UXD Launches on Sei: Decentralized Algorithmic money that fixes the problems of Terra’s UST
By Jeff Feng, Co-Founder of Sei
In the context of the current bear market, both users and builders in the crypto space have had a rare moment to catch their breath. It’s becoming increasingly clear that, as token valuations return to less euphoric levels, incumbent L1 projects such as Solana and Near are facing new and very real headwinds.
As builders look towards 2023 and beyond, the focus is often placed on their current chain’s sustainability, direction, and product market fit. All this coupled with attractive new opportunities in the space, is leading to an ecosystem shakeup behind closed doors. For many teams, the pressure of building in public rarely allowed time to pause and question their direction. In quieter times, larger changes of direction are possible, and these conversations are likely to emerge from stealth before long.
dYdX leaving the Ethereum ecosystem and becoming a sovereign IBC blockchain was a watershed moment for Cosmos. The announcement was unprecedented, especially considering that dYdX is one of the largest trading apps on Ethereum in terms of fees, volume, and community size.
This has seen many eyes turn to Cosmos, the internet of blockchains from elsewhere, along with new opportunities in the form of Aptos, Sei, and Sui. These upstart L1 chains have the beneficial position of learning from the UX and ecosystem development mistakes of previous L1s, with no tech debt or bull market investor hangovers.
The first major team to announce they are making the jump from Solana to build on Cosmos is UXD, the foremost Solana-native stablecoin. UXD has a $15M market cap. With the promise of greenfield ecosystems and new investment, and spurred on by dwindling interest in the previous class of “alternative L1 chains”, the Sei team are anticipating many similar announcements in the months ahead.
Why are stablecoins important/necessary?
Stablecoins are cryptocurrencies designed to maintain a peg with another currency, asset, or financial instrument. They are most commonly used as decentralized analogs to FIAT currencies, such as USD, EUR, and GBP. This provides traders a more “stable” alternative to historically volatile assets like ETH and BTC.
The vision is simple, decentralized finance requires decentralized currencies. As crypto is still an emerging market, volatility is to be expected and perhaps even welcomed. However, there must exist an on-chain alternative to “stable” FIAT currencies to act as trading pairs on DEXs and as a means to store capital long-term. Without a secure, capitally efficient, and decentralized stablecoin, it will be extremely difficult to onboard institutional and retail capital. Solving the stablecoin dilemma is paramount to crypto’s survival and success as our industry matures.
$UXD and $UST
$UXD is a fully collateralized decentralized stablecoin backed by delta-neutral position using derivatives. UXD Protocol accepts crypto assets, like ETH, and uses the deposits as collateral to short a ETH-USD perpetual contract of equal size. Hence the long ETH spot is balanced by the 1x ETH-USD short. The cumulative value of both the long spot and 1x short positions will always be $1. Due to $UXD’s delta neutral position, $UXD is much better insulated from the price movements of its collateral. If the price of $UXD becomes unpegged in either direction, arbitrageurs will arbitrage the price of $UXD back to the USD peg for riskless profit. This two pronged approach results in a more resilient stablecoin than overcollateralized stablecoin strategies.
$UST was an algorithmic stablecoin that attempted to maintain a peg with the USD dollar through a “mint/burn” mechanism that was intended to encourage arbitrage. $UST was the stablecoin offering from the Terra ecosystem, which was represented by the $LUNA (now $LUNC) governance token. Terra allowed users to swap LUNA and UST at a fixed price of 1 $UST = $1. This meant that traders were incentivized to arbitrage the price of UST back to the peg by minting/burning to alter the circulating supply of $UST. Increasing supply when $UST is trading above $1 and decreasing supply when it’s trading below $1. LUNA’s crash in May 2022 was a high-profile crypto catastrophe, wiping out an estimated $2 trillion in value (source). In spite of UST’s failure, stablecoins still have an undeniable product market fit in decentralized finance and all of Web3.
$UXD is the antithesis of $UST. It is a decentralized delta-neutral stablecoin with an efficient buy-and-burn mechanism, this makes $UXD much more resilient and peg-stable. $UST’s fully collateralized stablecoins are always redeemable for 100% of the underlying assets even during a “bank run” scenario like with $UST.
UXD has recently announced that they will be scaling to the Cosmos ecosystem by deploying on Sei. Sei is the fastest L1 blockchain and it is DeFi-specific. Sei offers multiple DEX optimizations, such as its built-in order matching module, the fastest finality in web3, and MEV prevention via frequent batch auctioning. This native stablecoin integration will provide a stable unit of value for Sei users.
About Jeff Feng
Formerly of Coatue Management and Goldman Sachs, Jefferey Feng is the co-founder of Sei Network. Feng is a long-time resident of San Francisco, and a frequent collaborator with Jay Jog, having partnered on multiple ventures prior to Sei- the Layer1 that gives traders an unfair advantage.
About Sei Network
Sei is the first sector-specific Layer 1 blockchain, specialized for trading to give exchanges an unfair advantage.