Has Multicoin Capital just created the ultimate stablecoin?

New competitor for Tether (USDT) and USD Coin (USDC ) – Multicoin Capital’s stablecoin, UXD, raises $3 million for the UXD protocol, a new stablecoin with nothing less than global ambitions.

UXD, the future global currency: a unique stablecoin in 3 points

On September 2, 2021, Tushar Jain, managing partner at Multicoin Capital, announced in a press release that he had raised $3 million for his new stablecoin UXD.

This is because the idea is not new: as early as 2018 Multicoin Capital had published an article on stablecoins, talking about the potential of stablecoins to become the digital money in a fiat-free world:

Multicoin Capital et son stablecoin UXDMulticoin Capital et son stablecoin UXD

“Stablecoins are one of the highest convexity opportunities in crypto. They aim to become global digital money, without fiat, so the total addressable market (TAM) is simply all the money in the world.”

UXD today would be a stablecoin with 3 essential qualities needed according to Multicoin Capital, in order to claim to become a global currency:

  • capital efficient: locking in more than $1 of collateral to create a stablecoin of the same value is inefficient and creates supply constraints for the stablecoin.
  • Decentralized: collateral pools should not be held “by a single entity, as is the case with Tether and the Centre Consortium. DAI would also not be decentralized according to Multicoin Capital, with MakerDAO sacrificing this decentralization to ensure the development of DAI. Over 65% of collateral is centralized stablecoins backed by fiat and WBTC.
  • stable: the value of a stablecoin must be stable unlike cryptocurrencies like Bitcoin (BTC). Still criticizing DAI, Multicoin Capital points out that DAI’s price has only been “within 50 basis points of its $1.00 ‘peg’ for 62% of its existence.”

None of the existing stablecoins, apart from UXD, have, according to Multicoin Capital, these 3 major characteristics mentioned above.

UXD issuance: the challenges of funding rate and diversification

UXD are fungible tokens with a stable value pegged to the dollar, accepting deposits of Bitcoin – or other cryptocurrencies – “and using them as collateral to short an equivalent amount of BTC-USD perpetual swap contracts or dated BTC futures contracts.”

If the value of UXD falls below1 If the price of the stablecoin exceeds $1, the arbiters send the stablecoin back to the protocol to release $1 in collateral. If the stablecoin price exceeds $1, the arbiters can post collateral and create more UXD.

Regarding challenges with the market funding rate, when the market funding rate is positive “longs pay shorts,” and UXD owners earn interest on their holdings. The protocol then pays part of the funding to the insurance funds and part to the governance token holders. The rationale for this mechanism is that when this rate becomes negative, the UXD owners, specifically the insurance funds and the UXD governance token holders when these funds are depleted, pay the funding.

When the market funding rate remains negative for a relatively long period of time, the protocol adapts “by reversing the stablecoin’s position by selling the spot and buying the derivatives to collect the funding.”

Regarding the diversification of collateral types used for UXD, the UXD issuance mechanism does not rely solely on long BTC spot and short BTC-USD perp positions. The protocol is theoretically compatible with any collateral, a diversification that makes UXD more scalable:

  • Long ETH spot, short ETH-USD perp
  • Long SOL spot, short SOL-USD perp
  • Long SRM spot, short SRM-USD perp
  • etc.

UXD can also be pegged to other fiat currencies such as the Euro, Yen, etc., if there are liquid futures contracts denominated in that currency, such as BTC-EUR futures.

UXD makes no secret of its ambitions to surpass the existing major stablecoins. It dreams of being a global digital currency, a far more ambitious vision than that of a USD Coin that could become the first bankable stablecoin thanks to Circle’s development project.