If you’ve interacted with the crypto industry in any way, chances are that you’ve used stablecoins. At the time of writing, the stablecoin sector has a total market cap of $146 billion which is 17.4% of the total crypto market cap. A sizeable portion to say the least.
For those who are unaware, a stablecoin is a token on the blockchain that is pegged 1:1 with another asset. That asset can be a fiat currency, a commodity or anything else. The purpose is for the underlying real-world asset to have a 1:1 representation on the blockchain in the form of an exchangeable token.
The importance of stablecoins is in the name. They are a source of stability in an otherwise volatile market. The most popular use case for stablecoins is for trading purposes, but it also has a bunch of other benefits such as international payments, and instant international access to foreign currencies. It allows a person in Bangladesh to get instant access to synthetic US dollars without the need to go through any intermediaries.
Seeing this, stablecoins quickly rose to become one of the most popular products in the crypto space. The most popular stablecoins are the ones that are pegged to the USD. USDT, USDC, and BUSD make up for a total of $133B of the $146B market cap. With 3 players controlling 91% of the market share, it's safe to say some competition is needed.
For all the benefits that stablecoins bring, the sector has its fair share of problems. The first problem is the lack of diversity leading to dependency risk. Almost every stablecoin is pegged to the US dollar which puts great dependency on the currency of one government. This in itself is very antithetical to the entire ethos and purpose of the crypto industry. To add to this, there is a further dependency on only 3 stablecoins, all of which are centralized. Having centralized points of failure for crucial parts of a decentralised system can prove to be problematic in the future.
We discussed this in an opinion piece a few months back after the Terra Luna Collapse which you can read HERE.
A related issue is that crypto is one of the most international industries in the world, therefore, to decrease foreign currency risk, it would be easier for people to interact with the ecosystem if they had stablecoins in their local currency.
While the risks mentioned above are more general, current stablecoins also face issues in terms of mechanism design and functionality.
The two prevailing mechanisms are full-reserve stablecoins and overcollateralized stablecoins. The full reserve is a system followed by the 3 sector leaders USDT, USDC, and BUSD. For every stablecoin in circulation, there must be $1 fiat in their reserves. When a user wants to redeem their fiat dollars, the stablecoin will be burned out of circulation and the equivalent amount of fiat will be released from the reserves. This way the peg is always maintained.
Overcollateralized systems are simple. To mint a stablecoin, some collateral must be deposited. The amount of collateral deposited must be worth more than the number of stablecoins being minted and borrowed. This ensures that the protocol is protected in event of price drops or defaults. It also ensures that the peg is maintained since the protocol has more collateral in its reserves than stablecoins in circulation.
The issue with both mechanisms is that while they are battle-tested and relatively safe, they are not very scalable. The trade-off they make is to favour stability over scalability. Full-reserve systems are limited by regulatory pressure while over-collateralised systems are limited by a lack of capital efficiency.
Keeping all of this in mind, the sector still has some room for improvement.
This is where Bluejay Finance steps in.
What is Bluejay Finance? - Overview
Bluejay Finance looks to broaden the horizons of the stablecoin sectors by offering stablecoins other than USD-pegged stablecoins. With a primary focus on the Asian market, Bluejay offers a variety of stablecoins which are backed by protocol-owned liquidity to make them highly scalable and efficient with the ultimate aim of enabling individuals and businesses to operate in DeFi without foreign currency risk while also increasing the suite of products on offer in DeFi for external businesses.
As a continent, Asia has the highest population density with an estimated 4.7 billion people living in the region. It is also the continent which has countries with the highest levels of poverty which means a significant portion of the Asian population remains unbanked. Therefore, to enable easy access to financial services to a region which needs it, Bluejay will start off with a focus on the Asian markets and transition into other markets as they grow.
There are three main stakeholders in the BlueJay Finance system, and each one of them plays an equally important role in maintaining the stability of the system.
- Stablecoin users
What are BlueJay Bonders?
Bonding is a process that was popularised by Olympus DAO. It allows the protocol to acquire its own liquidity to create something called protocol-owned liquidity (POL) which can then be used by the treasury for various purposes.
In the case of Bluejay Finance, the purpose of bonding is not only to acquire liquidity but to maintain the peg of the various stablecoins.
The basic premise of how bonding works is as follows. Users approach the Bluejay platform to purchase bonds, by purchasing bonds users are giving the Bluejay protocol their assets in return for a discounted price on BLU tokens. The quote for the bond will include the discounted BLU price, the vesting period, and the amount of BLU claimable when the bond matures. The assets are then taken as protocol-owned liquidity and the purchasers of the bond can either hold, sell, or stake their BLU tokens.
There are two types of bonds with Bluejay that fulfil different purposes. Treasury bonds & Stabilizing bonds.
The purpose of treasury bonds is to raise assets for the treasury which can then be used by the protocol for actions such as minting, backing, and providing liquidity for the various stablecoins. To purchase the BLU bonds there will initially be only 3 forms of accepted reserve assets, those are DAI, BLU/DAI LP, and bluSGD/DAI LP( Starting December) - bluSGD is the first stablecoin to be created by the Bluejay protocol. The bond will be vested linearly and the user can either redeem their vested BLU in between or wait for bond maturity and redeem all the vested BLU at once.
