Contents
Preamble
As the SEC brings securities charges against BUSD and with Binance listed LQTY, the governance token of Liquity, a decentralized stablecoin protocol, the spotlight is once again on decentralized stablecoins.
Mint Ventures has long been focused on these rapidly evolving stablecoin protocols, offering timely and comprehensive coverage of notable projects such as:
- FRAX Finance: From Monetary System to DeFi Matrix
- Angle Protocol: The Academic Stablecoin Rookie
- The Rise of Terra: How to Build The Stablecoins Ecosystem
Decentralized stablecoins continually face regulatory uncertainties akin to the Sword of Damocles, yet this is also a crucial driver of their growth. Mint Ventures has consistently monitored regulatory developments, assessing the opportunities and challenges facing decentralized stablecoins in research:
- With the Opportunity Brought by Regulation, Which Decentralized Stablecoin Will Stand Out?
- Does Tornado Cash Sanction Warm-up Into a New Decentralized Stablecoins Spring?
In this report, we turn our attention to Reflexer Finance, a standout decentralized and trustless stablecoin protocol featuring RAI, a stablecoin that operates independently from centralized currencies and even Federal Reserve.
Key Insights
Core Investment Logic
RAI is one of the most decentralized stablecoins on Ethereum. Vitalik Buterin, the founder of Ethereum, has praised it as the pure “ideal type” of a collateralized automated stablecoin, backed by ETH only. Unpegged to any fiat currency, RAI boasts full decentralization, governance minimization, and a high degree of trustlessness.
Stablecoins have a solid business foundation and have seen impressive growth throughout the latest crypto cycle, outpacing the industry average. Decentralized stablecoins, like RAI, show even greater potential for development under the background of strict regulations on centralized stablecoins. They align more closely with the censorship-resistant and trustless ethos of the crypto world, despite being less established at present. RAI’s unique attribute of not being pegged to any fiat currency sets it apart in the stablecoin protocols, shielding it from US regulation and the influence of the Federal Reserve’s monetary policy.
Main Risks
RAI may have some potential risks:
- Product-Market Fit Risk: Users may show low acceptance for stablecoins that are not pegged to fiat currencies
- Marketing Challenges:
- Relying solely on ETH as collateral could hinder RAI’s adoption among users.
- The governance minimization approach may limit the team’s ability to introduce breakthroughs in operations.
- The team has fewer breakthrough points in operations because of governance minimization
- With only 160,000 FLX tokens (worth less than $2 million in market cap) reserved for protocol incentives, the incentives for further promotion could be insufficient.
- Team Risks: After the departure of co-founder Stefan, the team made little progress in use case expansion and marketing promotion over the past year.
- Code Risk: Despite its innovative mechanism, RAI’s PID-based on-chain control system(Proportional-Integral-Derivative Controller, widely used for feedback control in industrial design) is unprecedented, which means risks should not be overlooked even though it has functioned securely for two years and undergone audits by trusted third parties.
Valuation
In terms of the price-to-sales (P/S) ratio, Reflexer’s valuation is lower than that of Liquity, another fully decentralized stablecoin on Ethereum. However, when comparing the market cap of their stablecoins, the situation is reversed.
For more details, please refer to Section “4.2: Valuation”
The Overview of RAI
Project Scope
Developed and managed by Reflexer Labs, Reflexer Finance’s one and only business is “stablecoin”.
The core business process is straightforward: users overcollateralized ETH to mint the stablecoin RAI, paying a 2% annual interest to continue utilizing RAI. RAI holders can redeem ETH by paying back RAI and interest. Currently, FLX (RAI’s governance token) holders oversee system governance, with a long-term goal of achieving the “governance-free” state.
Distinct from DAI and most other stablecoins, RAI is not pegged to any fiat or physical currency. Instead, the redemption price is automatically adjusted based on market supply and demand, with the objective of creating a “low volatility ETH-based asset.” For more information, please refer to Section “2.3: Business of RAI”
The History and Roadmap of RAI
The milestones of Reflexer Finance:
| 2020.2 | With the idea of improving on MakerDAO, Ameen Soleimani proposed the concept of Metacoin, the predecessor of Reflexer Finance, at the Ethereum Research Forum. |
| 2020.4 | MetaCartel Ventures Announced Investment in Reflexer Labs, the Development Team of Reflexer Finance. |
| 2020.8 | Announced a $1.68 million seed funding round led by Paradigm. |
| 2020.10.29 | Proto RAI Beta version goes live on the Ethereum mainnet. |
| 2020.11.24 | Open Zepplin completes the audit of Reflexer. |
| 2021.2 | Announced a $4.14 million funding round led by Pantera and Lemniscap. |
| 2021.2.17 | RAI officially goes live on the Ethereum mainnet. |
| 2021.2.22 | The total locked ETH position exceeds 100,000 after RAI went live on the Ethereum mainnet for 5 days. |
| 2021.3.1 | Announced FLX’s Tokenomics and use cases, as well as the retroactive airdrop program. |
| 2021.4.1 | Lending Protocol Cream announced support for RAI’s supply and borrow. |
| 2021.4.9 | Lending protocol Rari announced support for RAI’s supply and borrow. |
| 2021.4.15 | Token FLX officially launched. |
| 2021.6.24 | Lending protocol Aave announced support for RAI’s supply and borrow. |
| 2021.7 | RAI bridge to Polygon. |
| 2021.8.4 | Coinbase announced to list RAI. |
| 2021.8 | RAI bridge to Fantom. |
| 2021.9 | RAI bridge to Avalanche. |
| 2021.10 | RAI bridge to Arbitrum. |
| 2021.11.14 | Chainlink Price Feed Announced to list RAI. |
| 2021.11 | RAI bridge to Optimism. |
| 2022.2 | The protocol began to add the integral parameter. (You can find more details in Section 2.3.1) |
| 2022.3 | The founder Stefan Ionescu announced his retirement from most of the company’s affairs. He now serves as a consultant. |
| 2022.5 | Some contrasts upgraded to the “ungovernance” mechanism. |
| 2022.12 | Lending protocol Euler announced support for RAI’s supply and borrow. |
As RAI looks to the future, the project has set its sights on governance minimization, with plans to potentially add decentralized assets, like stETH, as collaterals. Vitalik Buterin recently wrote a post in the Reflexer Governance Forum, exploring how RAI systems might safely support staked ETH.
