1. Summary

There are already various stablecoin models in the market, including the fiat currency anchored model represented by USDC, the digital asset pledge model represented by DAI, and the algorithmic stablecoin represented by AMPL.

USDT is a stablecoin backed by the US dollar, a centralized asset, and DAI is a stablecoin pledged by assets from other systems. Those dependent on other economic systems are not blockchain-native stablecoins.  AMPL is a blockchain-native currency, but its expansion and contraction is based on prices fed from centralized information sources. Since its price has fluctuated dramatically, many do not consider it to be a true stablecoin. Ampleforth themselves also do not claim themself as a stablecoin, instead they call themselves a more stable cryptocurrency than BTC. The market lacks a blockchain-native, true stablecoin.

Daollar is the world’s first truly central bank algorithmic stablecoin protocol native to the blockchain economy. We aim to make DO a foundational component of the DeFi world.

This white paper will discuss Daollar’s model. 

 

2. Daollar Protocol

Daollar protocol, through a smart contract algorithm to automatically expand or tight currency supply to maintain price stability. At the same time, a U.S. dollar-backed stablecoin, pegged by Daollar protocol and pledged ROC can be exchanged on chain.

Daollar is managed by ROC holders. ROC holders community can conduct the community governance for Daollar protocol, thus ensuring the stability, transparency and efficiency of the protocol.

The DO Stablecoin

DO is the world’s first central bank algorithmic, fully onchain governed stablecoin protocol with its own blockchain economic system. The issuance of DO is entirely based on smart contracts and is completely decentralized. DO is issued by the Roxe Chain Foundation Limited.

3. The price stabilization mechanism

Target price

DO (‘DO’ defaultly refers to doUSD in this whitepaper) has a target price range of +/- 1% of $1. The supply and demand adjustments driven by smart contracts endeavor to have the price remain within this band on decentralized exchanges (DEXs).

Stability Threshold

When market supply and demand dramatically change, normal self-adjusting market actions cannot maintain a stable price for DO. When the price fluctuation exceeds +/- 5%, smart contracts are triggered to intervene in the liquidity of DO tokens and initiate expansion and contraction procedures.

Roxe Reserve and Stabilizer

Roxe Reserve (“RR”) is a set of smart contracts that is used to reserve roUSD, ROC, DO, and to implement DO issuance and price stability. RR is managed by the Roxe Chain Foundation. 

The Roxe Chain Foundation will contribute 5 billion ROC tokens. RR will reserve 100% of roUSD at the launch and will reserve no less than 80% of the total DO issuance of roUSD after launch. As the Roxe Chain economic system grows and ROC completes its 100% public offering, the expectation is that community will ultimately vote to revise the percentage of roUSD in the RR. 

The number of reserved and pledged ROC (at the average issue price) should be no less than twice the total amount of issue of the DO.

The execution of the RR cannot be controlled manually. No institution or individual can manipulate the assets. After the community vote, the private key of the RR wallet will be given entirely to the community. 

The roUSD Stablecoin

roUSD is anchored 1:1 with USD or an trustworthy stablecoin. For each roUSD issued, an equivalent amount of U.S. dollars are deposited in a bank or trust company OR a trustworthy stablecoin is pledged, with the price of roUSD constantly equal to one USD.

 

4. Issuance mechanism

Daollar’s operating mechanism relies on the combined action of three tokens: DO, ROC, and roUSD. Value can be transferred seamlessly between these three tokens. 

DO Issuance 

DO issuance adopts a dual-asset guarantee, and there is only one method to issue DO: RR with ROC, or users, who hold ROC after the public offering, can receive issued DO by pledging twice the amount of  ROC. The pledged ROC will be deposited in the RR, and the RR will reserve no less than 80% of roUSD as a reserve fund for those DO. roUSD in RR is from the sale of ROC or the sale of DO. Users can also purchase DO from intermediaries or exchanges.

The pledge formula of ROC and DO:

N=2/V

N is the number of ROC needed to issue one DO in the current issuance cycle, and V is the weighted average issue price of the ROC. For example, if the average issue price of a ROC is $10, a DO can be issued by pledging 0.2 ROCs, and if the average issue price of a ROC is $20, a DO can be issued by pledging 0.1 ROCs. The ratio of pledged ROC and issued DO will be changed as the average issue price changes, and the new issuance ratio will be adjusted and implemented only on the next day after a new issuance.

ROC Issuance

Roxe Cash, known as ROC, is the only governance token of the Roxe Chain and is the only ecosystem token for the applications run on the Roxe Chain.

ROC comes with its own smart contract, with an initial issuance of 10 billion tokens. There is no cap on the total issuance amount. 

5 billion are injected into the RR.

The Foundation’s initial issuance of 4.1 billion of the total 10 billion will be allocated to strategic investors, development partners, and ecosystem partners.

