Mento Stablecoin Factory
November 10 2023
by Oleksiy Novykov
The discussions around the Mento Platform vision narrative and future stablecoin developments blog posts have highlighted a shared objective: the creation of a multitude of decentralized stablecoins designed for specific use cases by diverse operators.
For that, the Mento Platform has to provide a toolkit that allows deployment of new decentralized stablecoins with specified parameters swiftly and at scale, while ensuring that the products launched on the Mento Platform have a robust technological foundation. This blogpost aims to suggest an addition to the Mento Platform, the Stablecoin Factory, that can act as such a toolkit.
Currently, every new asset that the community wants to launch on Mento requires significant engineering effort by the team with very specific domain knowledge. This approach doesn’t scale well, since there is a linear dependency between the number of assets that can be launched over time and available engineering capacity.
To fulfill the demand to launch multiple decentralized stablecoins with different designs, it is important to automate the process. The Stablecoin Factory will be the product that does exactly that. It will be a no-code toolkit for launching new assets in a permissionless and decentralized manner. It will allow future operators to deploy a new stablecoin by simply calling a function of a smart contract and providing the required parameters, like reference price feed, collateral asset, and name/ticker for the token. Upon selection, it will deploy a set of smart contracts that together make up a functional decentralized stablecoin: ERC-20 token contract, a Vault Factory for borrowers to interact with, and a Stability Pool to fund the necessary liquidations when needed. With these components, a new asset is ready to go.
At the heart of the Stablecoin Factory will be the CDP Module (Collateral Debt Position). It enables the borrowing of decentralized stablecoins into existence by providing underlying collateral. The CDP is especially suited for launching assets whose prices are loosely correlated with the price of underlying collateral. It transfers currency exchange rate risks from end-users to the protocol’s borrowers. This means borrowers must ensure that the ratio of stablecoin they have borrowed to the value of provided collateral (the collateralization ratio, CR) remains above a certain threshold. If it doesn't, their collateral will be liquidated (distributed to platform users providing stablecoins to the Stability Pool).
While the current oracles implementation provides robust on-chain price feeds for cUSD, cEUR, cREAL and eXOF, it is not scalable enough to support arbitrary price feeds future operators may have in mind. To address this, Mento Platform will be integrated with RedStone to tap into its decentralized network of data providers. Currently, RedStone offers data feeds for over 1,000 assets, including 19 fiat currencies, with the capability to add more as needed.
The core idea of easy and cheap launch of new decentralized stablecoins introduces a couple of challenges to think about. The first one is a likelihood of multiple parties launching multiple versions of the same asset. For instance, ten different operators might launch ten stablecoins, all tracking the price of the same fiat currency. This situation can lead to fragmented liquidity, with each asset individually being potentially unusable due to low market capitalization.
To mitigate this, the Mento Platform should be equipped with an incentivization module that will allow operators and users of decentralized stablecoins to incentivize borrowers and liquidity providers. Using the Gauge System, holders of MENTO governance tokens will be able to channel some portion of future token emissions to the stability pools of a particular asset, or liquidity pools on any third party exchanges where the assets are available to end-users. These mechanics will allow the Mento community to foster liquidity of meaningful assets on the platform, making other assets that the community doesn’t think are worth incentivising irrelevant.
A second challenge is the necessity to safeguard the end-users from the stablecoins that are launched with questionable economic setup or deliberately malicious intent. In theory, any ERC-20 token can serve as collateral to back a stablecoin. While it’s crucial to allow operators to choose any collateral asset to encourage experimentation, for the system to work correctly the price feed will be required for the desired collateral asset. So practically speaking, only the assets that a data provider (RedStone in this case) has a price feed for, will be possible to use as a collateral in the Stablecoin Factory. This natural limitation will work as a first line of defense against someone launching an asset that can potentially harm users.
The Gauge System will act as a second line of defense. Since adding new pools to the Gauge controller will be a subject to Mento governance decisions, the community will have a chance to review a new candidate and reject it if there is a consensus that the nominated asset doesn’t have a sound economic setup. Without protocol incentives it is unlikely that such assets will gain any significant scale.
The fee income generated by the Stablecoin Factory can be split between the Mento treasury and MENTO token holders participating in the governance process and voting for specific stablecoins’ pools.
With this post I would like to open a floor for discussion and hear what folks think about this idea. You can provide your feedback in the Mento section of the Celo Forum, our Discord or Twitter X. This also will be a discussion topic in one of the upcoming Mento community calls (keep an eye out for announcements).
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