Protocol XYZ

Overview of the mechanics and balance sheet of the protocol

The protocol aims to provide a truly scalable decentralized stablecoin solution that will meet its security requirements at any level of scale. For this purpose, two of the main previous economic designs for collateral and risk management, namely Fractional Reserve Seigniorage and Overcollateralized Lending, will run in parallel and work together as the core components of this new stablecoin model.

To provide the necessary backing guarantees and achieve sustainability, the Debt accrued through the Seigniorage minting process needs to be balanced with the Credit acquired through the Money Market lending activity.

The Overcollateralized and the Undercollateralized models have already started to converge, together they compound their synergies and complement each other's weaknesses:

• With the arbitrage opportunity provided by the Seigniorage minting process, the Overcollateralized design finds its solution to the positive depeg risk for borrowers (as Maker's PSM conceptually shows).

• Seigniorage's induced Equity price appreciation, during phases of economic expansion, resolves the conflict of interest regarding protocol adoption between the user base and the governance of Overcollateralized stablecoins.

• By framing the future payments of Interest Rates owed to the Money Market and its future cash flow, effectively, as collateral for Seigniorage's debts the protocol achieves capital efficiency while simultaneously solving the Undercollateralized design's security issues at scale.

Overcollateralization's inherent capital inefficiency represents an obstacle to growth, 100% is the correct collateralization target that needs to be always guaranteed, transparently verifiable on-chain and completely redeemable in any moment or situation. Covering the protocol's debt with the money market's credit or future cash flow achieves that. The debt of the protocol will only be allowed to grow up to the extent offset by credit, organically obtained through the lending activity. The lending activity will be stimulated and incentivized, without the need to resort to negative interest rates, through the accommodation of favorable borrowing conditions accordingly to the protocol's debt status. Novel dynamics, such as MCRs and DCRs, will allow the protocol to dynamically rebalance the requirements for both Seigniorage minting and CDP's Loan to Value scores (LTV) throughout the cycling of its economic phases. Collateral will be allocated in the protocol's balance sheet and directed either to the Money Market or to Seigniorage, according to its intrinsic volatility and Δ natural strategies will be adopted to favor the shift from centralized collateral to decentralized collateral. The protocol will seek to accumulate and store excess collateral beyond the 100% collateralization target into a Recollateralization Reserve (RR) and utilize a % of these funds to apply speculative strategies to directly profit from its monetary policy regime change and equity's "forward guidance" to promote and compound protocol growth and profitability for earnings sharing.

The schematic above gives us an overview on how the various moving parts of the protocol rebalance throughout the different phases.

Let's go through some of the core dynamics: 1 (risk on) - As we have already said, the protocol covers Seigniorage liabilities or Debt (PUC) with Credit (ePOC) coming from future lending profits. The first thing to note is that, during an Expansion Phase, Debt is only allowed to grow, through a decrease in MCR, when borrowing demand and protocol's credit and profitability organically grow. If the Debts of the protocol (PUC) are catching up with Credit (ePOC) MCRs are raised and the protocol stops accruing Debt because the Seigniorage stops burning the Equity for new mints.

2 (risk off) - When the selling pressure forces a Contraction Phase, the protocol exercises its Credit (ePOC) from the Money Market through IR hikes and, also, deploys RR to contract protocol's Debt.

3 - Collateral requirements in the Money Market (DCRs) change dynamically to respond to different economic conditions and follow Debt expansion/contraction phases.

4/4 - The protocol speculates over the price swings of its equity token caused by the Seigniorage mint/burn process through the cycling of each economic phase with a % of its RR. This way we achieve: Security: The protocol is solvent and focuses on keeping its emissions at least 100% collateralized under any circumstance; The Stablecoin is safeguarded against both depeg scenarios (positive and negative depegs) and its supply is able to fully contract, at any time, to meet any degree of possible demand destruction; Peg stability will be increased by the depth of Protocol Owned Liquidity (POL) stored in AMOs. Scalability/adoption: The incentive structure is aligned for growth and adoption for both equity holders and LPs; Seigniorage solves the "governance vs users" conflict of interest; Profitability: The utilization of the Money Market's future cash flow to back the Debt of the protocol unlocks capital efficiency; The profitability of the protocol is also compounded by all the different strategies and income sources that run in parallel, such as AMOs, Lending, Positive carry Δ neutral positions on L1 tokens, Swing trading the equity price momentum, etc.