DeFi for Bitcoin: Money On Chain from 0 to 100 (2)

12 min readSep 2, 2020

Original post (Spanish) = https://criptoblog.tutellus.com/entendiendo-money-on-chain-defi-sobre-bitcoin-2/

In the first part of the post we introduce the Money On Chain protocol, seeing the logic that the model uses to create a stable asset by balancing 3 different tokens: BPro, DoC and BTC2x. We saw its theoretical operation so now we will focus mainly on the practical application of the model, to see how it responds to market volatilities and thus get a better understanding of the protocol. Go for it!

PROTOCOL OPERATION: BALANCING THE 3 TOKENS

After a lot of information, it’s time to do a little review to make the concepts clear. What Money On Chain allows with this 3-token system is to offer each user the incentive they are looking for, thus allowing the generation of a stable currency for the ecosystem. The protocol never increases or reduces the number of RBTC that the contracts keep, but rather they distribute their value among the users.

Suppose Alice is a long-term holder of Bitcoins. For Alice, it will be attractive to acquire BPros in exchange for his BTC (transformed to RBTC to be used in the RSK network) and thus obtain passive income thanks to the Money On Chain protocol. The moment Alice makes the purchase, he provides collateralization to the entire model.

On the other hand, Bob is a business owner who wants to benefit from the features of Bitcoin but is not prone to risk, so he decides to buy DoC with his Bitcoins. These DoCs will use Alice’s Bitcoins as collateral, and you will only be able to acquire a maximum total of the DoCs equivalent to 1 Bitcoin (1/3 of the Bitcoins exchanged by BPros). At that point, Bob can start using his DoCs to make micropayments, remittances or possible DeFi services that will be created in the future, always free from volatility.

Finally we have Carol, very risk-prone and who wants to trade her Bitcoins to take leveraged positions in BTC2x. This leverage is obtained from the BPros, who sell the volatility they acquire from the DoC in exchange for interest that Carol assumes.

Now let’s put real numbers to the example:

Scenario 1: Bitcoin at $ 10,000

In this first situation the value of Bitcoin is at $ 10,000. Alice acquires 9RBTC worth 9BPro (we are assuming that BPro has not yet benefited from the proceeds of the protocol and its value is 1: 1 with the RBTC). This acts as collateral for the system, allowing a total of 3RBTC in DoC tokens (30,000 DoC, since the DoC has a 1: 1 peg with the dollar) to become available to users who are not prone to risk. Bob acquires all available DoCs by trading them for 3RBTC. Finally, thanks to Bob’s acquisition of all the DoCs, we now have a total value of 2RBTC available in positions leveraged at x2 via the BTC2X token. These positions are acquired entirely by Carol. There is really 3RBTC available to take 2x positions, but since interest rates increase exponentially, only positions for a total of 2RBTC are taken, since from that amount it is more profitable for traders to take leverage positions in other exchanges like Bitmex.

Scenario 2: Bitcoin at $ 11,000

As Bitcoin has risen by 10%, Bob holding the DoC tokens stops earning $ 3,000, and these in turn are shared between the BPros and the BTC2x. $ 2,000 is obtained by Carol thanks to her position of 2x and the remaining $ 1,000 is acquired by the BPros, in addition to the interest that Carol pays to maintain her leverage position.

Carol: $ 20,000 + $ 2,000 (Bitcoin price increase) + $ 2,000 of leverage

Alice: $ 90,000 + $ 9,000 (10% Bitcoin appreciation) + $ 1,000 of free leverage.

Scenario 3: Bitcoin at $ 20,000

Now Bitcoin is up 100% (current value is $ 20,000). Bob has stopped earning $ 30,000 as he traded his RBTC for DoC to stay out of volatility. These are shared between the BPro and BTC2x tokens. Carol gets $ 20,000 from her 2x position, and Alice gets $ 10,000 for her BPros. Adding back the interest paid by Carol for holding her 2x position.

Carol: $ 20,000 + $ 20,000 (Bitcoin price increase) + $ 20,000 of leverage

Alice: $ 90,000 + $ 90,000 (100% Bitcoin appreciation) + $ 10,000 of free leverage.

Scenario 4: Bitcoin at $ 9,000

The situation has changed, now Bitcoin is down 10%. Right now, the DoC holders are stable, saving you a loss of $ 3,000. This loss is assumed by the tokens BTC2x and BPros. Carol, who holds a 2X position, loses twice as much, 20%, which is equal to $ -2,000. The BPros take a loss of $ 1,000. Despite the loss, the BPros continue to accrue the interest paid for holding the 2x positions (and other fees).

