DeFi for Bitcoin: Money On Chain from 0 to 100 (1)

Original post (Spanish) =

Since the birth of Bitcoin in 2009, the world of cryptocurrencies has not stopped growing, making it increasingly obvious the great advantages they offer in the face of an inefficient, slow and expensive financial system, which uses its Fiat currencies as an exchange method, generating constant frictions in a globalized economy. Cryptocurrencies, on the other hand, provide solutions to these inefficiencies, and as a result their adoption has not stopped increasing.

However they have their limitations; Businesses looking to use its advantages are far from this option due to the great volatility of Bitcoin and other cryptocurrencies. To be considered as such, any currency must fulfill three functions: it must function as a unit of account, as a means of exchange and as a reserve value. These are clearly affected by the volatility of “newborn” assets, although with a lot of potential.

BTC / USD volatility vs USD / EUR volatility

In front of these problems solutions began to appear such as stable coins, commonly called stablecoins. Some of them claim to exist using as collateral Fiat currencies deposited in a bank account (USDT, USDC, PAX …) interesting, but not entirely effective: once again we find a currency that despite being more efficient is still susceptible to manipulation , to blocks or even to printing, since they are based on private contracts that we must trust. With these cryptocurrencies, the properties that make Bitcoin unique, such as decentralization and resistance to any type of manipulation, are non-existent.

On the other hand, other much more interesting solutions appeared. In the case of Ethereum, MakerDAO appeared, a decentralized protocol capable of generating a stable coin called DAI using Ether as collateral. For the first time we saw something that seemed impossible: generating a stable currency using as collateral an unstable asset, some would call it magic. Now, a new protocol (Money On Chain) appears that amazes us again by generating a stable currency although this time using Bitcoin as collateral. Although in fact this is not entirely true, since Bitcoin is unable to execute smart contracts, so the first protocol developed on the side-chain of Bitcoin RSK appears and that uses RBTC as collateral, a 1: 1 coin with Bitcoin.

We already saw how the DeFi ecosystem on Ethereum is evolving at high speed with protocols like Kyber Network, UniSwap, Flash Loans and MakerDAO. Now it is the turn of Bitcoin, which proposes as the basis of the ecosystem a system capable of generating a stable currency using Bitcoin as collateral.

The system that we are going to discuss is as complex as it is fascinating and promising. For the first time we could see the adoption of a stable Bitcoin, and convert the most used cryptocurrency, more decentralized, more secure, and more resistant to censorship by offering a currency with 1: 1 peg to dollar, giving the possibility to thousands of people around the world to benefit from the potential of Bitcoin, regardless of its volatility. Not only for businesses looking for a cheaper yet safe option to transfer money around the world, but also for remittances, micropayments and to serve as a base in a DeFi ecosystem on Bitcoin.

The latter also has certain advantages, since Bitcoin continues to be the least volatile network, which accumulates more value and which complies with the concept of decentralization more successfully: there is no one capable of making changes in the protocol and compromising the trust that millions of users have. people have deposited in it. We must not forget that the true value of a Blockchain is not in the speed of transactions or similar characteristics, but in its ability to maintain a secure and decentralized network, resistant to any type of manipulation by third parties. Because otherwise, we better use conventional databases.

And it is because of this potential that I see in this project that I have taken the trouble to make an introduction before starting the post. The start of a DAI version (completely different as we will see) in RSK can be a before and after. My goal today is to analyze in steps what Money On Chain consists of, and as always, try to offer the most complex issues in an understandable way, and for this project, dear reader, we will both have to do our part :-)

Money on Chain

Money On Chain is the largest project that is being generated on RSK and consists of a protocol of stable assets collateralized with Bitcoin. Contrary to Maker, the stablecoin of the protocol called DoC (Dollar on Chain) is not given to whoever collateralizes their Bitcoins, but uses a system of 3 complementary tokens where 2 of these tokens assume the volatility of the DoC.

The key to the MoC protocol is in how it has (successfully) sought to copy Bitcoin’s formula of incentivizing participants in its network.

That said, the first job is to correctly identify the users of the ecosystem and understand their needs. These are as follows:

  • Holders: those users who own Bitcoin and trust the asset in the long term and represent around 65% of the network. The BitPro (BPro) token has been created for these.
  • Stable users: those who want to make use of the advantages of Bitcoin but who want to get away from volatility. For these there is the Dollar On Chain (DoC).
  • Traders: users who use Bitcoin as a tradeable asset, in search of profitability. They have the option of leveraging the asset through BTC2x.

It is from these users that the three tokens are generated in the protocol, the BPro, the DoC and the BTC2x. Although there is also another, the MoC, which would become the platform’s governance token. It will also have a DEX (decentralized exchange) for users with compatible tokens in the RSK network and a system of nodes that will act as oracles of the protocol to decentralize the information on the price of Bitcoin, a critical data for the operation of the system.

MOC Protocol Ecosystem

Dollar On Chain (DOC)

The Dollar on Chain is a token with a 1: 1 peg guaranteed by a smart contract. This is an important detail: your $ 1 value is not guaranteed through a secondary market such as DAI. It is because even though the maximum total of DoC’s generated is the equivalent of 1/3 of the value stored in BPro, they are not generated when you buy BPro (collateral) as happens with DAI, but are obtained by exchanging them for RBTC. Therefore, DoC holders will be able to recover their share in Bitcoin through the smart contract without the need to have collateralized RBTC by buying BPro’s. This causes the DoC to be a very stable asset, with a zero level of fluctuation and with guaranteed liquidity (except in extreme cases of price movement, where it could only be settled through a secondary market such as the Money On Chain DEX). ).

