Badger and BAI: Bitcoin Backed Stable Credit 🗿

Background :back:

Reflexer Labs is excited to introduce RAI to the Badger community as well as introduce the possibility of BAI, a asset-back credit facility powered by the Badger community!

RAI is a self-stabilizing asset-backed credit facility (more on self-stabilizing assets here). After its launch in February, over $100m worth of RAI has been minted and more than $300M worth of ETH has been deposited in the protocol. RAI has managed to stabilize using its on-chain PID controller and is now undergoing a governance minimization process meant to harden the protocol.


More stats on RAI are available here

Reflexer Labs is now introducing the Money God League, an initiative meant to bring non-pegged stable assets into the mainstream and make control theory a common framework used in a wide variety of DeFi related projects.

The Money God League is specifically targeting strong, established communities that can benefit from running their own autonomous credit facilities. This post is meant to introduce the idea of a stable credit asset called BAI which can be backed by a variety of tokenized BTC flavours as well as derivatives such as tokenized Setts which can unlock liquidity for the Badger community.

Badger as a community have already earned the status of being leading coordinators across the Ethereum space, coordinating one of the most successful airdrop campaigns ever, and incubating a thriving Discord & Discourse community. This is why we think Badger is incredibly well positioned to summon and manage a stable credit facility focused on BTC.

:fire:_ :fire: (Fire Eyes DAO) is working alongside the Reflexer team to communicate and coordinate this partnership. :fire:_ :fire: is a DAO navigating token economic and governance systems across the DeFi ecosystem.

Summary of this post :1234:

  1. Introduce RAI & the ‘BAI’ structure
  2. Kickstart discussion between the Reflexer & Badger communities
  3. Allocating resources in BAI
  4. How governance could look for BAI
  5. Map out the longer term possibilities of collaboration

What is RAI - a TL;DR :question:

:moyai: DeFi Lego

  • Fork of MakerDAO’s Multi-Collateral DAI (MCD)
  • Governance-Minimized in the Long Run
  • Algorithmic (PID) interest rates

:moyai: Self-stabilizing asset-backed credit facility

  • Like MakerDAO, users can unlock credit from their ETH
  • Unlike MakerDAO, debt/credit is not fixed at $1. Rather, it fluctuates based on supply and demand.
  • RAI’s PI controller updates the system’s moving peg to balance demand for debt vs. credit
  • More capital efficient than money markets as capital cost is 0 (RAI is minted)

:moyai: Reserve asset for DeFi, alternative to “stablecoins”

  • More decentralized than dollar coins like USDC & USDT
  • Independent of USD inflationary monetary policy
  • Avoids being targeted by dollar coin regulation like the “Stable Act”
  • Backed by pure ETH, no centralized collateral

Discussion :speech_balloon:

BAI Summary

  • Badger’s focus on bringing BTC to DeFi as well as boasting an active community are the key ingredients to build a ‘stable BTC-backed credit’, a system similar to RAI where BADGER governs a credit facility backed by wBTC, renBTC and potentially other BTC derivatives in the future.
  • Introducing a ‘BTC stable credit’ to the Badger community has two core benefits:
    • The Badger community has a unique credit facility used to leverage wBTC, tokenized Setts and even assets created with other partners such as ibBTC from DeFi Dollar.
    • The Badger community has full discretion over funnelling BTC derivatives inside the protocol and unlocking their liquidity using BAI.

Questions to the BADGER community

  • Would you like to see a volatility-minimized asset backed by multiple BTC flavours?
  • Do you think BAI is a good/appropriate name for this stable asset?
  • What other assets apart from wBTC, renBTC and tokenized Setts would you think would make sense to add to this system?
  • What use-cases do you see for a BTC-backed stable credit?*

Implementation :computer:

Initial setup

If the collaboration were to go ahead, the following steps would be needed to deploy and support BAI:

  • A proposal would be made to BADGER governance, explaining the system, its requirements, benefits, risks and path to adoption. This proposal would also include one collateral type as a starting point to bootstrap BAI.
    • In the event of a passing proposal:
      • The Reflexer team would deploy the new system, recommend controller parameters, carry out ongoing maintenance and share the necessary smart contract infrastructure with Badger.
      • BADGER community would govern the protocol, build and operate the UI, manage communications, and take over the keeper/bot roles.
    • Further discussion and proposals (to both FLX & BADGER communities) would be created around:
      • Liquidity incentive collaboration around the adoption of BAI.
      • Further social and economic alignment between the two communities.

