Polaris at $0TVL Hour: A Bonding Curve-Based Stablecoin Operating System for DeFi

Well, hello. Uh, I'm from Polaris and I want to talk about why we're building it and the design choices behind it. So, when you analyze the existing decentralized default DeFi stable coin landscape, you realize that the existing solutions fail to scale and Polaris is designed to address exactly that problem. And we innovate across three different layers. the collateral layer, the stable coin layer and the governance layer.

Now, at the core of Polaris sits a bonding curve and in the bonding curve, we have ETH that enters and mints a PH asset. And with this bonding curve, what we can achieve is an asset that is tightly correlated to the ETH price, but importantly with adoption um appreciates in value. So in other words, what this means is the more P is being used, the higher its value becomes versus ETH. Now furthermore, the bonding curve serves as the primary liquidity layer for this asset and it charges swap fees which is one of the revenue sources of the protocol. So every time there's a trade, a swap fee enters and what do we do with this swap fee?

Well, we we burn it. So all the swap fees are burned and what does it mean for P to be burned on the bonding curve? It means that this part of the supply can never enter back into the market and it gives us a floor price for the PE and therefore it's a a viable collateral to be used in DeFi. Now additionally this part of the reserve which now doesn't need is not not anymore needed is free to be used as yield within the ecosystem. So what does this mean?

If you take a step back, the bonding curve that mints PS versus ETH is a viable alternative to uh Ethereum staking. Now once the collateral layer is in place, we can build our D5 tools on top of it. And the first one is PUSD. Now PUSD is a CDP style system but with a couple of innovations that help it scale. The first one being direct minting and redemptions such that the supply can can respond to market forces directly rather than uh just simple borrower demand.

Now the second thing is that the minting and redemptions they also provide a revenue source. So CDP holders can be looked at as decentralized stable coin issuers rather than just simple borrowers. And additionally, since the bonding curve can pay yield, we can incentivize the debt. But PUSD is only the first expression of the system. We can once the reserve layer is in place, we can um expand the system to also build P Swiss Frank or P gold.

And therefore, we look at uh Polaris rather as a stable coin operating system rather than uh just a simple stable coin. Now in this context it's important to highlight another feature which is that because Polaris can pay a yield to the CDP system and we have automatic set interest rates it is possible for the system to accommodate negative interest rates. And the way this works is if the yield is larger than the borrowing rate you can achieve an effective negative interest rate. And this is especially relevant if you think of assets such as um P gold and PUSD. Now another innovation that enters is on the polar governance layer.

So uh how does it interlock with the system? So the polar token can only be created via the burn mechanism which is the same burn mechanism that was used uh in the swap fees. Now so what does this mean? For every PE that is burned, users can mint polar and this happens via a Dutch auction. Now this Dutch auction the uh so as the price decreases of the Dutch auction the conversion becomes more and more attractive until somebody takes it and the price spikes back up.

So therefore polar can only be made with burning PE. So what does this mean for the system? It means that minting of polar and the issuance of polar is directly aligned with the ecosystem health because it improves the collateral base rises the floor price and releases yield into the system. Now once there's yield where should they go and this is where stewardship comes in. So, Polar votes and maintains a white list of protocols and smart contracts that that are eligible to uh to receive yield from the bonding curve.

And this is not restricted to only receive yield from so to Polaris native ecosystems but rather to the larger overall ecosystem. So in this way, Polar can vote to distribute yield to the products that drive the biggest demand and the biggest growth for the Path ecosystem. Now this is not just theory. Where do we stand in development? Uh it's available on testnet and you can try it out.

Uh it is a gated test net. So you do have to contact me or the team, but I'm happy to set it up. So what emerges out of all of this? Well, first a P asset which rivals Ethereum staking for long-term Ethereum holders. Second, scalable decentralized stable coins built on that reserve layer.

