Why multi-collateral for xDollar V2? by xDollar Research (XDOR)

An often question we get is “Liquity has only single asset feature and why xDollar bother to develop a multi-collateral feature for xDollar V2?”

We are clear on our vision to offer a multi-collateral since beginning of the xDollar born on Polygon planet. We respect the idealism of a purely decentralized stablecoin minting platform.

Yet we think that a consistent supply need of xUSD is critical too for the mass adoption of xUSD across DeFI universe. And this is only done through expansion of collateral asset type just like DAI launching its MCD earlier. — xDollar Research

It’s clear for xDollar to make a multi-collateral cross-chain stablecoin minting easy and efficient, letting crypto asset holders maximize their utilization values without selling them! And a multi-collateral feature is key improvement over xDollar V1 which only accepts MATIC as collateral.

So in our second research article, we will discuss why multi-collateral for xDollar V2 and how this feature benefits our xDollar platform. In case you missed our first research article about the price stability of xUSD, you may click here to have a leisure read.

Multi-Collateral is Helpful to Stabilize the Entire xDollar Platform

Right now, our parent project only allows users to deposit single type of token. For example, Liquity only works on ETH deposit due to the complexity of multi-collateral. Although the complexity, we find the entire platform will potentially become more stable if multiple types of crypto assets are allowed as collateral for xDollar platform.

Such benefit is very intuitive, and you can think about in real life, a bank will issue loans with different types of collateral, such as house, stocks, bonds, and other types of assets. These assets jointly have diversification effects. There may be default over time, but at the same time, other assets may be stable or even increase the value. Overall, the bank as a whole, can have very low default probability.

The same logic applies to xDollar V2 platform. We conducted extensive research on this front and try to exploit such benefit and slash the systematic risk. Our xDollar V2 users should feel safer when using xDollar as the systematic risk has been reduced by multi-collateral system comparing to single collateral system.

In our agent-based simulation, we allow the collateral as either MATIC or ETH. With that, we artificially created a scenario that MATIC is more volatile and its price sharply dropped to zero and re-bounced back after that, while ETH is more stable and does not have this flash crash.

Fig. 1 Price of ETH and MATIC

If we only have MATIC as the collateral, when its price flash crashed, the entire platform become insolvent, and the users and investors will lose their assets. At the same time, xUSD will become invaluable.

We would like to see what will be going on if we have two tokens as the collateral, MATIC and ETH. The chart below shows the price of tokens and xUSD price, where you can see the xUSD price is very stable within the theoretical range without any crash.

Fig. 2 Price Dynamics of xUSD, ETH, and MATIC.

The main reason of this protection and stability is that the total collateral ratio is very health even with one token price dropping to zero, as shown in Fig. 3, while you can see the collateral ratio crashed in MATIC pool as shown in Fig. 4

Fig. 3 Dynamics of xDollar Platform Total Collateral Ratio
Fig. 4 Dynamics of Collateral Ratio for Each Collateral Pool.

With such system stability, xDO price is super stable without any interruption in the middle as shown in Fig. 5.

Fig. 5 Dynamic of the Price and Market Cap of XDO

In summary, adding in more stable tokens as collateral, either a major blue chip token in the market, such as ETH and BTC, or a major stablecoin, such as USDC, will be helpful from the entire platform risk perspective and will general more stable profits for the users and investors.

About xDollar Research (XDOR)

xDollar Research (XDOR) is a critical arm of xDollar which is initiated to perform quant modeling, economic evaluation, data analytics, and any research tasks deemed to impact the platform’s stability and security risks as well as shape the platform’s key parameter decisions. We believe in “Innovation is key to continue disruption in the industry.” We have researchers joining the team from top financial institutions and research universities.

About xDollar

xDollar is an interest free lending platform that users can borrow decentralized stablecoin, xUSD against MATIC collateral on Polygon with a minimum collateral ratio of only 110%. The platform implements a systematic liquidation mechanism (stability pool) and fair platform revenue fee distribution (stacking pool). xDollar’s vision is to become the first cross-chain decentralized lending platform on multi-chains with DAO governance and a multi-collateral vault system.

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First Cross Chain Interest-free Borrowing Platform based on Liquity protocol.