The Foundation will retain 900 million ROC tokens for the developer community and ecosystem construction. 

 

Any allocation to partners and any allocations to the developer community, will be subject to a lock up period and restrictions on secondary market sales.  These ROC can only be sold as a tag along offering in conjunction with a public offering by the RR for a portion of its 5 billion allocation. The total amount of tokens offered in any tag along offering by these recipients of initial issuances cannot exceed 20% of the public offering by RR.  Once RR has publicly offered all of the 5 billion ROC initially received, the lock up period for any remaining ROC held by partners, or any developer community recipient expires automatically.  In the event that RR fails to publicly offer all the 5 billion ROC, the lock up restriction continues indefinitely.        

With the exception of the initial offering price ($1 USD), the price of each specific public offering of ROC is determined by the market. The target price for the initial issuance of ROC by the Roxe Chain Foundation is $1.00 per token.  

Following the initial offering by the Roxe Chain Foundation, RR cannot conduct a public offering of any portion of its 5 billion ROC unless the average price of ROC in the 72 hours preceding the public offering was 5% more than the price of the most recent public offering.  

ROC has no private placement or private sales. 100% of ROC will be placed in the secondary market via smart contracts. 

Minting:

Anyone can pledge ROC to generate DO. Minting is free.

Redemption:

Only the pledgee himself has the right to redeem the pledged ROC with the same amount of DO. A 0.3% fee is charged for redemption

DO is issued according to the fixed number of ROC pledged regardless of the current market price of the ROC. The price increase of the ROC cannot increase the issued number of DO, and the decrease in price does not require the replenishment of  ROC.

5. Economic Principles of DO

The value model of DO adopts two parts: the Quantity theory of money and the economic model.

Quantity theory of money

The core of quantity theory is the Fisher equation:

M * V = P * T

* M = Money Supply

* V = Velocity of circulation 

* P = Price Level 

* T = Transaction volume

The Fisher equation is an effective tool for a central bank to implement monetary policy, adjusting the price level through the expanding and tightening currency. M and P are strongly correlated if velocity of money and the transaction volume are unchanged.

Fisher equation is the basis for an algorithmic stablecoin built off a central bank model.  In a stable market, the more digital money supplied to the market, the lower its price (with V and T constant). Similarly, tightening policy causes a price increase. Basis is a pure stablecoin with an algorithmic central bank. The biggest problem of the central bank-based algorithmic stablecoin model is that the bonds used to raise money are essentially call options and if there is a severe lack of market trust, the entire economy could go into a death spiral. In traditional finance, the central bank is only part of the government because maintaining currency stability is not solved by the central bank alone, which is beyond the scope of the Fisher equation.

DO applies the quantity theory of money to the price stabilization mechanism, controlling the issuance of DOs to provide immediate control to currency price capturing the price to achieve DO peg to the dollar. DO has derived its own money quantity model, which can also be referred to calculate the market value of DO

WDO=RDOQDO

WDO — Total demand of DO

RDO — DO’s market price (conversion rate)

QDO — DO’s market circulation supply

Economic Model

Central bank model-based algorithmic stablecoins rely too much on quantity theory of money but ignore the role the economy plays, such as the ‘dollarization’ process in some high inflation countries. Only with support of the economy can a central bank truly achieve effective price control and be able to prevent a death spiral.

The DO protocol implements a quantitative pledge model to correlate with the Roxe Chain economic system. DO protocol uses the Roxe Chain ecosystem to achieve complete value stabilization as a complete economy. 

ROC is the ecosystem token of the Roxe Chain and issued periodically (see ROC issuance), and a fixed number of ROC can be pledged to issue DO in each issuance cycle. Through the fixed-amount pledge of ecosystem-token ROC, the core value of DO is protected by Roxe Chain’s ecosystem. This is very similar to the taxation and treasury bond model.

Low Ground Effect

RR smart contracts automatically execute buy and sell through the DEX liquidity pool, and the rapid price adjustment creates a ‘low ground effect’, which ultimately affects the price of the entire market through the arbitrageurs’ involvements in other markets such as CEX.

Due to the low ground effect and liquidity efficiency, the average DO price in the market during the price adjustment process will curve close to the target price.

 

6. Expansion and contraction of DO

Market supply of DO will be adjusted based on demand. Based on the roUSD/DO exchange rate curve, DO price stabilization strategy is in three states: stable, contracting and expanding. DO has a target price +/- 1% of 1 roUSD, which is an equilibrium state irrelevant to the fluctuation of roUSD/USD. As the DO exchange rate curve shown below, the outer dashed line is the stability threshold. When the price curve is in the stability threshold range, the stabilization mechanism does not kick off, and the market price of DO now is entirely dependent on market supply and demand. Once the price curve falls outside the stability threshold range, the smart contract will be automatically initiated for expansion or contraction, driving the price back to the target price range (inner dashed line), and then the smart contract stops adjustment, continuing to monitor the price.

