Level up your DeFi knowledge and subscribe to our newsletter!
Centralized stablecoins have many unknown risks. If you are holding a significant amount of Tether in your portfolio, you probably know what we are talking about. By holding centralized stablecoins, you are trusting a single institution to not mess with your money. In the case of Tether, you trust Bitfinex, that they have an equivalent amount of USD for every issued USDT in their bank account. The problem is: nobody can verify it.
That's why the crypto space is turning increasingly suspicious towards centralized stablecoins. There are too many things that could go wrong. For example, what will happen when we find out that Tether is not 100% backed with USD? This would not only be bad for USDT holders, but rather for the whole crypto space. Why? Because USDT makes up most of today's crypto volume. When Tether goes down, Bitcoin, Ether, and other cryptocurrencies could crash badly.
That's why we need decentralized stablecoins. Stablcoins like DAI are an excellent alternative leading in the right direction. But DAI also comes with significant trade-offs because it has to be backed by more than 100% of its value (over-collateralized).
Lien is a new approach to decentralized stable coins. iDOL, Lien's native stable coin, does not require over-collateralization and does not include third party risks.
But how exactly does Lien work and how exactly does iDOL solve the problems of existing centralized and decentralized stablecoins?
Let's dive a little deeper!
How Lien works
Lien is a protocol for creating decentralized stablecoins and options on the Ethereum blockchain. iDOL, Lien's native stable coin, forms the core of the Lien protocol.
iDOL is backed by a basket of bond tokens, which ensures that iDOL has a stable price. When you deposit ETH into the Lien smart contract, you receive two bond tokens:
1. Solid Bond Token (SBT)
2. Liquid Bond Token (LBT)
At the time of issuance, both bonds have the same price. They also have the same maturity date.
The LBT holds most of the price risk of ETH, so the price fluctuates. The SBT is stable and therefore forms the perfect base for backing iDOL. As the LBT fluctuates in price and the SBT is stable, the iDOL - USD pair will remain stable over time.
This mechanism has one significant advantage: iDOL does not require over-collateralization to be minted. Therefore the barrier of entry is much smaller than with other stablecoins, like DAI.
When you deposit ETH into the Lien smart contract, you receive an equivalent amount of SBT and LBT (50/50). The SBT is then used to mint iDOL. When the bonds expire, the smart contract sells SBT for iDOL. If ETH's price has increased, users receive even more ETH because they still hold the LBT. If the price of ETH is below the strike price, then you do not receive additional ETH.
This mechanism is essentially a call option, allowing you to speculate on rising ETH prices with 2x leverage.
Lien is governance-free. No authority has the right to change key protocol parameters. Nobody can shut the protocol down because it has no single point of failure.
The FairSwap DEX (AMM)
"Users of FairSwap can benefit from the wonderful user experience that AMMs, or Automated Market Makers, bring to the table. In addition, FairSwap will protect the users from front-running by implementing an additional layer of defense."
FairSwap is a special kind of Automated Market Maker (AMM) built on the Lien protocol. It differs from existing AMMs in two ways:
1. Front running is eliminated
Frontrunning transactions are not possible on FairSwap. Frontrunning is a well-known problem in DeFi. Consider the following case: You detect an arbitrage opportunity, which will make you thousands of dollars, totally risk-free. You are the first person to know about this opportunity and use it immediately. Your transaction is sent to the mempool. This is where the fun starts. Once your transaction is in the mempool, anyone can see it, which is why it is spotted immediately by frontrunning bots. These bots send the same transactions again but with a slightly higher transaction fee. Ultimately, your transaction is useless, and the bots make all the arbitrage money. Things like that are not possible on FairSwap.
2. Dynamic Fee Pricing
Lien users are charged protocol fees in the following way:
- 0.2% when users mint iDOL
- minimum of 0.3% when users use FairSwap, but fees are variable depending on annualized volatility
Every month, 20% of AMM fees and 100% of iDOL minting fees are distributed to Lien token holders.
What the future holds
Lien's future is looking bright right now. There are many things planned besides the FairSwap AMM. For example, Lien users will issue many different exotic options and buy/sell in an NFT market style. With this feature, DeFi more and more resembles traditional financial instruments. You should keep an eye on new Lien releases! Exciting times ahead!
Liem aims to solve a big problem in DeFi right now: making decentralized stablecoins more popular. All in all, the protocol seems to solve this problem very well.
Even Lien's tokenomics seem very attractive as investors can earn a passive income by simply holding Lien tokens. Protocol and Fairswap fees are distributed to the token holders similar to the concept of Kyber network.
Lien does not only provide a simple way to issue decentralized stablecoins without over-collateralization; it also offers leveraged call options for ETH at the same time. The process is so simple that you don't even realize you are betting on increasing ETH prices.
FairSwap solves one of the fundamental problems of AMMs, eliminating the possibility of bot frontrunning. Everyone, who detects an arbitrage opportunity, will be able to profit from that.
So where will Lien be in one year? It's challenging to tell be we certainly believe that the protocol will become a significant player in the DeFi industry. Lien is a project you should keep an eye on!
For more information about Lien, check out their website!
All information presented above is for educational purposes only and should not be taken as investment advice.