Carol: $ 20,000 — $ 2,000 (Bitcoin price reduction) — $ 2,000 of leverage

Alice: $ 90,000 — $ 9,000 (10% Bitcoin depreciation) — $ 1,000 of free leverage.

Scenario 5: Bitcoin at $ 5,000

In this case, Bitcoin is down 50%. Bob, who is in control of the DoCs, saves a loss of $ 15,000. Carol, who was in a position with x2 leverage, sees how she has lost 100% of her equity, $ 10,000 plus 50% loss and the BPros, she loses 50% plus a loss of $ 5,000, ending with a total loss 56%. Of course, regardless of the interest that continues to accumulate from the positions of BTC2x and other incentives of the token.

Carol: $ 20,000 — $ 10,000 (Bitcoin price reduction) — $ 10,000 of leverage

Alice: $ 90,000 — $ 45,000 (Bitcoin 50% depreciation) — $ 5,000 of free leverage.

As we have seen, the system has always maintained the amount of 14 RBTC (9 collateralized in BPro, 3 collateralized in DoC and 2 collateralized in BTC2x positions). At no time have there been more or less than 14 RBTCs, their value has simply been distributed among the tokens. The DoCs are stable and their volatility is delivered to the BPros, who sell it to BTC2x, keeping a small part of this volatility for free.

LAST ELEMENTS OF THE SYSTEM

MoC Token (Chain Money)

This is the governance token of the Money On Chain platform. Its main function is to democratize the decisions of the protocol, although in a way as pure as the Bitcoin protocol itself. Not only will the holders of the MoC vote whether to approve or reject the system improvements, they will have the power to actually allow these changes to happen. Control of the scheduling of smart contracts is held by the MoC holders, so without their approval, the smart contracts cannot be modified.

On the other hand, the platform fees can be paid with MoC with a 50% discount. And it can be used to make staking in exchange for a part of the platform fees for participating in the voting.

As for its tokenomics, there will be a total of 210 million MoCs, which have yet to be issued. 20% will remain to incentivize MoC holders who participate and BPro holders, to allow organic growth of holders of these tokens. 20% will be blocked in the form of a reserve for 3 years, so that then the MoC holders will decide what to do with them (burn them, use them for financing or distribute them). Another part of the tokens will be available for sale at the time of issuance and the rest will be shared between the founders and investors who financed the project in the first round and the nodes that will act as decentralized oracles of the system.

Decentralized Exchange (DEX)

There will be a decentralized exchange to exchange all the tokens on the RSK Blockchain. This, in addition to being a great contribution to RSK, will allow the protocol to have much more liquidity. In extreme cases where the fall in the price of Bitcoin is so great that the smart contract does not allow you to recover your RBTC in exchange for BPro’s or DoC’s, there will always be the option to sell your tokens in a secondary market.

Oracles (OMoC)

The oracles are nodes that provide information about the price of Bitcoin in real time, critical information for the operation of the system. Currently, these work centrally, but in the future they will be decentralized. They will be decentralized between the nodes of the network, where MoCs will be stake in each node, although the tokens can also be delegated to a node that you trust. Today the value of Bitcoin is obtained from a weighting between Kraken, Bitstamp, Coinbase and similar exchanges, which depending on its volume, the contributed price has more or less weight. These are constantly changing until information can be obtained from the decentralized nodes.

Later, these nodes (they must have and accumulate MoC tokens to function) can be used by other projects / smart contracts directly, since they will be available as a service in RSK’s RIF Market Place, while also being compatible with networks such as Ethereum and Ethereum Classic. This service will have a cost that the nodes will receive in addition to other income such as: benefit from the revaluation of the MoC due to the destruction and issuance of the MoC tokens, a small part of the fees and interest paid for the positions of the BTC2x and parts of the rates generated in the TEX.

ACCESSING THE PLATFORM

To access the services of the platform, we must first convert our Bitcoin to Smart Bitcoin or RBTC. To do this there are several ways, you can install a local whole following the indications of RSK or you can use CoinSwitch, a simple interface that swaps your Bitcoin for Smart Bitcoin and sends them to the desired wallet, with a minimum commission of 0.015%.

