It all started with a simple question. "What's the best way to create a decentralized stablecoin?" We've started Dalgona Mint project to serve our own needs at the beginning. We needed to build a stablecoin for currency with relatively small trading volume, which we call "longtail currency". However, because of regulatory constraints, fiat-backed stablecoin was not an option. Although the only option we had was algorithmic stablecoin, we've figured out it is hard to create an algorithmic stablecoin for longtail currency. Creating an algorithmic stablecoin is nothing but building social trust for the protocol supporting it. Because that's the definition of the currency. The system should be in a virtuous cycle to earn social trust. As this virtuous cycle starts with bringing a lot of users to the protocol, it is harder for longtail currencies to start it. Inspired by the economies of scale concept, a protocol that manages stablecoins for various currencies with a single shared reserve.
What it does
Dalgona Mint is a hybrid algorithmic stablecoin protocol that can manage stablecoins for various currencies. As a user, you only need to prepare a single set of collateral. Specifically, users choose to mint any of dUSD, dEUR, dGBP, dKRW, and dINR by providing USDC + Sugar token as collateral. With its oracle feed, Dalgona Mint tracks the exchange rate of each currency in the real world. We consider this as a fair value of each currency. As Dalgona stablecoins are partially backed by USD stablecoin, we have to check each currency's USD value and make sure we have enough collateral in our reserve.
How we built it
We chose a hybrid stablecoin architecture design. That means minters have to provide a mixture of tokens, existing stablecoin with solid peg, and protocol's share token as collateral. We believe this is the most elegant way to practically transit from centralized to decentralized stablecoin. We built our price oracle which feeds us forex rates. Based on these feeds, Dalgona Mint consistently performs buyback & recollateralize functions which are the methods to make sure that we have the appropriate amount of USD stablecoin collateral in our reserve.
Challenges we ran into
To the best of our knowledge, all the existing hybrid stablecoins' target currency and the backing currency that is used as collateral for the existing are the same. It is all about USD. However, Dalgona Mint has to maintain different currency's price peg with USD stablecoin collateral. If there's a change in currency rate between USD and the stablecoin trying to follow, the required value of the collateral in the reserve should be adjusted accordingly. It is critical because this is how we guarantee the value of our stablecoin. Also, although we think that hybrid stablecoin is the best way to smoothly convert from centralized to decentralized way, the existing system design is not error-free. As there was a real-world case of an entire protocol breakdown, we have to make sure that our system has enough failsafe.
Accomplishments that we're proud of
Based on thorough research and mathematical analysis, we built a system called GAME (Global Algorithmic Monetary Exchange) which uses a single shared reserve to manage multiple stablecoins for different currencies. With GAME, we can efficiently manage multiple different currencies with a minimized external side effect from currency rate change. This means that even a currency with the smallest market cap can be managed to keep its tight peg leveraging GAME's shared reserve. Furthermore, we've included various ways to stabilize our system and prevent a possible flash crash. Especially, Dalgona's "Feedback Controller" checks if the market cap of Sugar is enough to support minted stablecoins and adjust target collateral ratio properly. Also, there's a "Circuit Breaker" system in Dalgona Mint. By restricting mint & redemption of the users in a flash crash like condition, we provide time for the system to stabilize itself and prevent irrational panic selling.
What we learned
What we've discovered during our research is that there are fewer stablecoins for currencies even than our original expectation. We can not understand what's the main reason for this but we are pretty sure that this is a problem that should be addressed to build a web-scale service that everyone in the global uses.
What's next for Dalgona Mint
As we stated before, the success of algorithmic stablecoin starts with a virtuous cycle. As a fact, we all know that USD currency is the most widely used both in the real world and the Defi world. To motivate users to mint large amounts of dUSDs and hold them is essential to Dalgona's success as only in that way GAME's reserve is big enough to thrive with other currencies. So the next big step in our roadmap is to make dUSD staking mechanism in a way that Dalgona Mint ecosystem can self reinforce. Another future step is to open a possibility for any currencies to list in GAME so that they can leverage GAME's shared reserve. Only in that way our vision to make GAME supports any global currency will be realized.
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