), a full FIAT collateralization could be achieved and the baking rewards can be used for other activities that will benefit the overall ecosystem.

Some may ask, “why $3.00?” “Why not liquidate when XTZ reaches $2.00?” Although immediately selling off half of the XTZ reserve after the price doubles, would achieve double-collateralization immediately, doing so would not be a very insulated action. Once again, it’s better to err on the side of caution. So, we will set a threshold for FIAT liquidation at the point to the time in which the XTZ reserve has achieved 300% over-collateralization of the USDtz minted (or $300,000,000 value, independent of the FIAT on credit).

In the case of our example, at this trigger point, XTZ will have reached a $3.00 price, and 1/3rd of it will be liquidated to amount to $100,000,000 in USD FIAT. the remaining XTZ will continue to bake with the intent of achieving ever-growing collateralization. The FIAT account lent by the creditor will then be redundant and unnecessary. Instead, banking operations will begin for the FIAT on hand.

Pros of Organic Growth Collateralization

• We safely start with 100% shock-immune collateralization from Day 0
• 200% backed ‘dual-collateralization’ on Day 1 point-of-sale
• Future minting potential grows with market price and volume
• Credited FIAT is replaced by internally earned FIAT

Cons of Organic Growth Collateralization

• Secondary collateralization layer is not on-chain (but that’s okay)

FIAT reserve lending and other banking activities, however, can only be presumed if it can be determined that the FIAT needed to collateralize the issued USDtz won’t be redeemed for a given period of time (the time needed to lend the FIAT and collect a reward). To accomplish this, rather than buy-back and slash (destroy) the USDtz tokens to reduce the supply needed for collateralization, a better way (and a more rewarding option for users) will be the offer of a savings-like account for USDtez holders.

USDtez Savings — Earn interest by holding USDtz

We’re also introducing a new feature for USDtz holders. Obviously, USDtez will be used frequently by investors who want to move to a short position with their XTZ. Though, if a USDtez holder is a truly bearish investor (one that sees a long-term decline in XTZ of months or years) instead of simply holding USDtz until one chooses to move to a long position again), the USDtez holder can open a savings-like account with their USDtz and collect 3% annual interest yield. Given in the form of a smart-contract, the USDtez Savings offering performs is far better than the typical bank CD rate (as can be seen in the chart below).

USDtez’s Savings program offering will be paid by revenue collected. Part of this revenue will come from in part by lending FIAT, and in part through XTZ baking rewards. The high rate of return with no minimum is another way in which USDtez holds an advantage over FIAT. The USDtez Savings holder can opt for various term-periods that accrue different reward rates. As you may have guessed, a better return rate is awarded for a longer period of lock-in.

Once the USDtez Savings smart-contract matures, and after all pertaining transactions are triggered and completed, the smart-contract recognizes this, and it ends the term of duration. Everyone goes along their merry way.

The benefit to USDtez Foundation for issuing this financial instrument is that in aggregate, USDtez Foundation will know with certainty for some period of time, just how much USDtz will not need to be redeemed. Knowing with guaranteed certainty how much USDtz will not need to be redeemed for a given period of time, frees up the corresponding collateral funds for financial activities that would bring growth to the reserve.

The USDtez Foundation may also issue bonds or other asset-backed derivatives in the future. The choice to do so would be a tradeoff between simplicity vs. faster growth plus more growth options. Eventually, these decisions will be resolved democratically by a distributed network; they will be proposed and vetted by the presiding participants of the DAO. Details on the DAO and participation will be forthcoming.

More details will be added soon. We plan to publish at least one article a week in the lead-up to the release of the white-paper, followed by the release of the [more technical] green-paper.

Stay tuned.

How can I continue to follow the project?

Go to USDtz.com to sign up for the USDtez mailing list. You can also follow us on various social media channels, including:

• Telegram
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Collateralizing the Tezos Stablecoin was originally published in USD Tez (USDtz) on Medium, where people are continuing the conversation by highlighting and responding to this story.