The article Analyzing Unit Protocol models will help you:
- Understand how Unit Protocol works.
- How Unit Protocol captures value for DUCK token.
- The future and vision of Unit Protocol.
Please refer to it for more investment perspectives.
Information about Unit Protocol
Unit Protocol is a project about Lending In the field of DeFi decentralized finance, this is a fork project from Maker Dao. The 2 main and essential components of the project are USDP Stablecoin and DUCK (native Token):
- USDP Stablecoin is a type of Stablecoin mortgaged by Cryptocurrency and kept stable, corresponding to 01 USDP = 01 USD.
- DUCK is the project’s administrative token, used for administration and where the project captures value.
While Maker Dao only allows high-quality, reputable assets as collateral, Unit Protocol enters the long-tail market, allowing investors to mint Tokens from a wider range of assets.
How Unit Protocol works
Since it is a fork product from Maker Dao, in general, Unit Protocol’s operating model is similar Model Maker Knife.
To be able to start interacting with Unit Protocol, the first thing you have to do is open a Vault.
A Vault is like a position of brothers, after opening 1 Vault, you will have the right to provide collateral, borrow USDP, repay debt,…
You can open multiple Vaults at the same time to have multiple positions.
Mint/redeem stablecoin USDP . mechanism
This is the most basic feature in Unit Protocol. The amount of USDP minted depends on the quality of the collateral.
For example, $ 150 ETH can only be minted 115 USDP. But $150 USDC can mint up to 145 USDP.
Mint/redeem stablecoin USDP mechanism.
Mint & Redeem mechanics will go like this:
(first) Users will put collateral in their Vault.
(2) Based on the quality of the collateral, the borrower will be able to borrow a certain amount of USDP, the user can use this USDP to buy more properties, lend, farming,…
(first) When the user wants to repay the loan and get the collateral back. The user will return the borrowed USDP + 1 part interest, this interest will be paid in USDP:
- The USDP returned will be burned.
- The interest paid in USDP will be transferred to the Treasury of the project.
(2) After the user pays USDP + interest, the Vault unlocks the collateral, and the user gets his assets back.
Asset liquidation mechanism on Unit Protocol
To ensure USDP is stable at pegged $1, when the collateral Vault drops to a certain percentage, the assets in the Vault are liquidated to repay the debt.
Mechanism of asset liquidation on Unit Protocol.
Assets liquidated in Unit Protocol will be conducted in an auction format.
(first) Unit Protocol will hold an auction with the participating parties, to select the winner, and at the same time ensure the Vault owner can repay the debt in full.
(2) The winner (bidder) will transfer USDP to Unit Protocol. This USDP will be used for 2 things:
- Unit Protocol debt repayment: this USDP will be burned.
- Liquidation Penalty: Penalty here because the Vault owner did not secure enough collateral, jeopardizing the stability of USDP. This penalty fee will be transferred to the Governance Pool.
(3) Unit Protocol transfers Collateral assets to the winner (bidder).
Analysis of the parameters of Stablecoin USDP
Collateral: Collateral assets and COL → Primary collateral has its own % (min and max), as specified in the CDP on COL.
The USDP loan amount can be calculated as follows:
col = (mainUtizedMax + col) * minCol%
colUtizedMax = (main + colUtizedMax) * maxCol%
The variables mainUltizedMax and colUtizedMax can be considered as upper bounds of col, main, so we can actually calculate them by:
- mainUtilize = min(main; mainUtizedMax)
- colUtilize = min(col; colUtilizeMax)
→ total = mainUtlize+ colUlitizee
→ maxDebt = total * ICR
Where ICR is Initial Mortgage Ratio = Debt Ratio / Collateral Ratio.
An example of a mortgage.
Example 1: The initial collateral ratio (ICR) is the ratio showing the maximum value of assets that can be borrowed from the amount of collateral. With ETH, ICR rate = 77% and price of 1 ETH = $2,352.38 then user can get $1811. If the debt/collateral ratio exceeds the liquidation ratio, the asset will be liquidated (the liquidation mechanism will be shown below). And with a stability fee every year, your assets will be liquidated if you don’t pay attention.
Example 2: With 1ETH, users can borrow up to $1811. With a liquidation ratio = 78%, there is a maximum debt right of $1834. Assuming the user borrows up to $1811 (with 1 ETH), then after only 1 year, the debt will be 1811 * (1+ 5.5%) = $1910 and the assets will be liquidated.
The value of USDP is kept fixed around the $1 mark. When the USDP price fluctuates, there are mechanisms to correct the price.
Price stabilization mechanism
In case USDP falls below $1: Let’s say a user has borrowed a loan ($100) from Unit Protocol, after a while, the price of USDP drops to low ($0.9/USDP).
- Although the USDP price in the market is subject to change, the USDP price in the system is always set at $1 by default.
