Stablecoin Mechanisms Research

Abstract

This research LP explores stablecoin mechanisms for the Lux Network, analyzing different stability models, collateralization strategies, and algorithmic approaches. It examines how Lux's multi-chain architecture and zero-interest credit system can enable innovative stablecoin designs that balance stability, capital efficiency, and decentralization.

Motivation

Native stablecoins are essential for:

1. DeFi Growth: Stable unit of account for lending, trading
2. Payment Rails: Predictable value for commerce
3. Risk Management: Hedge against volatility
4. Capital Efficiency: Optimize collateral usage
5. Ecosystem Development: Reduce dependence on external stables

Current Implementation

Stablecoin Usage in Ecosystem

• GitHub: https://github.com/luxfi/stablecoin
• Status: Research phase
• Current stables: USDC, USDT bridged via T-Chain

Related Systems

// Stablecoin touchpoints across repos
interface StablecoinArchitecture {
  credit_system: {
    repo: "luxfi/credit";
    model: "Zero-interest loans";
    collateral: ["LUX", "BTC", "ETH"];
    stability: "Overcollateralization";
  };
  
  lending_protocol: {
    repo: "luxfi/lending";
    inspired_by: "Alchemix";
    feature: "Self-repaying loans";
    yield_source: "Multiple strategies";
  };
  
  bridge: {
    repo: "luxfi/bridge";
    supported_stables: ["USDC", "USDT", "DAI"];
    chains: ["Ethereum", "BSC", "Polygon"];
  };
}

Research Findings

1. Collateralized Debt Position (CDP) Model

Enhanced CDP with Zero Interest

// Building on Lux Credit's zero-interest model
contract LuxUSD {
    struct Vault {
        uint256 collateral;
        uint256 debt;
        address owner;
        uint256 lastUpdate;
    }
    
    mapping(address => mapping(address => Vault)) public vaults; // user => collateral => vault
    mapping(address => uint256) public collateralRatios; // Min 150%
    
    uint256 public totalSupply;
    uint256 public stabilityFee = 0; // Zero interest!
    
    // Mint stablecoins against collateral
    function mint(
        address collateralAsset,
        uint256 collateralAmount,
        uint256 luxusdAmount
    ) external {
        require(collateralAmount > 0, "No collateral");
        
        // Calculate max mintable based on collateral ratio
        uint256 collateralValue = getCollateralValue(
            collateralAsset,
            collateralAmount
        );
        uint256 maxMintable = (collateralValue * 100) / collateralRatios[collateralAsset];
        
        require(luxusdAmount <= maxMintable, "Exceeds limit");
        
        // Update vault
        Vault storage vault = vaults[msg.sender][collateralAsset];
        vault.collateral += collateralAmount;
        vault.debt += luxusdAmount;
        vault.lastUpdate = block.timestamp;
        
        // Transfer collateral and mint
        IERC20(collateralAsset).transferFrom(
            msg.sender,
            address(this),
            collateralAmount
        );
        
        _mint(msg.sender, luxusdAmount);
        totalSupply += luxusdAmount;
        
        // Deploy collateral to yield strategies
        _deployToYield(collateralAsset, collateralAmount);
    }
    
    // Liquidation mechanism
    function liquidate(address user, address collateralAsset) external {
        Vault storage vault = vaults[user][collateralAsset];
        
        uint256 collateralValue = getCollateralValue(
            collateralAsset,
            vault.collateral
        );
        uint256 minCollateral = (vault.debt * collateralRatios[collateralAsset]) / 100;
        
        require(collateralValue < minCollateral, "Not liquidatable");
        
        // Calculate liquidation amounts (10% penalty)
        uint256 debtToRepay = vault.debt;
        uint256 collateralToSeize = (debtToRepay * 110) / 100;
        
        // Execute liquidation
        _burn(msg.sender, debtToRepay);
        IERC20(collateralAsset).transfer(msg.sender, collateralToSeize);
        
        vault.debt = 0;
        vault.collateral -= collateralToSeize;
        
        emit Liquidation(user, msg.sender, debtToRepay, collateralToSeize);
    }
}

2. Algorithmic Stability Mechanisms

Rebase + Seigniorage Hybrid

// Algorithmic stability with collateral backing
contract AlgorithmicStable {
    uint256 public constant TARGET_PRICE = 1e18; // $1
    uint256 public constant REBASE_THRESHOLD = 5e16; // 5%
    uint256 public constant REBASE_INTERVAL = 8 hours;
    
    uint256 public totalSupply;
    uint256 public lastRebaseTime;
    