The bond price for treasury bonds is a function of the debt ratio in the bond depository (the contract which the bonds are purchased from) and the control variable. What this means is that if more bonds are sold over a specific period of time the price of the bond will be higher since the debt ratio will be higher, and vice versa.
The control variable is a figure set by the DAO which is dependent on the relative proportion of assets the DAO is willing to accept into the treasury. Adjusting this variable allows the bond price to fluctuate across different ranges.
Moving on to stabilizing bonds.
What are Stabilizing Bonds? - Bluejay Finance
The purpose of the stabilizing bonds is to act as a mechanism to bring stablecoins back to their peg depending on market conditions.
However, before diving deeper into stabilizing bonds, it is important to understand how the minting process of stablecoins works.
Now that we know the protocol attracts liquidity through their treasury bonds, they use that liquidity to back each stablecoin, the stablecoins will be overcollateralized with reserve assets. The type of stablecoin that will be minted and the ones that will be heavily backed is a decision that is left up to the DAO. After that is hashed out, the design is such that each stablecoin that is minted is backed by an equal or higher amount of reserve assets.
For example, if the stablecoin being minted is bluSGD, a stablecoin pegged to the Singapore dollar, there will be an oracle that will fetch data from different forex markets to establish its current price in the real world. Suppose that price is 0.80 against DAI, the stablecoin engine will add 100,000 bluSGD and 80,000 DAI into the liquidity pool allowing users to freely trade.
Regardless of the oracle which plays a role in automatically adjusting the ratio of assets in the pool, the primary demand and supply equations in these pools may cause imbalances leading to potential depeg. To combat this, there are two separate price stability mechanisms have been put in place. The stabilizing bonds and the price stabilizer.
What are Contraction Bonds and Expansionary Bonds? - Bluejay Finance
There are two types of stabilizing bonds that are on offer. Contractionary bonds and expansionary bonds. Contractionary bonds are offered when the price of the stablecoin on the liquidity pool is lower than that of the oracle. A depeg to the downside indicates decreasing demand and/or overselling of the stablecoin. Therefore, the contractionary bond will be used to obtain assets and those assets will subsequently be used to buy the stablecoins and burn them.
Expansionary bonds are offered when the price of the stablecoin is higher than the oracle price. This is usually an indicator that there is excess demand and/or the market is overbought. Therefore, the assets obtained from this bond are used to back the newly minted stablecoins and sell them into the liquidity pool to effectively lower prices back to the peg.
You may be wondering, what if there is no demand for stabilizing bonds? How would the stablecoin come back to peg?
This is where the price stabilizer comes in, the stabilizer is a keeper which is controlled by the DAO. This is used in times of extreme volatility where the stabilizing bonds aren’t sufficient. The stabilizer looks up the oracle price and uses treasury funds to manually bring the price back to the peg by either minting or burning stablecoins with the reserve assets in the treasury.
This stabilizer is a keeper which is an externally owned account (EOA). It's important to note that the protocol has a tolerance level. This is a band of price ranges until where a depeg is acceptable. Beyond that is where the stabilizing bonds or the price stabilizing module will be used.
Now that we know how the BLU tokens start circulating, the stakers come in.
How to Stake on Bluejay Finance?
Once a bonder or any other user receives their BLU tokens, they can stake them to get sBLU. sBLU is redeemable 1:1 with BLU. Staking allows users to be more aligned with the overall growth of the protocol as they receive rewards through revenue redistribution. Revenue is generated through fees collected from bonding, liquidity pool fees, as well as fees from other products offered by Bluejay finance. These rewards are auto-compounded so users do not have to waste gas by manually claiming.
The staking rate is determined by the DAO since initially the staking payout will be supplemented by the DAO treasury after which they will gradually move to revenue redistribution. The initial aim is to set the reward rate at 35% APY which will then change depending on the growth of the protocol.
Stablecoin User on Bluejay Finance
As the name suggests, the stablecoin users will be the end customers who generate demand for the stablecoins minted by Bluejay. This could be individuals, external businesses, or protocols. Without the demand from stablecoin users, a lot of the mechanisms in place will be made redundant.
These users will not only benefit from a lack of foreign currency risk, but they also benefit from the capital efficiency and deep liquidity that the stablecoins provide. Although these stablecoins are not yield-bearing in nature, there will be an opportunity to earn a yield on them through other protocols.
Oracles on Bluejay finance
As mentioned earlier, oracles are imperative to the system since the price of the stablecoins in the liquidity pools is dependent on the price feed data that is provided by the oracles which track the real-world forex markets.
Bluejay Finance uses oracles developed by Chainlink. These oracles will not only track the price of the underlying fiat currency that the stablecoin is pegged to such as SGD/USD, but it will also track the difference between the reserve asset value and the USD currency (DAI/USD). With this oracle, Bluejay can access and store the Time-weighted Average Price (TWAP) of the liquidity pools which they can use to protect transactions from potential flash loan attacks.
