Symphony Blockchain: Orchestrating a New Era of Stable Digital Assets
Introduction
Stablecoins make a big part of current DeFi in the blockchain. But how safe are the current stablecoins?
Solution to this problem is the Symphony blockchain. The blockchain is based on the Cosmos SDK and it provides a solution to having real world assets on the blockchain. It aims to solve problems related to the stablecoins stability while providing the decentralized solution. But why is there a need for Symphony blockchain? And why are old stablecoins inefficient? Find out in the article.
A brief history of Algorithmic Stablecoin Crashes
In the past, there were a couple of stablecoins that were abused or exploited. You will see why there is a need for stablecoin reform.
The one of the most horrific stablecoin crash was on the Luna blockchain because of the UST algorithm. The algorithm was designed to peg UST and some theorize that massive unstaking of UST from the Anchor platform caused the token to de-peg. Although some speculate this was an organized attack, it made everyone question algorithmic stablecoins.
Around the same time, the hacker exploited a bug and minted 1.3 billion of aUSD tokens, causing an impact on another stablecoin called Acala. There was a bug in one pool, iBTC/aUSD, which was exploited.
Prior to these protocols, there was a similar protocol called Iron Finance, which relied on smart contract and algorithms. The algorithm worked similar to Luna, where the main token (in this case TITAN) was burned or minted depending on the needs. To their smart contract, they have added a feature to their smart contract code that used a time weighted average price. But the problem was during the larger volumes, it was missing by a lot. When the smart contract valued the TITAN token to be worth $0.3, the token’s real worth dropped to $0.2, making a room arbitrage and around 5% gain on each transaction. It lead to users panicking and caused a “bank run” where all users tried to withdraw assets, resulting in the crash of Iron Finance.
There are more projects that had some similar faith. We showed only a couple of these projects to give you an insight into the problem.
Overcollateralized Stablecoin innefficieny
Some Stablecoins allow users to mint stablecoins by depositing a crypto assets. In theory, it sounds great, but the problem with this type of token is that you need to over collateralize your positions, otherwise your assets might get liquidated.
On top of that, you still rely on an entity that regulates these stablecoins. How many assets can be used as a collateral? What is the maximum ratio of assets to stablecoin allowed to be minted?
And they are highly inefficient. Some safer assets, like BTC or ETH, are allowed to mint more stablecoin than other assets. And even then, not all capital will be efficiently used. For example, if there is a limit of 200% collateral, then at best, the use would be for $2 worth of assets $1 worth of stablecoin will be minted.
But realistically, this would be a very aggressive strategy, and the user could be liquidated easily. So, depending on the assets and user risk tolerance, this gap could be even higher.
Centralized fiat-backed stablecoins trust problems
These Stablecoins are the most widely used. Some of the more popular are USDC, USDT, PYUSD and so on.
These token have some advantages:
Since the collateral is not held on the blockchain, they are less vulnerable to hacks and exploits. They are easy to understand and are more stable to market volatility.
But there are also some cons:
Because of being highly regulated and centralized, transparency is lacking, necessitating trust in independent auditors and the guarantee of fiat coverage for each stablecoin.
At times, there were irregularities that occurred behind the scenes. There have been multiple accusations of USDT engaging in misleading practices. Tether has been involved in various legal and regulatory challenges. Allegations have been made against the company for operating without adequate oversight, and it is currently being investigated for its financial practices.
Last year PayPal was investigated by SEC because of their PYUSD token. While fiat-backed stablecoins are easy to use and are more resilient to the market's high volatility, they are very regulated, can be affected by geopolitics and whether the coin is backed by the fiat can be questionable.
Symphony’s solution to the Stablecoin dilemma
Each type of stablecoin has some advantages and disadvantages. Crypto over-collateralized stablecoin seems like the safest of the all, but there is still some form of control from an entity while capital efficiency is very low.The fiat-backed stablecoins are the most stable ones in terms of price volatility, but are not transparent.Algorithmic stablecoins are based on complex mathematical equations. And how much are they stable and does the algorithm work?
Symphony aims to introduce multiple safety procedures and to implement multiple existing solutions.
Arbitrage rebalancing
This is the very first level safeguard. The algorithm pegs the HUSD to $1 by burning/minting Melody.
Supply Side Rebalancing
Symphony’s system places greater emphasis on maintaining proper collateral levels rather than strictly controlling price. In order to keep operations stable, Symphony’s algorithm dispenses twice the amount of $Melody when the collateralization ratio decreases from 1:1 to 1:2, ensuring the value of conversion.
Dual-Elasticity Algorithm
Symphony’s crypto-backed nature comes into play with the second of its safeguards, taking advantage of the 2:1 elastic reserves. These reserves are kept at 2:1 at minimum. When the value of the coin rises, these reserves rise past that minimum quickly and easily, making the system more secure as circulating supply falls.
High Capital Efficiency
Symphony maintains a minimum 2:1 reserve ratio but requires only $1 of capital to create 1 HUSD. This approach achieves high capital efficiency while ensuring sufficient collateral backing.
Besides these safety procedures and perks there are some other safeguards such as the delayed transactions and partial transactions, as well as the multi-key reserves, do not yet have infographics, but are also an essential part of ensuring Symphony can maintain the reliability of its tokenized assets.
What makes Symphony unique?
- Using features from algorithmic and over-collateralized stablecoin, they made a product which combined best from both worlds. It uses algorithms and crypto-backed assets to create and maintain their stablecoin.
- It has multiple safeguards to ensure security and stability of the funds while keeping capital efficiency high.
- The entire process is decentralized, and the blockchain architecture ensures resilience against censorship, regulatory interference, and single points of failure.
Conclusion
As the DeFi landscape continues to evolve, Symphony stands at the forefront of innovation, offering a unique solution to the stablecoin dilemma. By combining the best aspects of algorithmic and over-collateralized stablecoins, Symphony presents a decentralized, efficient, and secure alternative to traditional stablecoin models. With its multi-layered safeguards, high capital efficiency, and resilience against censorship and regulatory interference, Symphony is poised to play a pivotal role in shaping the future of digital assets.