And third, a stewardship ecosystem that continuously distributes value to ecosystem expansion. So, Polaris is not just a simple uh stable coin, but rather a a broader reserve centered architecture for Tifa. I'm happy to answer any questions. Okay. So I start uh so the bonding curve is a core thesis for uh for the yield right for the whole uh

yeah so it's it's only one component because it's if you think of it the CDP system is still a CDP system so the bonding curve yield can give a bonus to that right so at the base layer the CDP system still has borrowers that pay interest rate so the the P layer gives a boost to this

okay okay so so the problem with market with like low volatility for example or a sideways market just influence this element

right

okay so you just go

so the the the bonding curve component makes the interest rate competitive

right it gives you an edge

it's not it's not this the sole

or if the market is not really great for you it's just makes it less less competitive but not uh compet

well if the market is not great typically there's an overall an overall downturn right so the the interest rates will below everywhere but we still have an edge. So that's it's kind of that that thesis.

Okay. But yeah.

Okay. Thanks.

What oracles are you using in the system? Uh I guess you have to price book collateral which is PE. Right.

Right. So the bonding curve doesn't need an oracle but the the the stable coins do. On PUSD we use a medianizer of three oracles. Um on P gold you will need to set it up. So I mean we're still developing for PEL the the oracle and for each CDP you will it's like each CDP system you will have to have your your own oracle.

So you price E if with a medianizer and then P to E with a bonding curve.

Sorry what

you to price P you use the bonding curve to price P to E.

Yes. So no to price P to E you don't need a you don't need an oracle. What you need is the oracle for PUSD and for that you need to multiply the oracle with the with the bonding curve price if that's that's what you that's what okay

other one uh do CDPs kind of choose their interest rates or how are they set now

no they're set autonomously so that is uh it's actually a novel approach because we do have this direct minting and redemptions we can use the minting volume and redemption volume on chain to control the interest rate based on market forces. So this is one of the novel approaches because we have this minting and redemption volume. So it's fully autonomously.

Are are you engaging market makers or somebody to do the minting and redemption or are you just saying whoever

it's an arbitrage operation? So so the if there's a deep on the stable coin up or down this is a arbitrage operation. Anybody can call it it's fully permission. It actually will be me territory. So, MEV territory will can can an arbitrageer can mint if it's profitable.

That's what they said about Terra and some other like algo stable coins. There's arbitrage, but it doesn't sometimes it doesn't work that way.

Wh why you say this is an algo stable coin?

Huh?

Sorry.

It Well, it's it I I'm just It seems like what you're saying is that everything is due to the bonding curve, right? That's holding everything together.

Yes. Um, but I feel like bonding curves can still be manipulated.

So the bonding curve that we use uses a uh very narrow shallow. So it's concave, right? It uses a power law with an exponent and I'm happy to go into more detail because I don't think we'll be able to cover it like here. But it's a concave bonding curve, right? So it's not an exponential or something.

So it mean so rather it is designed to be exactly competitive to uh liquid staking meaning that if you look at the price chart here for example like the the price chart here the advantage that you get from PH over P US over over normal ETH is it just out competes like the liquid staking rate. So you're talking about like five six 7% per year. So it's a very narrow because you can't tune the bonding curve, right? The bonding curve can be tuned via this beta parameter. So it's not a u it's very tightly coupled to ETH.

Does that answer your question?

Kind of. I mean bonding curves work until you have times of high volatility and people just want to unbond. So

but that's why we have the floor price, right? Like the floor price is a continuously ratcheting up of your collateral base. So any person that enters into the bonding curve like we can define a maximum loss that he will have even if the system fully unwinds. So if you enter into the bonding curve and you know the floor price is let's say at 75%. Like you know that even if polaris fully unwinds you will still have this exit value because of the floor price.

I like so the bonding curve is designed to be very secure and yeah so it's not it's not a system that that can implode like by construction. cannot unless they're smart contract. I mean there smart contract risks, right? But the smart contract is designed such that it can fully unwind and still give back value to the user.

What prevents earlier PE u adopters from dumping from into the curve and

so if you if you're an early adopter of pe and the and you and the bonding curve expanded like you're free to sell, right? But the thing is that because of the way the bond curve is constructed the the amount of liquidity it has to get out is extremely large and it's because of the concave sh of the curve. So this I mean this is vital right. So the pe is constructed as a safe collateral with a very shallow curve to avoid exactly these kind of things. So the the appreciation rate is comparable to liquid staking on purpose to provide an alternative to liquid staking.

Is Polaris liquid DV free? No, it's not. I mean, I just showed you that we're innovating on three different layers. So, even though there's an overlap on some of the team members, uh I think the innovation is quite significant.