Long-Term Roadmap

  • Work to develop a Collateral Roadmap and a timeline to add new collateral assets in BAI.
    • renBTC or wBTC first?
      • Liquidity, protocol robustness, centralization all things to consider.
  • Create an Incentives Roadmap to encourage BAI liquidity and integrations in other protocols.
  • Collaborate on technical explainers for BAI/RAI and general community education as well as on potentially integrating BAI with protocols where RAI is already plugged in.
  • Collaborate on building smart contract infrastructure that can help the Badger community to upgrade BAI: a contract that sets debt ceilings for multiple collateral types in one transaction, a staking pool for the BADGER/FLX LP wrapped token, a Uniswap v3 feed for BAI etc

Resource Allocation :hammer_and_wrench:

In RAI, the interest accrued by the system is split equally between the protocol’s balance sheet (where it’s used as insurance for the protocol and as a buffer for surplus auctions/buyback & burn a la Maker/DAI) and the protocol’s treasury. The treasury will be used in the future to reward those who update oracles, the controller etc so no one in particular has to pay to maintain the system.

We recommend a similar setup for BAI in the beginning. Later on, governance can add a system staking pool where governance token holders can stake and receive a portion of the system’s surplus. This staking pool should be used as the first line of defence for the system: in case there is bad debt that couldn’t be covered by collateral auctions, the staking pool sells governance tokens in exchange for BAI that’s used to cover the bad debt. If there isn’t anything to sell from the pool, the protocol then uses debt auctions to recapitalize itself.

Governance :balance_scale:

In the short term (1-2 months post launch), we recommend either of the following:

  • The system is fully managed by a multisig
  • Only the BAI governance token and contracts that reference the token are managed by a multisig while the rest of the protocol is managed by token holders from the start

This ensures that we can act quickly if there’s anything wrong with the protocol. After the initial period, we can pass full management responsibility to governance token holders.

In terms of long-term active governance, the following are params/contracts that may need to change more frequently:

  • Stability fees (usually you can just set this once per collateral and leave it like that unless the risk profile of that collateral changes which shouldn’t happen too often).
  • Contracts/adapters to allow people to add new collateral types in the system (we already have several adapters and can show the Badger community how to add new ones).
  • Stability fee treasury parameters (for example, how much you pay an address to update the collateral oracles or the redemption rate); the treasury is in charge with paying others to frequently update the system in order to ensure it’s functioning correctly.

There are a couple of other parameters that need to be frequently changed (collateral debt ceilings, debt floors etc) but these changes can also be automated using contracts that Reflexer is currently building.

Incentive Alignment :gem:

  • In the spirit of using DeFi to align incentives, we propose to use a wrapped 50/50 FLX/BADGER LP share as the governance token / fee burn token / insurance mint backstop for the system.
    • In MakerDAO the MKR token plays 2 roles: governance and the “lender of last resort”. If the system is undercapitalized, MKR is minted and sold until the system is recapitalized (as it did on March 12th).
    • As an incentive for MKR holders taking on the risk of backstopping the system, the system earnings (stability fees) from all collateral types that accumulate beyond some threshold are used to buyback and burn the MKR tokens via public auction.
  • In Reflexer, the FLX token plays the same role as MKR, and in the proposed jointly operated system we propose the wrapped FLX/BADGER LP share will play the same role.
  • The reason we would “wrap” the the 50/50 FLX/BADGER LP share is to make it work with minting / burning; the system would mint & burn the wrapper token, meaning that holders of the wrapped token would get less of the underlying LP shares if wrapped tokens are minted (lose value), and when the wrapped tokens are burned the holders of the wrapped token get more of the underlying LP shares (gain value).
  • Aside from governance and the lender of last resort use-case, the wrapped LP share can also act as a “lender of first resort”. This means that tokens can be staked in a pool where they get sold off in case the BAI system is underwater and in exchange for this, the pool receives a portion of the surplus accrued by the protocol.

We’re open to suggestions for better incentive alignment setups, this was just an initial idea!

Next steps :footprints:

Let’s talk! There’s a significant amount to digest above and we’re keen to get as much community input as possible.

  • The BADGER community providing discussion & feedback on the above ideas.
  • Drafting an initial proposal to Badger governance.
  • Beyond/alongside the initial proposal:
    • Decide on collateral roadmap
    • Decide on governance roadmap
    • Propose LP incentives budget

RAI Learning :books:

:moyai: Website: https://reflexer.finance/
:moyai: Github: GitHub - reflexer-labs/geb: Core smart contracts for GEB
:moyai: Discord: https://discord.gg/3FEJX3h
:moyai: Twitter: https://twitter.com/reflexerfinance
:moyai: Docs: https://docs.reflexer.finance/
:moyai: Bankless - Trust Minimized Money (RAI Explainer)
:moyai: Stefan - RAI is Live (RAI Launch Post)
:moyai: Ameen - A Money God RAIses (RAI Launch Post)
:moyai: Defiant - Ameen on RAI (Podcast)
:moyai: ETHGlobal - Building a Money God (Presentation Recording)

16 Likes

This just seems like a brilliant plan. Especially if BAI can be minted against any/all bAssets on all chains.

