Protocol Spotlight: xBacked
Learn what xBacked is and why we're so excited about it!
Disclaimer: This isn’t financial advice! As we say in crypto, don’t trust – VERIFY! Do your own research and don’t ever invest more than you’re willing to lose. Like any DeFi project, xBacked comes with risks. The project can fail, smart contracts can be hacked, assets could be compromised, users can be liquidated, etc.
Be safe out there and make sure you do enough research before you decide if xBacked is right for you.
Welcome back to the club, gov!
Today’s newsletter marks the first in a new series where we’ll shine a spotlight on upcoming protocols we’re excited about. To kick off this series, we’re going to introduce xBacked. Their public testnet is launching next week (tentative launch date 2/2), so keep reading to be one of the first in the know.
What is xBacked?
xBacked is a Distributed Autonomous Organization (DAO) building decentralized stablecoins on Algorand set to launch on main net at the end of Q1 / start of Q2. Unlike other popular stablecoins such as Tether and USDC, stablecoins on xBacked will be backed by crypto assets (similar to DAI in Ethereum). The first stablecoin xBacked plans to release is the ALGO-backed xUSD, but over time the protocol will support a variety of stablecoins and collateral types.
In addition to stablecoins, xBacked will have a governance token named ‘X’. X token holders will participate in governance of xBacked and in exchange be provided with a generous 80% cut of the protocol’s earnings. We provide more information on X and governance below, so stick around!
Gov Tip: If you’re unfamiliar with DAOs and how they work, we highly recommend checking out this glossary entry from Binance Academy.
What is xUSD and how does it work?
The xUSD token will be a USD pegged stablecoin backed strictly by ALGO. Due to the DAO structure of the protocol, no central authority controls xUSD or any of the future coins the protocol will create.
The protocol always considers one xUSD token to be equivalent in value to $1 USD, and it will maintain that value through the following methods:
Over collateralization of approved forms of collateral (beginning with ALGO).
If the price of xUSD is trading below $1, users are able to purchase it (which increases its value/price), and repay debt at a cheaper rate.
If the price of xUSD is trading at above $1, participants can mint xUSD and sell it for a premium on the open market (effectively decreasing the value / price).
Gov Tip: The official litepaper has great examples of both arbitrage trading scenarios listed above. Navigate to ‘Debt Oversupply’ or ‘Debt Shortage’ for more information.
New xUSD can only be minted when users open a vault on the xBacked protocol. To create a vault, users have to deposit collateral (i.e. ALGO) equal to $1,000. Currently xBacked only supports ALGO as collateral, but over time new forms of collateral can be supported if the community submits proposals to do so during governance. According to xBacked, vaults will offer users full transparency, over collateralized stablecoins, and 0% interest on minted stablecoins.
As of now, the two initial use cases for xUSD will be:
Medium of Exchange: Like any other stablecoin, xUSD can be used to swap between other tokens or be used as a medium of exchange on protocols that accept stablecoins as payment
Staking: xUSD staked on xBacked will be used to liquidate the riskiest vaults on the protocol with xUSD from liquidators being used to repay the debt of the vault. Liquidators are entitled to 10% of the protocol’s earnings, and collateral from liquidation events will be distributed to the pool proportioned to each users’ share of the pool.
When a user mints xUSD there is no expectation they repay it to the protocol. The only expectation is that at some point the vault will close, either through liquidation, redemption, or debt repayment. When a vault is closed, the collateral in the vault is transferred back to users and the xUSD they originally minted is returned to the protocol’s vault until it is needed again. This is supposed to simulate ‘burning’ the tokens; however, due to the fixed supply of the underlying collateral (ALGO) the devs have decided to not officially burn any of the xUSD supply to ensure there will always be xUSD available for minting.
Governance & the X Token
At this point you may be thinking, “okay cool, but why are you so excited about another stablecoin?” It's a fair question, and to be honest, for us the most exciting initial feature of xBacked will actually be its governance model and token (with possibly the coolest token name ever: ‘X’).