    // Seigniorage shares for expansion/contraction
    mapping(address => uint256) public bonds; // Contraction bonds
    mapping(address => uint256) public shares; // Expansion shares
    
    function rebase() external {
        require(
            block.timestamp >= lastRebaseTime + REBASE_INTERVAL,
            "Too soon"
        );
        
        uint256 currentPrice = getOraclePrice();
        
        if (currentPrice > TARGET_PRICE + REBASE_THRESHOLD) {
            // Expansion: mint new supply
            uint256 supplyDelta = calculateSupplyDelta(currentPrice, true);
            _expandSupply(supplyDelta);
            
        } else if (currentPrice < TARGET_PRICE - REBASE_THRESHOLD) {
            // Contraction: issue bonds
            uint256 supplyDelta = calculateSupplyDelta(currentPrice, false);
            _contractSupply(supplyDelta);
        }
        
        lastRebaseTime = block.timestamp;
    }
    
    function _expandSupply(uint256 amount) private {
        // Distribute to shareholders
        uint256 shareSupply = getTotalShares();
        
        for (uint256 i = 0; i < shareholders.length; i++) {
            address holder = shareholders[i];
            uint256 share = (shares[holder] * amount) / shareSupply;
            _mint(holder, share);
        }
        
        totalSupply += amount;
        emit SupplyExpanded(amount);
    }
    
    function _contractSupply(uint256 amount) private {
        // Issue bonds at discount
        uint256 bondPrice = (getOraclePrice() * 95) / 100; // 5% discount
        uint256 bondsToIssue = (amount * 1e18) / bondPrice;
        
        // Users can buy bonds with stablecoins
        // Bonds redeemable 1:1 when price > $1
        emit BondsIssued(bondsToIssue, bondPrice);
    }
}

3. Multi-Collateral Stability

Cross-Chain Collateral Aggregation

// Leverage all Lux chains for collateral
contract MultiChainStable {
    struct ChainCollateral {
        uint256 chainId;
        address bridge;
        uint256 totalValue;
        uint256 utilizationRate;
    }
    
    mapping(uint256 => ChainCollateral) public chainCollateral;
    mapping(address => uint256) public userDebt;
    
    // Aggregate collateral across chains
    function getGlobalCollateralRatio() public view returns (uint256) {
        uint256 totalCollateralValue = 0;
        uint256 totalDebt = 0;
        
        // Sum across all chains
        uint256[] memory chains = [1, 2, 3, 4, 5]; // C, X, P, M, Z
        
        for (uint256 i = 0; i < chains.length; i++) {
            ChainCollateral memory cc = chainCollateral[chains[i]];
            totalCollateralValue += cc.totalValue;
            totalDebt += getChainDebt(chains[i]);
        }
        
        return (totalCollateralValue * 100) / totalDebt;
    }
    
    // Mint using cross-chain collateral proof
    function mintWithProof(
        uint256 sourceChain,
        bytes calldata collateralProof,
        uint256 mintAmount
    ) external {
        // Verify collateral on source chain
        require(
            verifyCollateralProof(sourceChain, collateralProof),
            "Invalid proof"
        );
        
        // Update cross-chain state
        chainCollateral[sourceChain].utilizationRate += mintAmount;
        
        // Mint stablecoins
        _mint(msg.sender, mintAmount);
        userDebt[msg.sender] += mintAmount;
    }
}

4. Yield-Bearing Stablecoins

Integration with Alchemix-style Lending

// Self-repaying stablecoin loans
contract YieldStable {
    struct YieldVault {
        address yieldToken;     // alETH, alUSD, etc.
        uint256 principal;      // Original deposit
        uint256 harvestedYield; // Accumulated yield
        uint256 debtOutstanding; // Remaining debt
    }
    
    mapping(address => YieldVault[]) public userVaults;
    
    function depositAndMint(
        address yieldToken,
        uint256 amount
    ) external returns (uint256 stablesMinted) {
        // Deposit into yield strategy
        IYieldStrategy strategy = strategies[yieldToken];
        uint256 expectedYield = strategy.deposit(amount);
        
        // Mint stables up to 50% of future yield
        stablesMinted = (expectedYield * 50) / 100;
        
        userVaults[msg.sender].push(YieldVault({
            yieldToken: yieldToken,
            principal: amount,
            harvestedYield: 0,
            debtOutstanding: stablesMinted
        }));
        
        _mint(msg.sender, stablesMinted);
    }
    
    function harvestAndRepay(uint256 vaultId) external {
        YieldVault storage vault = userVaults[msg.sender][vaultId];
        
        // Harvest yield
        uint256 yield = IYieldStrategy(strategies[vault.yieldToken])
            .harvest(msg.sender);
        
        vault.harvestedYield += yield;
        
