Cypherpunk Stablecoin RAI is Live on Ethereum

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Rai, a stablecoin for decentralization purists, is now live on the Ethereum mainnet. It’s not pegged to fiat, it’s not backed by fiat, and it’s designed to run completely by computer programs. If it had a physical bill it would carry the inscription, “in code we trust.”

RAI is an asset backed only by ETH ––unlike most other stablecoins which are backed at least in part by central bank-issued currencies–– and programmed to maintain its own price stability without needing to peg to an external price reference like the USD. It relies on an algorithm to maintain stability, and is designed to work with minimal governance or human intervention, which is why its creators at Reflexer Labs refer to it as a Money God.

RAI tackles what may be a contradiction in the DeFi ecosystem, where despite the communities’ mistrust for fiat currencies and work towards permissionless network, fiat-backed stablecoins have become the backbone of the emerging financial system. DAI used to be the one exception when it was only backed by ETH, but that ended in November 2019 with the introduction of multi-collateral DAI.  RAI wants to become the truly decentralized and uncensorable alternative 

Global Reserve Asset

RAI’s initial goal is to become an alternative to pegged-coins for use in DeFi as collateral and as a stable reserve asset. With time, its builders hope RAI could also become “the Ethereum Standard — a native unit of account for the Ethereum ecosystem,” wrote Ammen Soleimani, a Reflexer Labs member, in a post titled “A Money God RAIses.” But long term ambitions for RAI are even larger.

If RAI fulfills its purpose within DeFi and starts to earn global adoption, it could “bring credible neutrality to the administration of a stable global reserve asset, a global public good,” Soleimani wrote.

RAI, a fork of  Maker’s Multi-Collateral DAI , had over 28k of ETH locked, generating 7.4M of outstanding RAI at the time of writing, according to stats.reflexer.finance. With a current market price of $3.42 (and a redemption price of $3.14) the asset’s total market capitalization is $16M.

But according to RAI’s mechanism, its dollar-based price doesn’t matter. The asset is meant to be pegged to itself, so that 1 RAI = 1 RAI.

Ungovernance Token 

Reflexer Labs plans to announce its liquidity mining program for the RAI/ETH Uniswap v2 pool, and the “Reflexer ungovernance token,” FLX, in the next couple of weeks.

“In the meantime, we’re not saying that there will be retroactive mining rewards for the initial cohort of RAI/ETH LPs, but we’re also not saying there won’t be,” the project’s blog post said.

Works Like a Spring

To achieve relative stability RAI starts out with an arbitrary initial target price, which is also its redemption price. When RAI’s market price deviates from its target price, its algorithmic controller automatically sets an interest rate to proportionally oppose the price move and incentivize people to return RAI to its target price. 

“It works kind of like a spring: the further the market price of RAI moves from the target price, the more powerful the interest rate, and the greater the incentive to return RAI to equilibrium,” Soleimani wrote.

The protocol uses something called a PID Controller to stabilize the asset. A PID controller is a control loop mechanism which is widely used in industrial processes combining three functions to maintain a certain value. For example, a car’s cruise control function is a control loop mechanism in that an engine must output different amounts of power to maintain a constant speed as the vehicle goes up and down hills.

Redemption Rate

While an interest rate is a close analogue, the protocol employs something called a “redemption rate” as the variable which its PID controller acts on.

RAI has both an open market price and redemption price. The latter is the rate at which RAI can be redeemed for locked ETH within the RAI protocol. If both prices are the same the system is in equilibrium.

When the market price is greater than the redemption price, the control mechanism kicks in, continuously increasing the redemption rate of RAI. 

The increase in redemption rate incentivizes those with locked ETH (RAI borrowers) to now buy RAI, as their positions have become more expensive to close. This theoretically will bring RAI’s market price, in line with the redemption price. 

This balancing act works in the opposite direction as well, if the market price of RAI goes above the redemption price, the redemption rate will go negative. Now, the protocol has incentivized RAI holders to sell as a lowered redemption price functions as a defacto negative interest rate. At this point the market price should match the newly lowered redemption price.

Global Dreams

A semi-stable crypto asset unbeholden to any nation’s monetary policy can be an accessible solution to a macroeconomics problem called the Triffin Dilemma.

The Triffin Dilemma entails the potentially contradictory incentives which arise when an asset, like the USD, serves both as national currency and for international reserves. The currency’s controllers must both curb inflation at home, but also respond to demand for international liquidity. The monetary policies needed to achieve these goals are often misaligned. 

RAI, with its aim to cement its status as an algorithmically controlled “Money God,” would free  any nation’s currency from this dilemma. 

Reflexer Labs last week announced its $4.1M funding round led by Pantera Capital and Lemniscap, while other investors including MetaCartel Ventures, The LAO and at least two former MakerDAO team members. The round follows a $1.68M raise in August, which was led by Paradigm, with participation from Standard Crypto, Compound Finance founder Robert Leshner and Variant Fund, from a16z alum Jesse Walden.

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