To put it simply, the X token will enable the community to make and vote on proposals to shape the future of the protocol (i.e. new stablecoins and collateral types) as well as entitling X token stakers who actively participate in governance (i.e. voting) to 80% of the platform’s earnings!
To be clear, if a user stakes X but doesn’t participate in governance voting they won’t receive their cut of the earnings. xBacked is determined to have engaged governors/users who are interested in the future of the protocol and aren’t looking to quickly flip their tokens for a profit.
At this time, there are no official plans for a token sale of X; however, the devs are exploring options such as launchpads, liquidity mining, and other reward incentives.
What are the risks?
Like anything else in DeFi, xBacked comes with risks. As alluded to in the previous section, the two major risks are liquidation events and redemptions against vaults:
Liquidations: Users will be able to mint more xUSD within their created vaults if they deposit more collateral while maintaining a “healthy” collateral ratio. xBacked defines a “healthy” collateral ratio as 110% to avoid liquidation (in most cases) and 120% to withdraw collateral or mint new debt. If a user’s vault collateral ratio drops below 110% then it is completely liquidated as there are no partial liquidations on the protocol. In the case of liquidation, users keep the xUSD they minted but the collateral (i.e. ALGO) within their vault is now transferred to the liquidator(s).
Redemptions: As stated earlier in the article, the protocol will guarantee that 1 xUSD can be redeemed for $1 of underlying collateral at all times. When users redeem xUSD on xBacked, the protocol redeems against the riskiest vault in the system even if the vault’s collateral ratio is at or above the healthy ratio of 110%. The redeemed xUSD is used to repay some of that vault’s debt, and the collateral is also transferred to the redeemer.
There is one more risk to consider and it pertains to the X governance token. In severe cases when there is not enough collateral in the system to maintain the value of xUSD, staked X tokens will be automatically used by the protocol to pay off the system debt and maintain the peg (1 xUSD = $1 USD). This risk is one of the reasons X stakers are entitled to 80% of the earnings.
Gov Tip: The official litepaper has some great examples of each one of these risks to help users understand each scenario. Just navigate to either ‘Liquidation’, ‘Redemption’, or ‘Staked Governance Backstop’ depending on what you want more information on.
What are the fees and how does xBacked make money?
As mentioned above, xBacked doesn’t plan to charge users an interest rate for minted xUSD. Instead, they will implement a fee structure initially to generate income. You can find there fee structure here and below:
We recommend doing your own research around their fees to ensure you understand them enough to make an informed investment decision. There are some great examples in the link we shared above that help bring this to life.
Passive Income Potential
To understand the passive income potential of xBacked, let's review their earnings distribution schedule: 80% of earnings will be paid out to governance token holders, 10% of earnings will be allocated to liquidators who stake xUSD, and the remaining 10% will be allocated to the DAO’s treasury (i.e. contributor compensation).
This presents two clear ways to generate passive income from the protocol, especially for those of you who have a strong conviction in the protocol after doing more of your own research:
Staking xUSD: Liquidators will be the backbone of the xBacked as they will ensure the collateral rate of the system doesn’t become too high (and in turn risky). Minting and staking xUSD definitely comes with risks (as we discussed above), but if you maintain an especially healthy collateral ratio the rewards (xUSD and ALGO from liquidation events) may outweigh those risks
Governance: If liquidators are the backbone of xBacked, X token holders are the lifeblood. Without an engaged and invested community, DAOs like xBacked can’t succeed. By deciding to become a committed (i.e. staking and voting) governor of the protocol, users will be paid quite generously. If xBacked succeeds, 80% of earnings can quickly become a sizable amount.
And if you’d like to do more research on xBacked, you can review their official documentation and Litepaper. If you still have additional questions after reviewing both, we highly recommend their Discord channel as they have a pretty active and helpful team. Just make sure you tell them the Club sent you.
As always, thanks for dropping by the Club. Until next time, gov!