Sip of Tapioca Part 2: USDO Explained.

Actionable Insights
May 10, 2023

After your first sip of Tapioca in our last instalment, “What is Bentobox V2? (Yieldbox)” we’re sure you were left waiting for your next sip, and this one may be the most important (and tastiest) yet, what is Tapioca’s USDO, and why in the world do we need yet another decentralized stablecoin?

Firstly, what’s the O in USDO?

USDO is Tapioca’s Omnichain USD stablecoin. The first clear delineation from the hordes of other stablecoins available is the inclusion of the word “omnichain” and its inherent meaning. In the case of USDO (and Tapioca), USDO uses the LayerZero OFT V2 token super standard. OFT stands for “omnichain fungible token,” and completely removes the need for traditional bridging. With USDO using this standard, it can mint and burn from chain to chain in an instant, even from an EVM to a non-EVM chain!

This means you can teleport USDO directly from its token contract from Ethereum to Arbitrum, and Arbitrum to Cosmos or several dozen other chains in seconds with no fees, long wait times, slippage, and most importantly without ever interacting with trolls hiding beneath the often hacked and slow bridges we know of today.

“That’s neat, but what else?”

USDO is a CDP stable which means it is minted in a “collateralized debt position” (a fancy term for a loan) and is over-collateralized at a minimum of 110% (depending on the collateral asset). USDO holds the peg from these debt positions being liquidated (the collateral being sold) if the collateral falls enough in value, and secondarily from arbitrage opportunities from within Tapioca

This is similar to Maker’s DAI, and if USDO is above its $1.00 peg, users can “flash mint” USDO (like a flash loan but without borrowing from a lender) without upfront collateral to profit from it being above its dollar peg, which will bring USDO back down to $1.00 if USDO is below its dollar peg, users will purchase USDO from DEXs to float the peg back up to $1.00, since they can repay debt at a discounted rate (Tapioca always values USDO at exactly $1.00)

This is a tried and true mechanism to hold a stablecoins peg and relies on no algorithms to keep a peg to the U.S. dollar. “Algo stables” have failed in every incarnation- from UST to FEI and others. CDP stables are not fractionally backed or unbacked, and thereby inherently have more value backing each issued dollar, which is why they are prone to hold dollar equivalence even during times of volatility. You may ask, why didn’t Magic Internet Money hold peg being an over-collateralized stablecoin, in the same way, USDO is?

MIM / Abracadabra chose to back MIM with riskier assets such as FTT, wMEMO, and LUNA, which we all know caused it to lose its peg a number of times. So how do we know that won’t happen with USDO?

Tapioca has chosen USDO to only be backed by network gas tokens like ETH or AVAX, and their liquid staking derivatives like Rocket Pool’s rETH and Lido’s stMATIC which inherently have great on-chain liquidity, their prices being tied to demand for their underlying blockchains block space, and are decentralized. But there’s a bit more to this sip...

CIRCLing the Drain

Decentralized stablecoins have become nothing more than USDC wrappers, including Maker’s DAI. The reliance on USDC to hold its peg caused every major “decentralized” stablecoin to lose its peg during the Silicon Valley Bank / Circle (USDC) calamity, which calls into question how decentralized these stablecoins actually even are if a single bank failure can cause them to lose peg and 10% or more of their value. 

When the USDC depeg occurred, we as DeFi users had nowhere to run- no stablecoin able to hold the peg, and with the current economic environment, we can’t expect this to be an isolated incident. Backing stables with other centralized fiat coins like Tether (USDT) also doesn’t help the matter, as these assets can (and are) censored often or could collapse at a moment's notice. 

With Tapioca’s USDO, with its backing in gas tokens and the ballooning liquid staking derivative space, plus its roots as an over-collateralized CDP stablecoin, it would (and will) make for the perfect safe haven- something much needed in DeFi- a dollar-denominated decentralized asset.

Making USDO even more attractive is the ultra-respected Chaos Labs offering risk management and auditing of USDO and its backing. Chaos Labs currently provides risk management for Aave (and GHO), Chainlink, Uniswap, and many other well-known protocols in the space, Chaos Labs offers USDO an insane competitive advantage in being the 2023 version of what DAI was in its glory days which ended in 2020 with its onboarding of USDC. 

USDO is very clearly meant to be a return to the origins of DeFi as immutable and decentralized finance, where you don’t need to trust that it’s worth a dollar- it just inherently is (due to its backing).

And there’s more!

USDO is woven into every line of code with Tapioca as a money market- besides being able to access leverage, unlocking cross-chain composability for your liquidity, and keeping your gas tokens and liquid staking derivatives productive by borrowing against them, once you mint USDO in a CDP, you can immediately gain yield on it. How? Tapioca’s Singularity.

While we don’t want to make this sip a gulp, Singularity is a built-in lending market for USDO that offers access to borrow against riskier / centralized collateral assets like Stargate ETH, GLP, Curve TriCrypto, and more, requiring you- a holder of USDO to lend. These borrowers' interest creates real yield against your lent USDO. Secondarily, by locking your lent USDO for a period of time, you receive oTAP call options every week you’re locked! Call options allow you to buy TAP below its market value, which creates profit for you (and POL for Tapioca)!

All in all, USDO is the single most exciting and innovative stablecoin to come out in quite some time that fills clear market gaps in both the decentralized stablecoin space and the need for truly cross-chain stablecoins instead of the usual “store coupons” like USDC.e and other bridged wrapped assets. USDO will surely see a mountain of adoption from the free marketing Circle has had on offer for it, and with how exciting Tapioca’s Singularity lending markets are for yield, USDO is definitely going to become quite the memorable sip.

If you want to read the full DeFinitive Guide to Tapioca then you can head to our article here. 

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