Proposal: Silo Stablecoin
Updated: Feb 9, 2022
Silo is launching a stablecoin, SiloDollar (USDs). This stablecoin will serve as a bridge asset in every Silo alongside ETH.
Silo is launching a veSilo incentive program to incentivize the liquidity of Silo’s stablecoin within each Silo. The big hairy audacious goal is to make SiloDollar the most borrowed coin in crypto. There will be a 12 week beta of veSILO to determine the effectiveness in increasing demand for SiloDollars before determining if the program becomes permanent.
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We are excited to announce a proposal to launch Silo’s stablecoin and make this stablecoin a bridge asset for every Silo. By being the only dollar-pegged asset in each Silo, SiloDollar (a name will be determined later) will become the natural way to borrow against any asset, including newly launched tokens & esoteric yield-bearing instruments.
In addition, SiloDollar should serve as an excellent & liquid bridge asset to bridge borrowing activity between Silos for the many borrowers who would prefer not to use ETH as a bridge asset.
How will the stablecoin work?
We propose that SiloDollar be made up of a basket of multiple 3rd party stablecoins — such as Frax, DAI, LUSD, UST, etc. The approved stablecoins are deposited into a pool on one of the major AMMs — a Curve Gauge or a Balancer stable pool to name a few options.
Depositors receive an LP claim token, representing their ownership in the pool, that can be deposited into the SiloDollar minter to mint SiloDollars. Holders of SiloDollars may redeem their SiloDollars at any time and receive $1 of the LP token minus a 0.85% redemption fee, which will accrue to SiloDAO. This redemption fee is implemented to encourage the development of organic liquidity for SiloDollars rather than frequent minting and redemptions.
How are the backing stablecoins chosen?
A bi-weekly auction will be conducted to determine which stablecoins will back SiloDollar for the following 14 days. Proceeds from this auction will accrue to SiloDAO.
In the first auction, we suggest that there be 3 available backing slots, each representing ⅓ of the total backing for SiloDollar. SiloDAO will approve stablecoin projects in advance as to whether they can participate in the bid and how many slots they can buy (as a single project may be allowed to win more than one slot). By pre-approving the participants, SiloDAO can ensure that SiloDollar is only backed by high-quality stablecoins that keep their peg even in adverse market conditions.
We propose the following auction system:
T-14 days = Every other Monday, a blind auction will occur. All bids must be submitted by 23:59 UTC and are locked until the next set of backers is finalized.
T-13 days to T-7 days = SiloDAO accepts/rejects proposals of bidding parties based on a combination of bid size, perceived riskiness, and backing diversification. The backing set for the upcoming week is finalized by 23:59 UTC on the Sunday after the auction. Losers of the auction are refunded their bids.
T-6 days to T-0 days = If there is a transition to a new backing asset from the previous week’s backing set, the new asset must prepare a swap for the old asset at par value.
T-0 = The new set of backing assets is complete and finalized for the next 14 days.
Why would a 3rd Party project want to buy a backing slot?
Winning a backing slot provides immediate demand for a 3rd party stablecoin. Many lenders wish to receive the large yields often earned by lending dollars against long-tail assets and, with Silo’s risk-isolating money markets, Silo is the safest place for that lending activity to occur.
With SiloDollar being the only dollar-denominated asset to be in every Silo, a project that owns a backing slot will see new demand to create and lock up their token to mint SiloDollar as well as increased liquidity by being part of the deep Silo pool on the AMM — e.g. Silo’s Curve Gauge. The value of owning one of the backing slots will be directly related to the demand for SiloDollars, which will increase as the Silo ecosystem expands.
Why peg to other stablecoins? Why not launch a native stablecoin?
By pegging SiloDollar to other stablecoins at launch, Silo doesn’t need to worry about keeping the peg. Silo doesn’t need to artificially limit the growth of SiloDollar based on how well we can keep the peg of a nascent stablecoin nor does it need to decide among the multiple different mechanisms used to keep pegs, whether it is partial algorithmic backing, overcollateralization, floating peg or a new method that has not yet emerged.
This allows SiloDAO to focus on what really matters — having SiloDollar become the most borrowed stablecoin until it becomes a natural unit of account. By having the most debt denominated in SiloDollar, we hope that SiloDollar and other future Silo-issued bridge assets can develop permanent bids that will help them keep tighter pegs than even their underlying backing.
In the future, this will make it easy for SiloDollar to become a native stablecoin with a direct seigniorage mechanism, should SiloDAO ever choose to do so, as the debt will remain denominated in SiloDollars regardless of whether it is pegged to other stablecoins or uses another mechanism of to keep the peg.
veSILO Pilot Incentive Program
The veSILO incentive program aims to incentivize the liquidity of Silo’s stablecoin within Silos. The big hairy audacious goal is to make SiloDollar the most borrowed coin in crypto. There will be a 12 week beta of the program to determine the program effectiveness in increasing demand for SiloDollars before determining if the program becomes permanent. Incentives can be distributed to Silos according to weights decided by token holders.
For example, every 7 days, $SILO emissions are directed to certain Silos. A Silo’s voted emission weight is divided proportionally among depositors of USDs within the Silo. For example, if the Frax Share (FXS) Silo is rewarded 1,000 $SILO per day, then someone who has 20% of the SiloDollar deposits in the Frax Share Silo will receive 200 $SILO per day in incentives on top of any interest received due to natural borrowing and lending within that Silo. By rapidly increasing the demand for SiloDollars, we expect there to be increased demand from stablecoin projects to bid to become one of the assets that backs SiloDollar.
Why would a project want to incentivize a liquid lending market with veSILO?
By increasing the net APR SiloDollar depositors receive through SILO emissions, Silos can increase their SiloDollar liquidity while keeping SiloDollar borrow rates low. This will improve the ability to make markets, underwrite options, and other financial activity only possible with a deep lending market.
How should we determine if veSILO is a success?
If the backing auction for SiloDollar generates meaningfully more revenue than the value of the SILO rewards distributed in the veSILO program, we should consider extending the veSILO program. If the value of the SILO rewards is less than the bids generated in the backing auction for SiloDollar, then we should likely terminate or reconfigure the veSILO program.
What does Silo need to achieve these goals?
As the core contributors work to build out these new initiatives, they will need the following resources:
Expand the team: In the next 45 days, we plan to add 3 smart contract engineers, 1 business development lead, 2 front-end engineers, and 1 product designer to the team.
Vest Future Contributors’ token allocation to the development fund’s multisig wallet instead of the DAO’s treasury. This action doesn’t change the current token allocation for Future Contributors but rather makes it easier for the team to manage new hires’ vesting contracts. Instead of asking the DAO to approve each hire’s token allocation, change an existing contributor’s allocation or revoke it if a hire leaves the team for any reason, the core team can take such actions in a timely manner — which is crucial to expanding and maintaining a strong team.
Extend development runway: With expanded team and larger tech infrastructure, the development fund will need an additional $7.5M to extend its runway to 2 years. Funds can be either secured by selling tokens from the treasury or using DAO’s ETH holdings.