Our close partner BabelFish has made a huge step forward, introducing Balancing Curves, a groundbreaking mechanism designed to address the challenges of stablecoin bridging. Balancing Curves ensure a balanced and efficient flow of stablecoins across chains. But what does this mean for the Sovryn ecosystem and our users? Let's unpack this.
BabelFish's aggregator serves as a hub, pooling stablecoins from various chains like Ethereum (ETH), BNB Smart Chain (BSC), and the native Rootstock blockchain, and minting the meta-stablecoin XUSD. However, as DLLR borrowers using our Zero protocol bridge their loans to other chains, the bridge's reservoir of outgoing stablecoins diminishes and an overstock of DLLR on the Rootstock side builds up. This situation makes it impossible to bridge out stablecoins on other chains.
Unfortunately, the lack of a fully liquid stablecoin bridge leads users to sell DLLR for BTC so they can bridge out BTC to the main chain. The price of BTC then goes up in DLLR terms, and DLLR becomes worth less in BTC terms. Since Zero allows DLLR holders to redeem DLLR for BTC at the nominal price (with a small fee), this opens up an arbitrage opportunity. Users can buy DLLR cheaply in BTC and then redeem them for the nominal BTC value to make a profit. The redeemed BTC comes directly from the collateral of DLLR borrowers, leading to an undesirable conversion of their collateral. This problem has vexed Zero users and the Sovryn team for the last several months.
Designed to incentivize users, Balancing Curves encourage bridging in external stablecoins in exchange for XUSD by rewarding users who bridge in assets that are below a target level and in some instances charging users who bridge out these assets. This ensures a consistent stock of external stablecoins in the bridge, promoting equilibrium. In simpler terms, Balancing Curves act as a self-regulating mechanism, rewarding users for their contributions to maintaining this balance and charging users who create further imbalance.
To kickstart the balancing process, Babelfish has added 10,000 XUSD to the reward fund. This initial funding will make sure that users who deposit stablecoins that are below the target weight will be rewarded. These rewards will go as high as 2.5%, which should accelerate a move toward the desired equilibrium of stablecoin balances.
For the Sovryn community, this is a game-changer. It incentivizes the bridge's smooth operation, preventing potential disruptions and ensuring seamless cross-chain transactions. Users stand to benefit from a system that not only rewards them for bridging in external stablecoins but also ensures the consistent availability of stablecoins for their DeFi needs. DLLR will also be added to the Babelfish aggregator so users can move directly between XUSD and DLLR. DLLR borrowers will then be able to bridge out to other stablecoins as needed without triggering excessive redemptions against BTC collateral positions.
BabelFish's Balancing Curves are more than just a solution to a current challenge; they represent new opportunities—from potential rewards for FISH stakers to the establishment of emergency funds.
For a deeper dive into the intricacies of Balancing Curves and their broader implications, we recommend reading the comprehensive Navigating ‘The Aggregator’ — BabelFish’s Balancing Curves Explained. We applaud Babelfish for this new development and look forward to seeing Balancing Curves bringing improved performance to BabelFish and to the whole Sovryn ecosystem.
1. What are BabelFish's Balancing Curves? Balancing Curves are mechanisms designed to incentivize users to bridge in external stablecoins, ensuring a balanced stock in the bridge.
2. How do Balancing Curves benefit Sovryn users? They ensure a smooth operation of the bridge, ensuring uninterrupted cross-chain transactions and helping to balance DLLR demand and supply. Users are rewarded for maintaining balance.
3. Why were Balancing Curves introduced? Babelfish needed a mechanism to maintain a balance of stablecoins. Initially, the aggregator attracted more USDT than was desired, but Babelfish had no mechanism to rebalance. The need for this mechanism became more pronounced as DLLR borrowers began bridging loans to other chains. The bridge's outgoing stablecoins were depleting, leading to an overstock of DLLR on Rootstock. Balancing Curves create an economic incentive to maintain a balance of stablecoins.