f(x) Protocol: Decentralized Yield-Bearing Stablecoin & 0-Liquidation Perp - Cyrille Brière

FX Protocol introduces a leverage product for ETH and BTC with a unique cost structure that includes only a one-time opening and closing fee, eliminating ongoing costs. It abstracts the looping process, allowing users to achieve overexposure to their collateral. A standout feature is its innovative liquidation mechanism, which prevents hard liquidations, evolving the traditional Collateralized Debt Position (CDP) model.

The stability mechanism employs a yield-incentivized strategy using FXUSD and USDC. When FXUSD trades below its peg, USDC is used to buy FXUSD to restore balance, and if FXUSD trades above one, it is sold back for USDC. Cyrille Brière, a core contributor, emphasizes the importance of decentralized stablecoins, especially after the USDC depeg incident in March 2023, advocating for alternatives that provide trustworthiness and scalability. FXUSD has achieved a market cap of over 100 million without venture capital funding, indicating organic growth.

Cyrille discusses the advantages of decentralized stablecoins, such as censorship resistance and reduced financial risk through trust abstraction in code. He acknowledges the convenience of centralized stablecoins but warns of potential disappointments. Concerns about decentralized options persist, particularly due to past failures like UST, leading to questions about whether FXUSD is algorithmic.

The FX Protocol's mechanism offers a predictable cost structure and a leverage product that provides directional leverage on ETH and BTC. Users typically leverage through external protocols, which can be cumbersome and risky. In contrast, FX Protocol offers built-in leverage of up to 7X, featuring a gradual liquidation mechanism that allows for more manageable liquidations. When a leverage position crosses 88% Loan-to-Value (LTV), it is adjusted back to 88% to prevent reaching the 95% hard liquidation threshold.

The liquidation mechanism is socialized, allowing collateral from multiple positions to support each other, enabling higher LTVs and more efficient liquidations. The fixed liquidation penalty on FX Protocol is 25%, lower than other protocols, allowing for up to 50% of a position to be instantly repaid upon liquidation. Notably, FX Protocol has had zero liquidations recently, contrasting with other perpetual solutions that experienced significant liquidations.

The stability pool acts as a peg keeper, attracting USDC to support its peg. The protocol generates nearly $1 million monthly, primarily distributed to the stability pool and governance token lockers. However, the main risk for liquidity providers is the potential de-PEG of USDC. In de-PEG mode, new long positions cannot be opened, and a higher funding cost is applied to leverage positions, incentivizing the closure of loans.

The FXSave yield strategy offers sustainable yields between 10% and 20%, managed by smart contracts, contributing to the overall stability of the protocol. The protocol has achieved a Total Value Locked (TVL) of over 400 million organically, highlighting the importance of building trust in a decentralized stablecoin. The token's fixed emissions over 50 years make it less speculative compared to VC-backed projects.

The long-term vision for FX Protocol focuses on creating sustainable projects without seeking VC funding, instead welcoming market purchases of the token. This approach aims to increase liquidity and stabilize the TVL in the stability pool. The discussion also emphasizes the risks posed by centralized assets like USDT and USDC, advocating for decentralized alternatives when feasible.

FX Protocol's unique position in the competitive perpetuals market is noted, with a focus on zero stress leverage, contrasting with traditional leverage risks. The evolving landscape of stablecoins is discussed, with institutions beginning to adopt them, leading to a rise in branded stablecoins. FX Protocol sees opportunities in catering to institutions with tailored products, aiming to provide safe yields without DeFi risks.