Sep 19, 2022

9 min read

🤝 Ethereum, meet MAI!

A brief introduction to the MAI stablecoin

2022 has seen the rise and fall of stablecoins that purely relied on algorithmic mechanisms to sustain their pegs, privacy protocol users being censored by centralized stablecoins and OG decentralized stablecoins bouncing around ideas of a free floating peg to truly become censorship resistant. Many people have come to wonder just how “stable” are the stablecoins they are holding.

With MAI coming to mainnet, QiDao wants to introduce the Ethereum community to a crosschain, overcollateralized, and decentralized stablecoin, backed by your favorite non centralised collaterals.

Before we dive deep into what makes MAI unique, let’s catch everyone up on popular types of stablecoins to understand the landscape:

Algorithmic Stablecoins (e.g. UST): Mint $1 worth of stablecoins by burning $1 worth of Asset X. Redeem $1 worth of Asset X in return for burning $1 worth of stablecoins. Supply and demand is used to keep value at $1 and is maintained through arbitrageurs finding profitable mint and burn exchanges when peg is not at $1.

The risk with this type of stablecoins is that they often rely entirely on supply and demand to retain their peg. While this isn’t always a problem, black swan events or massive declines in the price of assets used to mint them can cause the stablecoin to lose peg, creating a death spiral with the stablecoin struggling to rebound to $1.

Fiat Collateralized Stablecoins (e.g. USDC, USDT): These coins are backed by good old-fashioned fiat like USD! $1 in stablecoins is minted for every $1 held by a centralized authority in reserves. Redeem stablecoins to get your fiat back.

Up until recently, many would say Fiat Collateralized stablecoins are the safest form of stablecoin because they are backed by 1:1 fiat reserves in a bank. What makes these fiat backed stables so safe from a peg aspect comes with the drawbacks of centralization. The companies that back these stablecoins, such as Circle and Tether, ultimately have power over the assets. If a government agency suspects foul play from a user’s wallet, they can ask for that user’s wallet to be blacklisted, causing the user to lose the value of those stablecoins. While fiat-backed stablecoins play a big and important role in crypto, they don’t exemplify the decentralization that a lot of users come to DeFi for.

Overcollateralized Crypto-backed Stablecoins (Collateralized Debt Position — CDP) (e.g. MAI, LUSD, DAI): Mint $1 worth of stablecoins by locking up more than $1 worth of crypto assets as collateral. Redeem/repay stablecoins to get collateral back.

If you’re looking for a stablecoin that’s always backed by collateral, but also remains decentralized and permissionless, then an overcollateralized stablecoin backed by decentralized assets is a good choice. These types of stablecoins are often backed by volatile assets, so the value of the collateral fluctuates depending on the market. However, as long as the stablecoin protocol has robust liquidation mechanisms in place, the protocol can avoid bad debt during periods of high volatility and maintain a strong peg. The CDP model has been tested time and time again and is considered by the crypto community to be one of the safest stablecoin models.

So what type of stablecoin is MAI?

MAI is an overcollateralized crypto-backed stablecoin issued by users of QiDao. QiDao enables crypto holders to use their decentralized assets as collateral to get a loan at 0% interest. This way, users can maintain ownership of their favorite crypto while still being able to use them to get stablecoins when they need them. Since the loans are interest-free, borrowers can repay the loan at their own pace.

In order for MAI to always remain overcollateralized, users lock up their crypto and can mint MAI up to a certain amount, such that the collateral/loan value remains lower than the minimum set collateral ratio limit. Confusing? Let’s walk you through an example:

Brittney’s monthly phone bill is coming due. She is running low on fiat to pay her bill but has some of her beloved ETH investment. Brittney is faced with a few options, either she sells her ETH, losing out on the potential upside, or borrow against her ETH, retaining ownership of her tokens. Lets say Brittney has $100 worth of ETH. The minimum collateral to debt ratio for ETH vaults is 120%, therefore the maximum amount of MAI Brittney can withdraw for each $100 in collateral is 83.3 MAI ($100/$83.3 = 120%). Brittney borrows her 65 MAI and pays her phone bill. If the value of Britney’s collateral increases she will be allowed to borrow more MAI against her ETH collateral. If her collateral value decreases, Brittney will need to repay some of her loan to make sure her vault remains above 120% CDR, or she runs the risk of being partially liquidated. More on liquidations later.

As you see the process is simple

Deposit Collateral
Mint MAI at 0% interest
Use your MAI and manage your debt position

Now you know what MAI is. Let us walk you through some of the mechanisms that make it unique.

Isolated risk — Separation of collaterals and users

Isolation of funds on QiDao brings new levels of safety for users. Most major lending markets suffer from a lack of sufficient isolation, pooling together all users deposited liquidity to be lent out. This commingling of funds presents a risk if one collateral type in a pool experiences extreme volatility, exposing users to others’ bad debt.

To avoid this problem QiDao segregates all user deposits from each other. Not only that, deposits are also separated by collateral type. Borrowing on QiDao is decentralized and non-custodial, only users have privileged access over their deposits in vaults.

Collateral risk

Backed by over 70 collaterals and minted on 12 blockchains, MAI is one of the most decentralized and diversely backed stablecoins in all of DeFi. A diverse set of assets helps to ensure that MAI is never over-exposed to any one particular asset, and is therefore less likely to experience scenarios where MAI would find itself undercollateralized due to extreme changes in the value of any single asset. Users can use static tokens like ETH and CRV or exotic interest bearing assets collateral such as Beefy, Yearn, and AAVE receipt tokens.

