Ethereum’s promising decentralized finance sector continues to give rise to new kinds of assets altogether. These novel innovations, or DeFi primitives, could revolutionize the way the world approaches finance in the future.
With one eye on what’s to come, then, keep one eye on what’s already arrived in the here and now. Among the newest DeFi primitives of note are “reflex bonds,” which bear considerable potential to help stabilize the hitherto volatile DeFi arena.
On Monday, April 13th, blockchain developer Stefan Ionescu published an introductory post titled “Stability without Pegs” that charted a path forward for such a reflex-bond system in DeFi.
A New Stability
In his post, Ionescu noted that in the cryptoeconomy the dominant conception of stablecoins to date has been around pegged tokens, i.e. currencies like the Dai from MakerDAO that maintain soft pegs to particular prices like $1 USD.
The developer went on to say that stablecoins with floating redemption prices — i.e. assets with stablecoin-like price stability that don’t maintain an arbitrary peg to a specific price — were viable but had been generally “abandoned” in the space until now.
Ionescu said the Dai was originally devised to have a floating redemption model, and that if the token had retained this model, the Maker ecosystem likely could have weathered the crypto market crash on Black Thursday, i.e. March 12th, much more gracefully.
The point of putting forth reflex bonds was thus to mitigate the effects of volatility on the DeFi sector during extreme market swings, Ionescu explained:
“The purpose of a reflex-bond is to be a more stable representation of its collateral while still maintaining a high level of trustlessness. If used in other protocols, a reflex-bond can shield its users against major and sudden moves in the cryptocurrency markets. For example, if Maker had used reflex-bonds as collateral prior to Black Thursday, [Maker Vault] creators would have had more time to avoid complete liquidation.”
How Will Reflex Bonds Work?
As things currently stand in DeFi, the most popular collateral in lending dApps like Maker, Compound, and dYdX is Ethereum’s native asset, ether (ETH).
Yet as a young digital currency, ETH can be very acutely volatile, which is precisely what happened on Black Thursday when the second-largest crypto by market cap lost around 50 percent of its value intraday.
With that said, ETH-based reflex bonds could be used as collateral, like ETH, though the bonds would be considerably more stable price-wise even during market shocks. Ionescu likened these bonds to a “washing machine” system, wherein ETH can have much of its volatility washed away. Accordingly DeFi could get a lot more stable soon, the developer said:
“After launching the system, anyone will be able to atomically deposit ETH to create reflex-bonds and then deposit reflex-bonded ETH in another protocol to borrow or create other cryptoassets, as well as synthetic gold, oil, stocks or even the current prevailing synth, synthetic USD. The bonds act as middleware between the initial cryptoasset and the final protocol. The main benefit of using the bonds as collateral is that they dampen some of the volatility from the assets supporting it.”
The MetaCoin Angle
Earlier this year, the MetaCoin project came about as a “governance-minimized” MakerDAO alternative that was aimed at making a Dai-like stablecoin that would maintain an ETH-centric collateral system.
Per a March 2020 project update, Ionescu has been helping out with MetaCoin’s interest rate system, and in kind MetaCoin’s team has been providing “support and guidance” to the developer’s work on reflex bonds. More is coming from this meld, too.
“Together with my friends from [MetaCoin] we will soon announce other exciting plans we have for this new primitive,” Ionescu said on Twitter.