Stablecoins are a cornerstone of the DeFi ecosystem, providing a stable medium of exchange and a safe haven from volatile crypto assets. The current generation of stablecoin models are imperfect – often prioritizing reliance on fiat reserves or over-collateralization. Rather than follow in their footsteps, Resolv recalibrates the formula, looking to build a more inclusive, efficient, and decentralized stablecoin with patented mechanisms.

Our partner Resolv has been diligently building a new stablecoin – USR. This next-gen currency will not be backed by fiat reserves, or controlled by a centralized party. It takes an entirely different path, employing a delta-neutral hedging strategy with crypto-backed collateralization. More specifically, this means Resolv aspires to keep its stability algorithmically, positioning it as one of the most novel competitors in the stablecoin space. Join us to learn more, get a behind-the-scenes look at how Resolv operates and what makes it unique.

Understanding Resolv's Innovative Approach

Resolv helps build out a very different model for stablecoins. It employs crypto-backed collateralization, a delta-neutral hedging strategy, and a two-tranche token model.

Delta-Neutral Hedging Strategy

At the core of Resolv’s stability mechanism is a delta-neutral hedging strategy. You’ll look to create a portfolio that balances out gains and losses in one asset with shifts in another. That’s because this strategy is super effective at neutralizing directional risk.

By using an implementation that combines long spot positions with short futures perpetuals, Resolv achieves a delta-neutral portfolio. While this strategy is geared towards Ether (ETH) and Bitcoin (BTC), unlike most derivatives users, Resolv is constantly managing price risk with a strategy of dynamically shorting long positions in the underlying asset. They hedge the delta of an options position by taking the opposite position in that underlying asset. In order to remain delta-neutral, Resolv leverages treasury management strategies to keep these exposure metrics below low-target thresholds. Bond a small percentage of your wealth into ETH staking. Keep the other chunk as a cash liquidity buffer, while simultaneously shorting perpetual futures contracts on the underlying on the relevant venues.

Collateralization and Risk Management

In contrast to typical stablecoins, which use over-collateralization as a basis for stability, Resolv derives its stability from its delta-neutral portfolio and hedging strategies. Resolv employs a minimum collateralization threshold of 110%. If the system-wide calculated collateral ratio (CR) calculation goes below this threshold, ability to redeem RLP is paused. To assure payment stability, Resolv maintains a slightly overcollateralized buffer, targeting a 30% margin ratio. It establishes a 20% minimum threshold as a safeguard against slippage, unexpected market volatility, or timing issues in rebalancing.

Resolv easily connects with centralized exchanges (CEXes) and perp decentralized exchanges (DEXes). With this integration, users can hedge with futures, programmatically dynamically adjust their hedge to stay delta-neutral. Resolv has released a Trustworthy Computing Risk Isolation Mechanism. Within this ecosystem, RLP (Resolv Liquidity Pool) tokens act as a buffer layer, covering any losses that may occur and in turn, guarding USR’s peg.

Two-Tranche Token Structure

Resolv also boasts a unique two-tranche token structure. It involves USR, a stablecoin that backs the value of the senior tranche, and RLP, which backs the junior tranche. This attractive structure separates risks and enables allocation to various classes of institutional investors according to their risk appetite.

USR is a stablecoin, pegged to $1 in value. RLP, by contrast, is the token that stands for the representation of the junior tranche. Secondly, it serves as a buffer layer to absorb any potential losses and protect USR’s peg. The Risk Isolation Mechanism protects USR holders from this volatility. At the same time, RLP holders can capitalize on the opportunity for greater returns with increased risk.

Advantages of Resolv's Model

Resolv's unique approach offers several potential advantages over existing stablecoin models:

  • Yield Generation: The strategy generates inherent yield approaching 10%, which is better than comparable metrics of current RWA (Real-World Asset) and CDP (Collateralized Debt Position) models.
  • Delta-Neutrality: Maintaining delta-neutrality helps minimize directional risk, allowing Resolv to profit from time decay or changes in volatility.
  • Risk Mitigation: The strategy employs multiple risk mitigation layers, including holding collateral outside of CEXes, and has a self-balancing economical mechanism to protect against swift price action events.
  • Decentralization: The architecture paves the way for ultimate decentralization of the stablecoin, with 100% on-chain collateralization made possible by the dual-tranche mechanics.
  • Sustainable and predictable returns: Resolv's model generates sustainable and predictable returns through a mix of ETH staking rewards, funding fees from perpetual futures, and optimized collateral management.
  • Decentralized and community-driven: Resolv is a decentralized finance (DeFi) protocol with a community-driven approach, including airdrop campaigns to bootstrap community participation.

Onchain delta neutrality is fully realized with Resolv. It removes dependency on traditional reg.strictly real-world assets, lowering third-party credit exposures & regulatory ambiguities. Resolv’s web3 integrated design, being completely on-chain, offers a more decentralized, transparent, and robust stablecoin solution. Together with the defense community, Resolv has created a powerful defense framework. This comprises the RLP Risk Buffer, which strongly absorbs risks ranging from exchange default risk to funding rate risk.

Potential Risks and Challenges

It's important to acknowledge the potential risks and challenges:

  • Complexity: The delta-neutral hedging strategy is complex and requires careful management.
  • Counterparty Credit Risk: Risk of loss due to failure or insolvency of a trading venue.
  • Market Volatility: Sudden and extreme market movements could strain the system's ability to maintain stability.
  • Smart Contract Risk: As with any DeFi protocol, there's always a risk of smart contract bugs or exploits.

Conclusion

Beyond that core function, Resolv provides a fundamentally different approach to stablecoins, with its delta-neutral hedging strategy, crypto-backed collateralization, and two-tranche token structure. Its dual-token model, on-chain transparency, and fierce community incentives do all they can to outpace the competition both on yield and composability. Although risks and challenges are definitely present, through their cutting-edge model, Resolv has the power to change the DeFi stablecoin game.

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