Recently , there have been new moves on the stablecoin track.
The privacy stablecoin protocol Zephyr has risen rapidly. The market value of the token ZEPH has increased five times to 30 million US dollars in one month. Why can it stand out in the highly competitive stablecoin market?
First of all, Zephyr is built on Monero, even the wallet is the same.
Extended reading: What is the ancestor of privacy coins "Monero XMR"? Development status, future prospects, market growth, regulatory crisis
ZEPH is the base currency of the protocol, with a total supply of 18.4 million and a current circulating supply of 1.35 million. The Zephyr protocol runs on the RandomX Proof-of-Work (PoW) algorithm, designed to optimize general-purpose CPUs and support decentralized and equal mining. However, Zephyr has a block time of 120 seconds and its launch curve is slightly slower than Monero. This choice was made to reward early adopters and limit dilution, slowing initial emissions and mitigating any inflationary impact on the ZEPH price, thereby enhancing the stability of the algorithmic stablecoin system. The graph below shows emissions compared to Bitcoin and Monero:
At its core, the Zephyr Protocol is an over-collateralized, cryptocurrency-backed stablecoin protocol, a concept that is complemented by the innovative Djed Protocol.
What is DJED? Inspired by AgeUSD and developed by well-known organizations Emurgo, IOHK and the Ergo Foundation, Djed is a stablecoin protocol with a proven stability mechanism.
Its principle can be summarized as an autonomous bank that buys and sells stablecoins in a price range linked to the target price. The stabilization mechanism has been tested by the market. Currently, zephUSD behind it has basically not de-anchored.
ZEPHYR How to avoid the “death spiral”
Although Luna's collapse has been a while now, the "death spiral" is still an unavoidable topic for stablecoins. So how does ZEPHYR avoid the "death spiral"?
Extended reading: UST Death Spiral Brews "Anchor 1 Billion Magnesium Liquidation!" Tether CTO: Terra is a poorly designed "castle of cards" and not a soft carpet
A “death spiral” typically refers to a situation where an algorithmic stablecoin protocol is forced to mint an excess of base tokens to maintain the peg of its stablecoin, causing the value of the base token to spiral downward.
The Zephyr protocol ensures that no additional ZEPH will be spontaneously created, as ZephUSD is backed by ZEPH being over-collateralized in reserves, and importantly: the core mechanism of the stablecoin is not algorithm-dependent. The supply of ZEPH grows only through periodic emissions. Such an approach safeguards the stability and value of the network, as a constant emission rate eliminates the risk of sudden inflationary shocks that could destabilize the system.
In other algorithmic stabilization protocols, spontaneous and unlimited base token minting is often employed to ensure the stability of the stablecoin, leading to a potential death spiral. Fundamentally, Zephyr doesn't follow this approach.
Zephyr Protocol v1.0.0
On October 1, 2023, Zephyr Protocol achieved a critical hard fork, enabling two new assets on the Zephyr blockchain. Zephyr Stable Dollar ($ZSD) and Zephyr Reserve Shares ($ZRS).
$ZSD is a privacy stablecoin that is over-collateralized and backed by ZEPH.
The main advantages of $ZSD over other stablecoins:
- Privacy : Amounts, recipients, and destination addresses are hidden in $ZSD transactions.
- Decentralization : Other stablecoins (i.e. USDT) are operated by centralized entities, which runs counter to the decentralized spirit of DeFi.
- No base currency inflation : Algorithmic stablecoins must mint a base currency to maintain their peg, leading to inflation. $ZSD is not algorithmically pegged, but is cryptocurrency-backed.
- Overcollateralization : At the time of minting $ZSD, there needs to be >400% ZEPH in reserves to back $ZSD. USDT is backed by <1% of Treasury bonds.
- Facts : The Zephyr protocol is inspired by the proven Djed protocol, which has been implemented with SigmaUSD (Ergo) and Djed (Cardano) for many years.
- Low transaction fees : transferring $ZSD costs less than a cent.
Zephyr Reserve Share ($ZRS) holders receive a portion of the slot reward in each block as a premium for supporting the Zephyr Stable Dollar ($ZSD). Reserve providers are effectively betting on Zephyr in terms of value and adoption.
Incentives for reserve providers:
- Leveraged position : As the price of Zephyr increases, the value of ZEPH in the reserve also means that there is more equity available
- Switching fees : As adoption grows and the protocol is used more frequently, more fees will be incurred, thus increasing reserve assets.
- Block Rewards : 20% of block rewards go directly into the reserve, supporting the reserve and providing another avenue for ZRS to appreciate in value.
- Spot and MA Divergence : Due to the dual pricing of Zephyr assets, users will use the "worse" exchange rate between the spot price and the moving average price. This mechanism is used to prevent manipulation, but has the added benefit of aiding reserve.
This incentive structure is called the "pseudo- staking rewards" on the Zephyr protocol.
Example of asset collaboration within the Zephyr ecosystem
Let's use two user scenarios to understand the mechanics and functionality of the Zephyr protocol. For simplicity, we exclude fees and other additional agreement features from these examples:
Scenario 1: When the base currency (ZEPH) price increases
Suppose Alice is a user with 100 ZEPH and is looking for value stability.
On the other side, Bob owns 200 ZEPH. He seeks asset appreciation and bets on the future value of ZEPH.
Bob becomes a reserve provider, depositing his 200 ZEPH into the Zephyr protocol and minting reserve tokens ($ZRS). These tokens can be redeemed for base ZEPH reserves at any time as long as the reserve is above the minimum reserve ratio.
Alice deposits her 100 ZEPH into the protocol and mints $100 worth of stablecoins ($ZSD).
The total reserve is now equal to 300 ZEPH. Four weeks have passed and the price of ZEPH has increased by 10%.
Alice is excited about the recent price surge and decides to close his position. She exchanged $100 of stablecoins and withdrew $100 worth of ZEPH. When the ZEPH price was $1.10, her stablecoin was exchanged for 90.90 ZEPH, leaving 209.1 ZEPH in the protocol reserve for subsequent use.
Bob, wishing to secure a profit, exchanges his reserve tokens for the remaining reserves and receives 209.1 ZEPH. Therefore, Bob makes a profit of 9.1 ZEPH by becoming a reserve provider, while Alice maintains value stability by minting stablecoins.
Scenario 2: When the base currency price falls
Now, let’s take a look at the ZEPH price drop. Assume that Alice and Bob start with the same number of stablecoins/reserve tokens as in the previous example. Four weeks later, the price of ZEPH dropped by 10%.
Alice decides to exchange her stablecoin for $100 worth of ZEPH. When the ZEPH price is $0.90, she receives 111.12 ZEPH, leaving 188.88 ZEPH in the protocol reserve.
Next, Bob decides to close his reserve token position and receive the remaining reserve tokens, receiving the remaining 188.88 ZEPH in the reserve. In this case, Bob instead lost 11.12 ZEPH by providing reserves to the protocol, while Alice kept the value stable relative to the US dollar through the stablecoin ($ZSD).
It is not difficult to see from the above example that Zeph, ZSD, and ZRS cooperate with each other to form a stable flywheel:
- Zeph – Limited supply base coin
- ZSD – Stablecoin
- ZephRSV – Earn block rewards and a share of profits from those minted and redeemed
However, there are always regulatory risks with privacy coins. Many governments do not agree with privacy coins, which may limit the appeal of privacy coins to ordinary cryptocurrency users. This is also the problem ZEPHYR currently encounters. The solution Zephyr has come up with is to integrate with decentralized exchanges (DEX), but it remains to be seen whether this approach will be effective.
