The stablecoin project Resolv has launched spot trading.
It's very popular, and many people may have already heard of this project.
It was actually announced on April 16 that it had raised $10 million in seed funding, meaning there may be more financing in the future.
Let's talk about the project's situation and the logic behind its stability as a stablecoin project.
First of all, let me explain that Resolv is essentially a stablecoin protocol.
Stablecoins are actually a project that guarantees profits, as historically, almost all stablecoins that can maintain stability have higher annualized returns.
Many project teams or institutions actually want their own stablecoin, like Binance's previous BUSD.
In fact, whether a stablecoin project is reliable can be judged by whether the logic behind maintaining stability is feasible.
--How have stablecoin projects in the market performed?
Before understanding Resolv, let's take a look at how some well-known stablecoin projects have operated over the years:
A relatively famous one is LUNA, which is also a stablecoin project. Many people held Luna during the last bull market.
The result can be described as a complete loss, and in the end, the project team compensated by re-airdropping LUNA. It cannot be said to be worthless, but at least it has shrunk by 99%.
LUNA is actually a failed dual-token model, where the LUNA project has one UST stablecoin and one LUNA project token.
The logic behind the project is to use the tokens of the project itself to endorse its stablecoin, maintaining a 1:1 ratio with the US dollar.
If UST becomes unpegged, that is, when the price of UST is lower than the US dollar, they will choose to issue more LUNA, then sell the issued tokens to let the entire market together pull UST back to a 1:1 stable ratio with the US dollar.
If the price of UST exceeds $1, the project team will destroy LUNA to raise the price of LUNA, thereby maintaining a dynamic balance.
This is the issue of self-endorsement; during a bull market, when many people buy your project token, you may become more prosperous, accumulating more funds.
But in a bear market, LUNA is just air because all coins are falling. LUNA continues to drop and cannot guarantee the stability of UST, so they keep issuing LUNA, which leads to the continuous dilution of LUNA's value, ultimately falling into a death spiral and collapsing.
Another one is USDUAL. This project is also a stablecoin project.
The project team is led by a former French finance minister, and they chose to use government bonds, specifically U.S. government bonds, to endorse the stability of the project's stablecoin.
In theory, this endorsement method should be very stable because the volatility of government bonds is quite low, but the risk of this project lies in whether its off-exchange institutions are stable and can facilitate timely redemptions.
--RESOLV, and today we will introduce the Resolv project.
It uses a delta-neutral investment portfolio as its stablecoin protocol.
Its endorsement logic relies on the cryptocurrency space itself, not on external government bonds or uncertain risks from off-exchange institutions. Also, it differs from LUNA as it does not rely on itself.
He uses shorting ETH to endorse himself.
For instance, when ETH rises, it doesn’t matter.
For example, if a user deposits $1 million, they will immediately convert $1 million into an equivalent amount of ETH, and then short the ETH.
If the price of the coin rises in the future, then it doesn't matter; they can short and sell ETH to meet the demand for redeeming $1 million. Users can redeem at any time.
If the price of ETH drops later, due to the existence of short positions, users can obviously redeem at any time.
This is actually a hedging logic, always keeping the project team's asset amount equal to $1 million. Users can redeem at any time and be fully paid.
Currently, there are many financial solutions for short hedging in cryptocurrency derivatives, and the returns are quite stable, generally above 5% annualized.
This is actually the simplest fundamental logic of this project. However, this logic does have loopholes; the project team uses shorting ETH as a hedging plan. If it's a 1x short, there is no problem, and stability can be maintained.
But if that's the case, the returns they can obtain would only be those few annualized points from the funding rates, and they still have to share it with the staked users.
Given that the project team has put in so much effort to earn only a little, it is clearly not possible. So in reality, the project team is not shorting at 1x; in fact, we can see from this chart that they are shorting at around 2.5x.
This multiplies the risk; once ETH experiences an extreme surge, the project team will definitely lose money. Even if their smart contract is well-written, it is not easy to maintain the stability of UST.
So how does the project team operate?
In fact, this project has two tokens, one is USR, this stablecoin, and the other is RLP, the project token. They regard RLP as a second line of defense; once there are extreme market conditions, and they are losing money on shorting ETH, and the funding rate is not enough to cover the losses, they will use RLP to bear this risk.
So in the entire stablecoin project, USR exists as a stablecoin. You can use USDT, USDC, and other coins to mint USR, then stake USR to earn returns. At the same time, RLP, as the second line of defense, can also be staked to earn returns.
According to the logic of this stablecoin protocol, RLP is obviously riskier, so if I were a project team, I would also offer higher returns for staking RLP.
From this perspective, the logic of maintaining the stablecoin's stability in the entire project itself is not too problematic, sufficiently ensuring the operation of the stablecoin USR.
However, since it is based on shorting ETH, if you want to short, you have to do it on an exchange, which brings about the risk of exchange bankruptcy. The measures the project team proposed are three.
The margin for futures positions will be held by a self-regulated third-party custodian outside of the exchange.
Use the RLP project token to compensate for the amount needed to achieve returns.
Use more diversified exchange exposure to cope with the risk of a single counterparty.
The first measure protects your staked principal, the second measure compensates for your staking interest, and the third measure will also try to minimize our staking yield loss.
In summary, the project team is quite mature. The delta-neutral investment portfolio and the fundamental logic behind the project are sufficient to maintain a hedging arbitrage working model.
There are also external factors to consider: exchange platform failures, negative financing rates in the market, massive liquidity withdrawals, and these main risks, along with comprehensive countermeasures.
So, in the short to medium term, this project is quite good, with no logical loopholes and can properly handle external risks.
In summary, the cryptocurrency space, as a relatively new financial direction, has many opportunities and many good projects, but it also comes with many risks. I must emphasize that investment carries risks, and one should be cautious when entering the market!
I am WeCoin's Wu Yanzu, wishing everyone wealth during the bull market!!
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