Now we come to the next topic, wallets. In order to store Smart Bitcoin you need a wallet compatible with RSK, and that also allows you to access the platform. For this we have two, Ninfty and Metamask. In the case of Nifty, the RSK wallet is already integrated, with Metamask we have to integrate it manually:

Data to fill in to make the RSK network compatible with Metamask

Accessing “Networks” and selecting “Custom RPC”, there you can enter this information and have a wallet compatible with RSK. Let’s remember that RSK is compatible with Ethereum. What can be considered a future option where the same money on chain system in RSK is implemented in the Ethereum network.

Once we have the wallets we can enter money with chain to get our tokens!

Interface where you can acquire DoC’s, BPro’s and BTC2x

Purchase interface [MOC FEE (0.1%) + INTEREST RATE (0.321515%)]

CONCLUSION AND COMPARISON Maker — Money On Chain

We could say that the only similarity between MakerDAO and Money On Chain is the creation of a stable asset through the collateralization of unstable assets, since their operation is completely different.

MOC recognizes 3 types of users in the Bitcoin network, and generates a token thinking about the needs of each one, thus aligning their interests. The level of collateralization is much higher in MOC, in addition to the fact that the collateralizer does not receive DoC’s in return as it happens in Maker with DAI. This allows the value of the DoC to be guaranteed by a smart contract and not by a secondary market, making it more secure and giving the possibility to any user the privilege of returning their DoC in exchange for RBTC through the smart contract without the need for have contributed collateral to the system. In case this is not possible or it is not something attractive since if it is returned before the settlement window of 30 days a commission is charged, there will always be a secondary market. In short, I believe that this model offers more solidity than the Maker case, it is much more resistant to volatilities and safer in the face of system liquidations, something that should not happen in MOC. Even in extreme cases, there are mechanisms such as an important incentive for BPro holders to quickly enter to offer collateral for the system.

Let’s not forget Maker’s “black Thursday”, a day when most assets had a drop of more than 60%; many vaults were liquidated, and even the protocol became “in debt”, since it had not been able to recover the value in DAI’s loaned. It is true that it has continued to function correctly, and they have managed to stabilize the protocol again, but there is no doubt that it is a risk that users of stable tokens want to be able to stay on the sidelines.

Finally, I would highlight the philosophy of the MOC protocol, since it is intended to achieve a very high level of decentralization, very typical of the Bitcoiner current. Obviously, now it is not decentralized, but taking into account the vision of leaving the system in the hands of the MoC holders — including the control of smart contracts and the decentralization of oracles — I think it is a model that seeks to align with the decentralization offered for Bitcoin.

Of course, not everything is positive for MOC and negative for Maker. In my opinion, Maker continues to be one of the most brilliant and relevant projects in the ecosystem. I think that giving holders who trust the asset they hold, in this case Ether, the possibility of accessing stable financing by giving their Eth as collateral is something amazing. This generates a great incentive for all token holders to generate debt with their assets, creating great opportunities for the DeFi ecosystem. We have already seen how DeFi protocols have flourished dramatically on Ethereum. This is not possible with the MOC system, as well as being more complex to understand and its lack of traction right now making it a perceptually riskier investment than it probably is. It is true that a type of event similar to that of Maker could be achieved in DAI, since if I take positions in the 3 tokens, the loss of value on the one hand, I recover it on the other thanks to the balance of the system. Although this movement will only be used by a minority, due to its practical and conceptual complexity.

And in terms of complexity, I not only take into account the balance system generated by the 3 tokens, but also the need to convert your BTC to RBTC, something that I hope will be a faster and easier process very soon than it is now. A version of debt generation through collateralizing an asset can be a great addition in the MOC system, since it is true that its current operation is much more stable and can give more confidence to users looking for a stable value, but it reduces the incentive for Bitcoin owners to use their assets to take out a debt in DoC and use it in a DeFi ecosystem in Bitcoin, which would be much more incentivized to grow, as quickly or more than it has done in Ethereum.

Undoubtedly, a stable currency with Bitcoin as collateral is something that surprises and excites, since surely Bitcoin is the asset that can best perform this function. I wholeheartedly hope that this project goes ahead and creates the ecosystem that Maker has been able to create in Ethereum as well as offering the possibility for millions of people to take advantage of the properties of Bitcoin without being exposed to volatility. For my part, I contribute my grain of sand by offering a synthesis of the project so that it is more understandable for everyone, in addition to having obtained BPro tokens to give the system more liquidity.

There is no doubt that it is a complex and interesting topic, we will see more about Money On Chain, both at the protocol level and with the workshop it is practical, both in the Blockchain Master and in the DeFi Bootcamp.

And with that said, let’s go for your first BPro! ;)