※Added on 04/12/2021
This is an overview of v0 of Soteria. Once derivatives dex starts accepting BTC or SOL as collateral, we will not custody funds and users will be able to issue/redeem USDS trustlessly.
We decided to start Soteria, a stablecoin project that enables users to trade, transact, and store a better stablecoin than the current options. We will first release USDS, a stablecoin that is pegged to the value of the USD. In the near future, we will release stablecoins pegged to other fiat currencies like the euro, yen, pound, etc.
Although there are many stablecoins in the cryptocurrency industry, there is no stablecoin that is censorship resistant, price-stable, and pays interest.
With Soteria, users will be able to transact with a stablecoin that has the above features.
An overview of stablecoins
The stablecoin market has grown rapidly this year, increasing from a $5 billion marketcap in the beginning of the year to a $22 billion marketcap. We expect this trend to continue with more people entering the cryptocurrency market and trading on offshore exchanges, which lists stablecoins as their main trading pair. The growth in the number of lending platforms and users lending stablecoins to earn interest will also contribute to the growth of the stablecoin market. Some people believe that the marketcap for stablecoins will exceed $1 trillion in the future.
The 3 types of stablecoins
There are 3 types of stablecoins: Fiat backed stablecoins, cryptocurrency collateralized stablecoins, non-collateralized stablecoins.
Fiat-backed stablecoins like Tether, USDcoin are IOU’s that are backed by an equivalent amount of bank deposits and can be redeemed for $1 through wire transfers. Fiat-backed stablecoins are conceptually easy to understand, which is one of the reasons Tether and USDcoin are the top 2 stablecoins in marketcap. But since accounting firms do not audit the balance sheet of the companies that operate stablecoins, users cannot be assured that they are 100% reserved. Also since bank transfers are expensive, time consuming, and requires strict KYC/AML procedures, not all users can issue/redeem tokens.
Cryptocurrency collateralized stablecoins
Cryptocurrency collateralized stablecoins like MakerDAO, Synthetix are stablecoins that are over-collateralized by cryptocurrencies and can be redeemed through smart contracts. Since these stablecoins do not have a centralized entity operating them, they have censorship resistance and are accessible by anyone. But since the cryptocurrencies that backs the stablecoin are volatile, you need to over-collateralize as a buffer. This makes it capital inefficient. Also when the underlying cryptocurrencies drop in value rapidly, the stablecoin is at risk of losing its peg.
Non-collateralized stablecoins like Basis, Carbon are stablecoins that are not backed by anything and tries to peg its value through algorithmic seigniorage.
This makes it very capital efficient. Since there is no central entity that issues the stablecoin, it also has censorship resistance. But since there is no underlying asset, it is exposed to a loss of confidence in the stablecoin from negative feedback loops, which might lead to complete destruction of the stablecoin.
Soteria is a bitcoin backed stablecoin. It is not a cryptocurrency collateralized stablecoin because users do not own the bitcoin that they exchange into USDS. When the user redeems 1 USDS for bitcoin, they will receive 1 USD worth of bitcoin.
Flow of funds
In the steps below, we show how a user can issue/redeem USDS with BTC.
User deposits bitcoin worth 100 USD to Soteria. (We will use the FTX BTC index rate to calculate the BTC/USD rate.)
Soteria will mint 100 USDS. Total USD value of bitcoin deposited by the user = amount of USDS issued to user.
Users can transact with USDS. The user can transfer, exchange, and store USDS.
The user deposits 100 USDS with Soteria for redemption into 100 USD worth of bitcoin.
Soteria will destroy the USDS and send bitcoin to the user’s wallet.
Users will also be able to obtain USDS through exchanges and other third party providers. Once the USDS is in circulation, it is freely traded.
Features of Soteria
Fiat-backed stablecoins such as Tether, USD coin,TrustToken have to maintain bank accounts, which forces them to comply with strict bank KYC/AML procedures. They cannot accept fiat transfers from everyone without doing an extensive background check, which leads to some people to be excluded from being able to issue stablecoins. Furthermore, if they do not comply with the banks’s strict rules, they may lose access to their funds. If this happens, they will not be able to redeem their users for fiat at par value, which hurts the reliability of stablecoins.
Soteria is different from other stablecoins in that it does not interact with the banking system. Since it will always be 100% backed by bitcoin, all users will be able to issue and redeem the stablecoins in exchange for bitcoin. By not interacting with the banking system, Soteria will not have access to their funds cutoff and will always be able to redeem their users for bitcoin. Soteria has more censorship resistance compared to other stablecoins.
Stablecoin operators have to blacklist addresses based on requests from law enforcement. While Soteria is also not immune from pressures from law enforcement, stablecoin operators that have bank accounts are more likely to blacklist addresses since banks will freeze their accounts if they don’t comply.
Soteria will hedge its position by using futures on a bitcoin derivatives exchanges, so that it will be delta-neutral in respect to the price of bitcoin. To explain this concept in more detail, let’s suppose that a user wants to issue 1 BTC worth of USDS.(BTC/USD= $13,600 at this time of writing.) Soteria will issue 13,600 USDS to the user in exchange for 1 BTC. Soteria will then send the BTC to a cryptocurrency derivatives exchange, and short 1 BTC worth of futures contract. Soteria will be protected from the price fluctuations of BTC, and will always have a position worth 13,600 USD. When users wants to redeem their USDS for BTC, Soteria will oblige and transfer BTC to the user’s account.
Arbitrage between exchanges and Soteria will ensure that USDS is pegged to the value of USD. An example of how traders will arbitrage is explained below.
Suppose that USDS/USD is trading at 0.99 on a cryptocurrency exchange. Traders can buy USDS with USD and redeem USDS for 1 USD worth of bitcoin at Soteria. This will net the trader 0.01 USD of profit. If USDS/USD is trading at 1.01, the trader can issue USDS with bitcoin and sell the USDS for 1.01 USD. This will net the trader 0.01 USD of profit.
Arbitrage will insure that this type of transaction is not possible and USDS will be pegged to the value of USD. A stablecoin based on arbitrage is easier to scale then a stablecoin that is capital inefficient.
Since the futures curve on bitcoin derivatives exchanges tends to be in contango most of the time, users of Soteria will be able to earn interest. Interest is paid directly to user wallets every day at 00:55 UTC. Soteria is an ERC-20 token and utilizes the smart contract function to pay interest to users.
Users can earn interest without lending or staking their coins. We use the basis trading strategy to generate interest for our users.
Basis trading is an arbitrage strategy where you generate risk free returns by being long the physical asset and short the futures contract. In the case of usds, Soteria is long spot bitcoin and short BTC/USD futures contracts on cryptocurrency derivatives exchange. As a result, Soteria is delta-neutral to the price of BTC and will always have a position worth as much as the total amount of usds in circulation.
This can be considered to be a form of risk-free interest, which makes it much less risky than lending your stablecoins to other companies and individuals.
An interest-bearing stablecoin that is price stable, censorship resistant, and backed 100% by a delta neutral position using derivatives has the potential to change the cryptocurrency industry’s financial infrastructure in many ways.
We are very excited to introduce Soteria to the cryptocurrency industry.
If you want to issue USDS, please go to our website and register. Registering only require an email address and anyone can issue/redeem usds.