How it works
Our prototype draws on publicly available fundamental data to set its price, providing high returns and very low volatility. Its design makes it the first investment product to substantially outperform the market leading stablecoins in returns and volatility.
How is the price determined?
The prototype coin is modelled on fundamental data extracted from the quarterly balance sheets of companies making up the S&P 500 composite. The result is a coin with 2000 price updates per year, is free-floating against the dollar, and does not require a fixed peg to maintain stability. Instead, price stability is achieved simply by virtue of the weighted average book values of the companies that make up the S&P 500 whose composition is regularly updated to reflect the top performing 500 companies by public market cap.
A backtest spanning 20 years of balance sheet data revealed that over 99% of daily price swings fell within the range of 0-1%. In the same period, testing showed an average annual rate of return of 6.6%. Eczodex’s self-pricing algorithm protects investors from a sudden overnight drop in the value of their investments due to an inexplicable change in market sentiment or a sell-off caused by an early morning tweet from influential individuals. Hence, investors can start earning high returns passively without having to track pricing data daily.
How is the price supported?
The protocol’s principal function is to support the secondary market by providing liquidity and maintaining sufficient reserves. Integrating with Decentralised Exchange (DEX) liquidity pools such as Uniswap solves the liquidity problem. At genesis, the protocol will seed the pools with reserve proceeds and Eczodex, both purchased from early selling and newly minted.
DEX pools provide always-on liquidity for secondary market trading and incentivise arbitrageurs to trade on pools when the prices do not align with the market price. To maintain stability, the protocol offers an in-built arbitrage mechanism, successfully implemented by other algo-stablecoin projects. The mechanism is based on a fluctuating protocol token, which transfers volatility in the price of Eczodex coin to the Eczodex Liquidity Token (ECZLT) supply. For clarification, Eczodex price volatility is the difference between the DEX pool price and the quoted reference price.
How are the reserves managed?
To maintain sufficient reserves, Eczodex is designed as a seigniorage coin with high capital efficiency. In other words, seigniorage not currently deployed to liquidity pools, will be invested in a diversified basket of assets based on a risk averse investment strategy. While minimising investment risk protects the reserves, it also limits the rate of return meaning investments alone will not be sufficient to maintain a minimum 100% collateralisation ratio against the market capitalisation.
The solution is a transaction fee levied on transfers to ensure that the protocol is fully self-sustaining. The fee combined with investment returns and income earned from liquidity pools, gives sufficient cover to the reserves, and mitigates the risk of an attack or run against the protocol. Finally, excess returns determined as a function of the net growth rate (i.e., % growth in reserves - % growth in Eczodex market cap), will be distributed via an in-built profit share mechanism to liquidity token holders who stake their tokens with the protocol.