Based on the quantity theory of money and liquidity function MDO=PDOVDO, When the total market value MDOis constant, market price of DO PDO goes down when number of outstanding currency circulation amountVDO goes up. In order to increase exchange rate, the number of outstanding circulation supplies should decrease, Vice Versa.

When supply and demand change, the liquidity pools would have price slippage. When price slippage is within the stability threshold range, the price DO is adjusted through market liquidity, with supply and demand automatically adjusting. Arbitrageurs and AMM automatically adjust the price cross liquidity pools.

When the market undergoes a dramatic change in supply and demand and the price of DO falls out of the stability threshold range, the smart contract uses the DOs, roUSD, and ROCs reserved in the Reserve to adjust the market price.

Contraction

When the price is too low that roUSD/DO is below the stability threshold, Reserve initiates the contraction process, using the pledged roUSD to purchase DO from each liquidity pool and collect DO back to the RR Reserve and destroy, thus reducing the market liquidity of the DO and raising the price to the target threshold.

In general, the contraction activity is similar. As long as enough participants value the opportunity to purchase more DO at cheaper prices, prices will be corrected up and a normal price and supply patterns would appear.

Again, in this case, the price (left chart) appears to be the same as at the beginning and at the end. However, the corresponding supply (right chart) shows a different perspective, ending at a lower level than that at the beginning. In order to assess the dynamics of the market, the following charts of market capitalization trends can be used.

In the figure above, between t1 < t < t2, there is an opportunity O to buy more DO at a price below the next equilibrium point, M1. This is because when the exchange rate of the sample is less than the target price threshold, the system contracts proportionally and continues contracting until it gets back to target price range.

Expansion

When the price is too high that roUSD/DO is above the stability threshold, Reserve initiates the expansion process, selling DO in the liquidity pool. Smart contracts automatically initiate the minting process. The smart contracts would pledge ROC to issue DO accordance with DO issuance rules, and then sell newly-minted DOs in the liquidity pool until the price of the DO returns to the target threshold range.

During the expansion, there is a time window that quick-responded users can sell their DO after supply increases but before the price retraces.  As long as there is willingness to sell, the price would fall. This could have the following price and supply patterns.

In the figure above, the price may end up at the beginning level, but supply ends higher than its beginning level. In order to better assess the unique profit and loss relationships, the following chart of changes in market value can be used as a reference:

Fast responders see that, during t1<t<t2, there is an opportunity to sell more DO at a price higher than the next equilibrium point, M2. This is because when the price of DO is greater than the target price threshold, the system expands proportionately and continues expanding until it gets back to the target price. 

Market Prediction

Combining all these factors, the following potential price and supply patterns can be derived.

The price (left) may remain at a certain exchange rate range, deviating in dynamic (dashed) periods. However, market capitalization may look like a step function, alternating between a dynamic (dotted line) state and an equilibrium state.

Governance

Daollar Protocol is fully community-governed, with ROC holders voting on decisions.

ROCs are governance tokens, and ROC holders can vote themselves, or let others proxy their vote

(a) 1% or more of the votes cast may initiate proposals.

(b) A three-day voting period.

If after the vote, there are more votes in favour of the proposal than against it, and the number of votes in favour is more than 3% of the total, the proposal is automatically adopted.

Each proposal is code that can be executed, and the code can be executed after the proposal is approved.

Risks

Algorithmic stablecoins can be considered a dream of the blockchain industry. DO is a practice with some unforeseen risks.

Despite 80% of roUSD and at least twice as much ROC are stored in RR, the price drop of DO cannot be completely prevented, as ROC also faces the risk of the price going to zero. The value of ROC is also closely related to the ecosystem development of the Roxe Chain. The ecosystem development of Roxe Chain is closely related with Do’s development.

Moreover, even audited smart contracts are not guaranteed to be risk-free.

Both DO and ROC are assets with risk.

The DO family

Based on the Daollar protocol and an RR, there will be successive issues of doEUR, doKRW, doJPY, etc., with the exchange rate using an oracle.

 

6. The Future of DO

The main goal of DO, as an essential component of DeFi, is to become a cross-border, unified measure of value. This means that, much like gold or USD is a universal equivalent in today’s world economy, DO can play this same role in the borderless, digital world. Along with the popularity of DO, the efficiency of cross-border trading, remittances, capital turnover, global investment and financing and other kinds of economic activities will be faster and more cost-effective. In countries with high inflation rates, DO helps the public to effectively offset the negative effects of inflation. At the same time, as a borderless crypto, DO accelerates value transfer across the globe in a highly measurable way, allowing better analysis of value in the global economy.

DO runs on Roxe Chain, a hybrid public-private blockchain dedicated to payment and settlement.  DO is designed to quickly and easily scale and interoperate with other economic systems.