The DOC token maintains its stability because the BPro absorbs its volatility. That is, if I exchange 1RBTC for DoC (if BTC has a value of $ 10,000 I will acquire 10,000 DoCS) the smart contract saves the RBTC used to acquire the DoC. If the price of BTC rises to $ 15,000, this increase of $ 5,000 is absorbed by the BPro allowing the DoC to remain stable.

The amount of DoC’s available in the market will always be a maximum of 1/3 of the value stored in BPro. Although this proportion can vary since it is calculated using the exponential moving average. For example, in 2017, when the value of Bitcoin reached $ 20,000, the ratio would have been 1/10. This makes the DoC overcollateralized at all times and therefore resistant to Bitcoin volatilities. You have to be clear about one thing: one of the bases of Money On Chain is to avoid liquidations, and this is one way to achieve it.

BitPro Token (BPro)

BPro is the token that the money on chain system uses as collateral to maintain the stability of the DoC, it is aimed at holders since, we could define it as a vitaminized Bitcoin because it receives passive income by absorbing the volatility of the DoC tokens, receiving the interests of the BTC2x and fees of the platform. Therefore, as a holder and user who trusts the value of Bitcoin in the future, it is a good investment, since the price of Bitcoin will always continue but increasing more when Bitcoin increases and decreasing more when Bitcoin falls. In the long term, BPros will rise more than Bitcoin itself.

As we have said, the BPro absorbs the volatility of the DoC but this, to avoid being subject to too much risk, sells this volatility to traders through the BTC2x token in exchange for an interest. This allows the BTC2x to provide a 2x leverage, because it assumes all the volatility of the DoC. The amount of BTC2x will be equivalent to the number of DoC’s generated, since it is the only way to guarantee the 2x leverage of the token. Its acquisition implies a cost which increases exponentially as the number of available BTC2x decreases. This exponential rate guarantees that 100% of the BTC2x are never sold, since from 60–70% the interest to pay is too high, incentivizing traders to prefer similar operations on exchanges such as Bitmex. This remaining 30% of btcx2 -which assume the volatility of the DoC- allow such remaining volatility to be taken by the BPro tokens, giving it a free leverage that allows it to become the “vitaminized bitcoin”. As you can see, dear reader, the game theory implicit in Satoshi’s paper also works at full capacity in MoC :-)

In addition to this free leverage, the BPro’s also receive passive income from the interest paid by the traders who acquire the BTC2x, part of the platform fees (the cost of acquiring one of the 3 tokens is 0.1%) and finally they will receive part of the MoC tokens at the time of their issuance. It is these incentives that make the BPro a desirable asset for long-term Bitcoin holders. It is a way to receive passive income to your Bitcoin.

The BPros are the key to the system, as they act as collateral. The movement of the process begins when a holder exchanges Bitcoin for BPros, allowing 1/3 of the value to be made available in the form of DoC, which in turn will allow the appearance of BTC2x.

Bitcoin2x Token (BTC2x)

The BTC2x, despite being a token is different from the DoC and BPro, since it works within the platform, it cannot be taken out or exchanged. As we have already seen, this token absorbs all the volatility of the DoC, sold by the BPros in exchange for an interest.

Let’s take an example. A holder buys BPro for 3RBTC. At the beginning of the protocol 1BPro was equal to 1 RBTC, but as the BPro increases in value due to the passive income that it accumulates, in the long run it tends to increase in price compared to the RBTC. We continue with the example; as there are now 3RBTC in the form of collateralized BPros, a total of 1RBTC becomes available in DoC. A user looking for a stable value, buys DoC for a total of 1RBTC, automatically, a total of 1RBTC in BTC2x tokens become available, since only in this way can 2x leverage be guaranteed. If more BTC2x were sold than the total DoC, this leverage could not be guaranteed.

BTC2x have a 30-day settlement window. That is, the leverage lasts a total of 30 days; on day 1 the leverage is 2x, but as the days go by this may vary according to the price behavior. If it goes up a lot, the leverage will stop being 2x, and it will be reduced. Traders also have to pay interest to make use of this token, which increases exponentially as the amount of available BTC2x decreases and which is received by the BPros in the form of “passive income”. As it increases exponentially, there comes a point that obtaining BTC2x is no longer profitable, and the leverage options of other exchanges such as Bitmex become more attractive, giving away the remaining leverage to BPros for free. Another important piece of information: the interest paid is paid daily, and the number of days the trader has held their positions in BTC2x is proportional. If a trader decides to redeem his token before the day of settlement, the part of the interest corresponding to the days that he has not used the token is returned.

Model of the 3 tokens

There is no doubt that it is a complex and interesting subject. In a second post we will analyze the most practical part and do an operation through our Metamask. Of course, we see more of Money On Chain, both at the protocol level and with practical workshops, in our Blockchain Master and in the DeFi Bootcamp, both in its face-to-face and online versions. You’re invited :-)


Blockchain-Business Developer & DeFi manager at — Asset Tokenization, modeling tokenomics & crypto-business