Stablecoin Kolibri: How to Issue Your Own kUSD, Explained and Shown
Stablecoins are the foundation of a DeFi ecosystem. They protect capital from volatility and provide additional liquidity while making payments easier.
Back in February, we talked with the developers of the algorithmic stablecoin Kolibri, Ryan Sears and Keefer Taylor. It was mostly about the development, not the coin per se. Today we make things right and talk about why Kolibri maintains a stable exchange rate, and shed some light on how you can issue kUSD as well as which Tezos-based projects accept it.
How Kolibri works
Kolibri (kUSD) is an algorithmic stablecoin pegged to USD and using tez as collateral. Users issue kUSD themselves using special smart contracts called ovens. For that purpose, a tez holder creates an oven, puts in collateral, and takes kUSD. The maximum collateral factor is 200%, which means that the user can take up to $0.50 for each deposited $1.
The deposit on the oven’s address remains busy: Kolibri automatically delegates it to a baker. A share of the profits from the delegation goes to the Kolibri development sponsorship fund, the rest goes to the oven’s owner.
Kolibri checks the tez price through Harbinger oracle on a regular basis and re-calculates the current collateral factor for all active ovens. If it drops below 200%, Kolibri eliminates the oven. A liquidity pool smart contract automatically deposits as many kUSD as the user had withdrawn. Then the contract withdraws tez from the oven and exchanges them for kUSD via a decentralised exchange. Kolibri then burns half of those kUSD to tackle inflation, and returns the rest to the pool. The liquidated oven’s owner keeps their kUSD but loses the deposit.
The most notable risk of issuing algorithmic stablecoins is the lack of funds to liquidate during a market decline. To tackle that risk, Kolibri developers have established a stabilisation fund. Oven owners send there 0.06% (22.5% annually) of the cost of kUSDs they had issued earlier. The fund also gets 9% of all the liquidated kUSDs. Kolibri uses the stabilisation fund only if the liquidity pool lacks funds to liquidate a major oven.
This is how excessive collateral and a liquidation mechanism help Kolibri with the backing and ensuring a stable rate for kUSD. At the time of writing, users have issued 2.5m kUSD with the collateral of 3.76m tez (around $10m).
A brief comparison to MakerDAO (Dai)
Kolibri employs the same principle as Dai on Ethereum. Dai offers more profitable conditions, though: the stabilisation fund fee is 9% at most rather than 22.5% while the minimum collateral factor is 102% instead of 200%. The reason for that discrepancy is that Kolibri is very young. The developers will improve the issuance conditions once the market stabilises and the fund balance increases.
Another notable difference is the abundance of smart contracts for stablecoin issuance. Thus, a user can deposit the centralised stablecoin Gemini USD and issue a Dai with a zero fee and a collateral factor of 101%. It is possible that Kolibri will also add ovens with different options for deposit currency.
Creating an oven and issuing kUSD
In order to issue a kUSD, you will need the wallet Temple, Spire, Galleon, or Kukai, and at least 1 tez on the balance. Then visit Kolibri.finance and click “Create new oven.” Kolibri will offer you to accept the default baker or specify their address on your own.
Creating an oven includes publishing a smart contract on the Tezos blockchain so the transaction fee will comprise around $2. The fee is payable just once.
Now the home page of Kolibri.finance shows the newly created oven.
In order to release kUSD, you will need to deposit the desired amount of tez by clicking “Deposit”, specifying the number, and confirming the transaction.
To take stablecoins out of the oven, click “Borrow kUSD.” Kolibri will warn the user in case they want to issue kUSD for more than 80% of the maximum amount. Doing so is dangerous because tez price drop by 20% will cause the platform to erase the oven and the XTZ deposit. The collateral factor can be increased by returning some kUSD to the oven or placing an additional deposit.
In order to redeem the deposit, click “Pay back kUSD” and specify the amount of kUSD.
Once your kUSDs are redeemed, click “Withdraw” and specify the amount of tez for withdrawal. Most likely, the oven’s address will have 0.000001 tez, which is okay as Kolibri charges a stabilisation fund fee once a block is added. The platform manages to accrue some debt during the transaction’s confirmation.
You can use an existing oven to re-issue kUSD.
Here are some Tezos-based projects accepting kUSD:
- DeFi service provider Crunchy. You can add liquidity to the XTZ/kUSD pool and earn CRUNCH;
- Decentralized exchanges Quipuswap and Dexter.They support the exchange of kUSD for other Tezos-based tokens as well as liquidity pools featuring kUSD;
- Cross-chain bridge Staker DAO. You can farm STKR in the XTZ/kUSD pool.
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