USDH: Stablecoin as a Hyperstructure

[GENERAL] Name and surname of main applicant

Prometheus Pool

[GENERAL] Are you delivering this project as an individual or as an entity (whether formally incorporated or not)

Individual

[GENERAL] Please specify how many months you expect your project to last (from 2-12 months)

3

[GENERAL] Please indicate if your proposal has been auto-translated into English from another language

No

[GENERAL] Summarize your solution to the problem (200-character limit including spaces)

USDH is a concept for a fully decentralized stable coin completely owned and governed by collateral providers.

[GENERAL] Does your project have any dependencies on other organizations, technical or otherwise?

No

[GENERAL] If YES, please describe what the dependency is and why you believe it is essential for your project’s delivery. If NO, please write “No dependencies.”

No dependencies

[GENERAL] Will your project’s output/s be fully open source?

Yes

[GENERAL] Please provide here more information on the open source status of your project outputs

This project will be fully open source under GNU General Public License v3.0

[METADATA] Horizons

Stablecoin

[SOLUTION] Please describe your proposed solution

USDH is a combination of Djed and CDP style stablecoins. Instead of collateral providers pooling collateral like in Djed, every collateral provider has their own individual pool of collateral that anyone can mint/redeem USDH at. Stablecoin users pay fees directly to the collateral providers they mint/redeem with; the fee is the same for every pool and can be adjusted through governance. A pool's outstanding stablecoin liabilities are tracked and the pool can only mint USDH as long as its reserve ratio (collateral to liabilities) remains above a certain level.

There are several trade offs to consider for constructing a stablecoin this way.

Advantages:

1. By avoiding pooling collateral there is less contention when attempting to mint/redeem stablecoins
2. Since USDH can be redeemed at any time regardless of a pool's reserve ratio, USDH should be very good at maintaining its peg on the open market
3. No collateral pooling means collateral providers continue to maintain staking/voting rights over their ada and there is no need for a secondary token such as Shen is for Djed
4. Collateral providers are not "locked" in by a drop in the reserve ratio like in Djed, a pool can be closed by the provider at any time by redeeming the outstanding amount of stablecoins the pool owes in liabilities

Disadvantages:

1. Since USDH can be redeemed at any time, collateral providers don't have full control over the amount of leverage their pool has
2. Since USDH will be fully decentralized, it is only as strong as the oracles it uses

The above are properties that come from how USDH is constructed, but there are some additional advantages that USDH would have over other available stablecoins.

1. Fully decentralized and fully open source
2. No rent-seeking value extraction, the only fees are those paid directly to collateral providers when minting/redeeming stablecoins

The openness of the protocol is one of the biggest selling points. Anyone can be a collateral provider and open a pool with any amount of ada (well there will be some small minimum value) and there is no fee to pay for doing so and you keep full access to your ada's staking/voting rights. This low barrier to entry could encourage many community members who have yet to get their feet wet with defi to try it out.

[IMPACT] Please define the positive impact your project will have on the wider Cardano community

I believe it would be great for our ecosystem if we can create a homegrown stablecoin and build liquidity around it. A truly community owned stablecoin is very inline with Cardano culture and the low barrier to participate could bring together many users who might otherwise be hesitant to engage in DeFi.

[CAPABILITY & FEASIBILITY] What is your capability to deliver your project with high levels of trust and accountability? How do you intend to validate if your approach is feasible?

I'm a software engineer by profession and I have some experience with writing smart contracts and transaction building code https://github.com/ken-underscore/cardano_loans_aiken

[PROJECT MILESTONES] What are the key milestones you need to achieve in order to complete your project successfully?

Milestone outputs: Smart contract code for opening a USDH pool, minting/redeeming stablecoins, and closing USDH pool

Acceptance criteria: User can open/close a USDH pool and mint/redeem stablecoins

Evidence of milestone completion: Integration tests via tx building code and shown on testnet

Milestone outputs: Smart contract code for governance of parameters of the system such as fee amount and min reserve ratio

Acceptance criteria: User can vote for changes and a resolved governance action implements the changes

Evidence of milestone completion: Integration tests via tx building code and shown on testnet

Milestone outputs: Smart contract code for governance of oracles with the ability to add/remove oracles 

Acceptance criteria: User can vote to change oracles and a resolved governance action implements the changes

Evidence of milestone completion: Integration tests via tx building code and shown on testnet

Milestone outputs: Project Close-out Report and Video

Acceptance criteria: HUSD prototype can be demoed on the testnet

Evidence of milestone completion: Close-out Report contains testnet transaction showing functionality, video demo of prototype on testnet, all code open source on github

[RESOURCES] Who is in the project team and what are their roles?

I am the sole contributor https://github.com/ken-underscore

[BUDGET & COSTS] Please provide a cost breakdown of the proposed work and resources

Smart contract code: Dev time 200 hours at $40 an hour = $8000

Transaction building code: Dev time 150 hours at $40 an hour = $6000

Total Cost = $14000 -> 40,000 ada

[VALUE FOR MONEY] How does the cost of the project represent value for money for the Cardano ecosystem?

I think this concept aligns with the values of the Cardano ecosystem. It's a dapp that allows users who want to long ada do so for no fee by becoming collateral providers and also brings a fully decentralized fully open source stablecoin with strong ability to maintain its peg. Since it has no ancillary token, no rent seeking fees, and is solely owned by collateral providers, it is similar to a primitive of the system, and I think this could encourage a high degree of participation.