6 Likes

I’m in, let’s do it! Wen?

3 Likes

It should not be any BAsset just BTC and Digg to keep quality of the collateral pegged to BTC

4 Likes

I love what Reflexer is doing. As a participant and community member of both projects, I am excited about this initiative since I clearly see the tremendous possibilities, synergies, a win-win for both projects.

I wonder if bDIGG could play some role here as well and not only BADGER (shouldn’t it be bBADGER btw?). Just some food for thought and to expand potential discussion around it.

1 Like

Sounds like an interesting project, but would need a lot of further consideration and analysis.

  1. Do we need another collateral option besides yet to be released CLAW?
  2. What are the specific benefits of adding yet another non-BTC product?
  3. Why aren’t we putting those resources into our primary “stablecoin”- DIGG?

I like the proposal, but find it a bit too early/diverting from our core mission - offering and bringing BTC to DeFi.

My suggestion would be looking into it, but take ample time for proper cost/benefit analysis.

Perhaps a partially collateralised synthetic token (I.e. BTC(95%)-badger(5%) or BTC(80%)-digg(20%) could be minted to include Badger tokens too.

2 Likes

I like this idea. Is this possible or does RAI only have one asset backing it?

1 Like

RAI will indeed be backed solely by ETH. BAI would be a completely different asset/system that the Badger community can shape!

2 Likes

Some questions I have: Could the supply of badger be inflated by the need to mint FLX/BADGER?

How will this work with Claws? Will it be competing with it in some way?

What are some examples of how BAI could be used?

It seems like reflexer labs would do a lot of the back-end work which is good since our devs already have a lot on their plates but how much time would they have to put into this?

Timeframe for the roadmap if approved? Does reflexer just have to tweak some contracts they already have for us?

This could be a good use case for DIGG that is sorely needed.

2 Likes

Allow me to answer in order:

  • BADGER supply is kept intact with this scheme. The protocol would mint the wrapped version of the BADGER/FLX LP token, meaning that each wrapped token would be able to claim less LP tokens from the pool where they are staked
  • Very similar to RAI. There are novel use-cases around non-pegged stable assets and they also make for great collateral in other synths (possibly in CLAWS)
  • Correct, we’d help a lot with all the backend work whereas the Badger community would be more focused on UI/UX, marketing, education etc. We have a more detailed proposal ready that includes TODOs for both Badger and Reflexer in order to launch the new system. This post is simply meant to start the discussion and if the community agrees, we can push forward with more details.
  • I would say approx. 3 months although it also depends on how fast we can sync to build the frontend for BAI, do a 1-2 week test on Kovan, pick the first collateral to be added in the system, deciding on budget for LP incentives etc
1 Like

Is there a reason to only start with one collateral?

Yes. Having one collateral type in the beginning means it’s easier to deploy and manage the system, it’s also safer to start the controller and see how it reacts and to focus LP incentives for BAI on one pool/pair.

lets go do it!!! cant wait!

1 Like

I can get behind this proposal. Creating an independent stablecoin backed by all BTC asset types in the Badger ecosystem sounds like a very valuable addition to the DAO’s offering.

It seems like it’s unclear how this system would work with more than one collateral type. In that case, I think using ibBTC as the collateral backing this new asset would make most sense. This way, the system would automatically inherit support for all BTC collateral types the DAO wants to support (wBTC, renBTC, tBTC, DIGG, bDIGG, etc.).

1 Like

In response to @bernat above, one option that the Badger community can consider is mStable’s mBTC - a meta-asset based on tokenised BTC with built in risk-minimisation due to its diversified nature of its collateral.

mBTC is permissionless to mint by depositing collateral asset, and backed fully on-chain by wBTC, RenBTC and sBTC with weight limits, ensuring that in an event that a tokenised BTC fails, it will not be catastrophic for the holder of mBTC, because mBTC caps the holder’s exposure to that asset. In fact, this allows the system to get diversified BTC collateral exposure and easily support a variety of collateral types.

There is currently ~15m of mBTC in circulation, with liquidity pools available on mStable to easily swap in and out of mBTC.

(Edited for clarity it was in response to a reply above and not directly related to the topic)

2 Likes

Chiming in here too, I’m also part of the mStable team and we’d love to see this happen.

I know there is some collaboration we are doing with the Badger team around our BTC products that will be released soon, so looking forward to increasing the surface of that collaboration if so! We’re here and happy to discuss should the Badger community think it could be of value.

1 Like

Hi guys, with all due respect, you can make a separate proposal and discuss this. We’re discussing a completely unrelated idea.

2 Likes

Noted, on reflection this is pretty clear, I think we got our wires crossed. Thanks @sionescu and apologies we got muddled.

4 Likes