The oracles will also be used by the price stabilizer module as well as the stabilizing bonds depository module.
Tokenomics of Bluejay Finance - BLU
Maximum Supply: Uncapped
Initial Supply: 86,834.6167
The emission for BLU tokens is controlled by the automatic capitalization module. This module essentially monitors, controls, and adjusts how much of BLU is emitted through staking rewards, treasury bonds, and stabilizing bonds. The expectation is that the emission rate will be higher in the infancy of the project and then gradually decrease as usage of the product increases.
However, there needs to be some other use for the token other than being a pure emission token.
The first part of this is governance. BlueJay can be thought of as an on-chain central bank where all BLU holders can vote upon the monetary and fiscal policy enforced by the central bank. Some of the things that BLU holders can vote on include:
- Expansion/contraction of stablecoin supply
- The proportion of resources to allocate to different stablecoins
- The proportion of collateral held as reserve assets
- Issuance of additional currencies
- Project collaborations
- Protocol parameter tweaks such as fees
The other form of value for the token comes from the revenue model for Bluejay finance. Bluejay aims to develop a whole suite of revenue-generating products around their stablecoins in association with their ecosystem partners. Some of the products they aim to develop include real-world asset lending, forex markets, payment providers, remittance services, and much more.
All of these activities will be revenue-generating for the protocol. This revenue will be redirected to the protocol treasury which in turn will act as a quasi-backing for the BLU token. A portion of the revenue will be used to support the BLU token, but in the initial stages, most of the revenue will be used to make all the stablecoins highly liquid and robust.
pBLU tokens –
pBLU tokens are unminted BLU tokens. These are the tokens given to the early backers, team & founders, and investors. There’s a total of 20m pBLU tokens which are vested linearly. They are distributed as follows.
- Early Backers: 16,015 pBLU in supply, 0.1%
- Investors: 3,550,000 pBLU in supply, 17.8%
- Core Team: 5,133,985 pBLU in supply, 25.7%
- Marketing: 1,500,000 pBLU in supply, 7.5%
- Legal: 900,000 pBLU in supply, 4.5%
- Security: 900,000 pBLU in supply, 4.5%
- DAO Treasury: 8,000,000 pBLU in supply, 40%
Bluejay Finance Team
Based on the information available to the public, there are a total of 10 members on the BlueJay finance team.
Sherry Jiang – Co-Founder & CEO
Sherry spent around 6 years working at google as a growth product marketing manager for emerging markets. She left her role at google in 2021 and decided to move full-time to crypto working in the stablecoin space seeing that she already is aware of the pain points in current emerging markets.
Raymond Yeh – Co-Founder & CTO
Raymond has been working in the crypto space since 2017. He worked as a blockchain developer at GovTech Singapore after which he started working as an independent security researcher. He has now pivoted into working full-time on BlueJay finance to propel the stablecoin space forward using his experience and expertise.
Ye Myat Min – COO
He previously founded a company called Nexlabs after which he moved on to become the CEO and board member of Better HR. He has now decided to shift his focus to building stablecoins for local economies through Bluejay Finance.
Anthony Ng – Marketing Executive
Previously, he has worked in multiple community management and business development roles across the crypto industry. He has also worked as an Investment Research Analyst at CRC capital and is now using his expertise to help Bluejay marketing with the marketing side of things.
Htut Myat – Community manager
Htut previously worked as a business development executive for global wave technology after pivoting to Better HR where worked in business development and product management. In early 2021 he decided to pivot to the crypto space where he started working as the community manager at BlueJay finance.
Geoff Richards - Head of Marketing
Having previously worked in academia as a climate science researcher, he decided to follow his passion for DeFi and joined Bluejay Finance on a full-time basis. He is now Head of Marketing at Bluejay and focuses on solving real-world problems and inequalities by helping to finally deliver on the promise of DeFi.
Details about the other 4 members are not public due to which they have not been included.
The community appears to be most active on discord where they have 2512 members (or Jays). The team members appear to be very interactive with the community and most of the conversation is very informative. The members and the team often talk about mechanisms and different aspects of the protocol and the discussions are often very fruitful.
There is also the occasional meme sharing for comical relief which works hand in hand with the welcoming nature of the community. It is very easy to blend in as a newcomer. Their community has gradually been growing and is only likely to get bigger.
Stablecoins are an extremely important facet of the crypto markets, but there is still a lot of room for improvement. The market is still dominated by USD-pegged stablecoins even though international players flood the crypto markets. The next logical step is to target emerging economies and allow them to participate in the crypto economy freely and easily after which other regions of the world can be targeted.
Bluejay seems to be doing exactly that which should put them in a preferable position a few years down the line. The pegging mechanism in itself is also unique. Other than overcollateralized stablecoins, no other decentralized stablecoins have stood the test of time. Stress tests in crypto tend to be very volatile which often breaks most mechanisms. The bonding mechanism has not been used before for pegged stablecoins so it will be interesting to see if this is the first decentralised mechanism to reach high scalability and capital efficiency while maintaining long-term stability. Regardless of the outcome, it’s an experiment worth attempting.