Before an asset can be used as collateral for MAI, it goes through QiDao’s rigorous asset listing process.

Accurate pricing: Mai Finance only accepts assets as collaterals that have Chainlink Price Feeds. These price feeds are critical as they help secure underlying collateral calculations by providing high-quality, decentralized market data that’s resistant to API downtime, flash crash outliers, and data manipulation attacks that make reliable operations possible.
Asset Risk analysis: Following QIP111, in order to add new collateral types there must be a public risk assessment performed by the community, determining the risk profile of an asset and a minimum collateral to debt ratio.
Governance insight into new deployments: all new vault and oracle code are approved by the DAO before vaults are launched.
Vault size limits: caps the debt size that each individual vault can have to keep them under acceptable risk parameters.

Native and fungible

MAI can be bridged and traded on over 20 different chains, making it the most cross-chain decentralized token. It operates under a canonical bridging system, unifying MAI across all chains to use the same version. This eliminates the systemic risks of having bridges minting their own versions and facilitates interoperability to help users use the same MAI among different chains and dApps.

To read more about our improved QiDao V2 vaults and safety measures, we cover them in detail in this Medium post.

Peg Maintenance

Assumed debt value

When users mint MAI, their debt is denominated in MAI, not USD. This means that they can always pay off $1 of debt by repaying 1 MAI. MAI loans do not charge interest; instead, they have a single, .5% fee upon repayment of the debt. Users can keep MAI loans open for as long as they want. Because there is no time limit on the loan, users are encouraged to repay the loans when MAI trades below $1. This arbitrage opportunity lets users buy MAI for less than $1 and repay the loan valued at $1. The incentive to buy MAI for repayment when trading below the peg increases demand, which pushes MAI back to the peg. On the other side of the peg, if users see MAI trading above the peg, they are encouraged to mint MAI from their vaults and sell it for a premium.

To maintain the peg of MAI, QiDao relies on market forces as well as three main mechanisms: debt ceilings, liquidations, and interest-bearing stablecoin leverage.

Debt Ceilings

Debt ceilings are the maximum amount of MAI that can be minted for each collateral type. This helps QiDao not be beholden to any single collateral type. Constant on-chain liquidity monitoring is maintained for all collaterals and chains QiDao is on. This monitoring helps track the onchain liquidity of an asset to make sure that the MAI debt against that asset does not become too large to liquidate easily. This collateral monitoring and diversity reduces the overall systematic risk of the protocol greatly, and ensures that if a collateral token price drops greatly, the protocol and MAI can remain solvent. The debt ceilings also protect against large amounts of MAI being minted and entering the market (hyper borrowing), which could trigger a depegging event. If demand for MAI remains sustainably high, the protocol can gradually raise the debt ceilings for each collateral type.

Liquidations

As mentioned previously, liquidations are key for any overcollateralized stablecoins protocols to avoid bad debt and remain solvent. Liquidation is the process of selling collateral and repaying debt to make sure that there is always enough collateral backing MAI from a vault.

Any vault whose collateral to debt ratio falls below the liquidation ratio can be partially liquidated. Each vault type will have its own liquidation ratio, based on the risk profile of the particular collateral asset type. This is to ensure there is always sufficient collateral in the vaults to cover all outstanding debts.

When vaults fall below the liquidation ratio, liquidators have the opportunity to repay 50% of the vault’s debt and withdraw a portion of the locked collateral tokens as compensation. To ensure the protocol always has quick and robust liquidations, liquidators receive a 5% and 10% spread on stable and volatile vaults respectively, coming from the users deposited collateral.

Interest bearing Stable Leverage

When the peg of MAI is above $1, the protocol will increase the debt ceilings for interest bearing stable vaults. This is because the low risk and high loan to value ratio of stable collaterals make them attractive for high leverage, where the new MAI is sold for more ib stables and vaults are quickly depleted. Since users can earn much higher APYs than the minting fee and liquidation risks are close to zero, the debt ceilings fill up, increasing supply of MAI and helping bring peg back down to $1.

Historical Analysis

Since launch, the price of MAI has stayed very close to $1 with a smaller standard deviation than many well known stablecoins. With an average low of $0.992 and a high of $1.016 within the last 3 months the peg maintenance mechanism has performed as intended to maintain the soft peg. In fact, in the past year, MAI has only deviated by more than 2 cents on 3 occasions due to macro events before quickly rebounding back to peg.

Additionally, liquidations on the protocol have been automatic and dependable. Over 20,000 liquidations have occurred on the protocol, with a single liquidation high of over 1 million of worth of collateral liquidated, meaning the protocol can handle both volume and size.

Before the most recent bear market hit MAIs TVL peaked at just over 380 million, while now it sits at 75 million after the recent market capitulations. To be able to maintain peg after such large market downturns and decrease in supply shows the robustness of the protocol design to ensure peg stability. This is a great sign for the future to show that expanding and contracting the supply of MAI due to market conditions will not have a large or lasting effect on the peg.

Future Outlook

After months of building one of the largest and most cross chain stablecoin protocols in DeFi, QiDao is coming to Ethereum. With its decentralized nature, overcollateralized backing, and strong peg mechanics, MAI should be a staple in every defi users stable holdings.

Try out our new Ethereum vaults at https://app.mai.finance/vaults/create