        // Auto-repay debt
        uint256 repayAmount = Math.min(yield, vault.debtOutstanding);
        vault.debtOutstanding -= repayAmount;
        
        // Burn repaid stables
        _burn(address(this), repayAmount);
    }
}

5. Privacy-Preserving Stablecoins

Z-Chain Integration

// Private stablecoin transactions via Z-Chain
contract PrivateStable {
    mapping(bytes32 => bool) public nullifiers;
    bytes32 public merkleRoot;
    
    struct Note {
        uint256 amount;
        address owner;
        bytes32 nullifier;
        bytes32 commitment;
    }
    
    // Shielded pool for private transfers
    function shield(uint256 amount) external {
        // Transfer public tokens to shielded pool
        _burn(msg.sender, amount);
        
        // Generate commitment
        bytes32 commitment = generateCommitment(
            msg.sender,
            amount,
            block.timestamp
        );
        
        // Add to merkle tree
        merkleRoot = updateMerkleRoot(merkleRoot, commitment);
        
        emit Shielded(msg.sender, amount, commitment);
    }
    
    // Private transfer with ZK proof
    function privateTransfer(
        bytes calldata proof,
        bytes32 newCommitment,
        bytes32 nullifier
    ) external {
        require(!nullifiers[nullifier], "Double spend");
        
        // Verify ZK proof
        require(
            verifyTransferProof(
                proof,
                merkleRoot,
                nullifier,
                newCommitment
            ),
            "Invalid proof"
        );
        
        // Update state
        nullifiers[nullifier] = true;
        merkleRoot = updateMerkleRoot(merkleRoot, newCommitment);
        
        emit PrivateTransfer(nullifier, newCommitment);
    }
}

Recommendations

1. Stablecoin Architecture

recommended_architecture:
  primary_mechanism:
    type: "Collateralized with zero interest"
    collateral_types:
      - "LUX: 150% ratio"
      - "BTC/ETH: 140% ratio"
      - "Stables: 105% ratio"
    revenue_model:
      - "Yield on collateral"
      - "Liquidation penalties"
      - "Bridge fees"
  
  stability_features:
    price_stability:
      - "Oracle price feeds"
      - "Arbitrage incentives"
      - "Emergency collateral"
    
    peg_defense:
      - "Direct redemption"
      - "Stability pool"
      - "Protocol controlled value"
  
  advanced_features:
    privacy: "Z-Chain shielded pool"
    yield: "Auto-compounding variants"
    cross_chain: "Unified across all chains"

2. Risk Management

1. Oracle Security: Multiple price feeds with circuit breakers
2. Liquidation Efficiency: MEV-resistant liquidation auctions
3. Black Swan Protection: Emergency shutdown mechanism
4. Insurance Fund: Protocol-owned stability reserves

3. Capital Efficiency

1. Multi-Use Collateral: Same collateral for multiple protocols
2. Yield Optimization: Automatic deployment to best strategies
3. Flash Mint: Atomic arbitrage for peg maintenance
4. Capital Recycling: Liquidated collateral redistribution

Implementation Roadmap

Phase 1: Basic Stablecoin (Q1 2025)

• Deploy CDP contracts
• Integrate price oracles
• Launch with LUX collateral

Phase 2: Multi-Collateral (Q2 2025)

• Add BTC/ETH collateral
• Cross-chain collateral
• Yield strategies

Phase 3: Advanced Features (Q3 2025)

• Privacy features via Z-Chain
• Algorithmic stability modules
• Global liquidity pools

Related Repositories

• Stablecoin Contracts: https://github.com/luxfi/stablecoin
• Oracle System: https://github.com/luxfi/oracles
• Yield Strategies: https://github.com/luxfi/yield
• Liquidation Engine: https://github.com/luxfi/liquidations

Open Questions

1. Regulatory Compliance: How to handle stablecoin regulations?
2. Scalability: Can we maintain peg with billions in circulation?
3. Composability: How to integrate with existing DeFi?
4. Competition: Differentiation from USDC/USDT?

Conclusion

Lux's multi-chain architecture and zero-interest credit system provide unique advantages for stablecoin design. By combining overcollateralization with yield generation and privacy features, Lux can create a stablecoin that balances stability, capital efficiency, and user privacy.

References

• MakerDAO DAI
• Liquity LUSD
• Frax Finance
• Alchemix alUSD

Copyright

Copyright and related rights waived via CC0.

Specification

The LP’s algorithms, data definitions, and parameters are normative; implementations MUST follow them.

Rationale

Selected to improve operability and safety while meeting Lux performance goals.

Backwards Compatibility

Additive and non‑breaking; existing systems remain unchanged.

Security Considerations

Enforce validation, rate limiting, and robust crypto to defend against common attacks.