- At that time, users can buy 100 USDP from secondary markets (exchanges like Binance, Kucoin, Okex, Uni,…) at a cheaper price (about $90) and then use that money to pay off debt. As a result, the user receives the amount of the price difference ($10).
- All returned USDP is burned, reducing the USDP supply. This will eventually lead to an increase in the market price of USDP.
Price stabilization mechanism in case USDP falls below $1.
In case USDP rises above $1:
- Since USDP still holds $1 in the system, users will proceed to borrow USDP from the system and sell it on the secondary market for a higher price (say $1.1).
- Users will profit from this ($0.1$/USDP).
- In addition, injecting more USDP into the market will lower the price of USDP.
Price stabilization mechanism in case USDP rises above $1.
- Use Keep3r do Oracle primary to provide data on the price of assets collateralized with ETH.
- Use Chainlink to get ETH price.
- The data feed for Keep3r is Uniswap and Sushiswap.
How Unit Protocol captures value for DUCK token
How Unit Protocol captures value for DUCK token.
Present Unit Protocol captures value in two main ways:
- Administration: DUCK holders can be used to vote for important indicators in the Protocol Unit Protocol such as Stable Fees, Collateral Ratio, Liquidation Ratio,… As a Debt trading protocol, financial indicators play a very important role with Unit Protocol, because it is related to lending risks, so the role of DUCK holders is very important.
- Buy Back & Burn: The project’s Treasury revenue will be used to Buyback & burn DUCK on the market, thereby reducing the supply of DUCK tokens.
Comment on how to capture value for Unit Protocol
According to the project’s litepaper, Buyback & Burn DUCK token is only a temporary measure to redistribute revenue to the community (buyback & burn is an activity that helps the whole community benefit from the increased DUCK price).
In the future, after the infrastructure is completed, Unit Protocol will adjust the way of revenue distribution, especially focusing on redistribution to DUCK stakers who have actively participated in the governance system. of project.
Personally, I think, redistribution to DUCK stakers is a more reasonable way, because governance is very important, especially for Lending projects, redistribution of revenue to DUCK stakers will encourage DUCK holders. participate more in administrative activities.
However, on the downside, if compared to MKR token of Maker, the role of the DUCK token is quite small, not participating as much in the stable operation of the Protocol as MKR.
For Lending projects, stability is very important, currently Unit Protocol’s Liquidation feature is still working well so there has not been any Hack or deficit problem, but if not prepared in advance, when the problem occurs In addition, Unit Protocol may also have to Shutdown like Maker did in March 2020.
The Future of Unit Protocol and USDP
As a Debt protocol, the goal of Unit Protocol is of course to expand the need to use USDP, develop DeFiusing USDP to replace the dominance of centralized stablecoins until now.
Money plays an indispensable role in any economy, so in the present and even the future, The potential market of USDP is also the DeFi market, As the DeFi market grows, the demand for USDP increases.
However, there are also some challenges for Unit Protocol:
- Firstly, compete with competitors in the same industry, a market when later, the possibility that the winner will take all (Winner take all), then the piece of cake for Unit Protocol will be very little, the project must have a winning strategy. strategy to compete with competitors in the same industry.
- Second, it’s a growing trend stablecoins private. Many projects realize the important role of stablecoins in an ecosystem, so they are developing their own stablecoins. One of Unit Protocol’s key strategic partners, Yearn Financerecently announced about the project’s stablecoin design, if this is adopted soon, it will greatly affect the development of Unit Protocol.
In general, the stablecoin market is a very large market with high growth potential, but there are many challenges, especially for small-cap projects like Unit Protocol.
Comments and conclusions
Unit Protocol is one of the famous Lending stablecoin projects in the market, the project chooses the Long-tail segment to gain market share.
Overview of the operating model of Unit Protocol and USDP, we draw some main points as follows:
- Unit Protocol is a fork product from Maker Dao, but there are no two by-products, Buffer and Saving Rates like Maker.
- The project focuses on the long-tail segment, accepting a variety of highly volatile collateral to gain market share.
- The main Oracle that Unit Protocol uses is Keep3r.
- Buyback & burn DUCK tokens is the current main way of capturing value of Unit Protocol.
Here is an overview of Unit Protocol model. What do you guys think about this project? Please leave your comments in the comment section below so we can exchange and discuss.
Series How It Works (Analysis of Operational Model) is a Series to help you understand more deeply about 1 Protocol, how it works and its potential for future development.
Brothers, if you want to learn more about the working model of Protocol, please commnet in the comment section so we can do it in the next issues.
Disclaimer: All information contained in this article is intended to provide readers with the latest information in the market and should not be considered investment advice. Crypto investment is a very risky form of investment, readers need to learn carefully before investing and should only participate with capital that can be lost.