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What is the XAR Network?
Xar Network is the framework for Cosmos and Fantom based decentralized finance (DeFi).
To understand how to protect your staking rewards, we need to explain a few trading and finance terms first.
What is a Long Position?
If you take a long position in an asset, you probably believe that the asset you are holding will increase in value against another asset. If you buy an asset at $1, and you believe it will go to $2, you go long that asset against the USD. To hold a long position in an asset, you usually have to buy the asset.
What is a Short Position?
In a short position, you probably believe that the asset will decrease in value against another asset. If the asset is currently at $1, and you believe it will go down to $0.50, you can go short that asset against USD. To have a short position, you borrow the asset now, and sell it immediately at the current price. Later you buy the asset at the lower price and return it to where you borrowed it from.
What is a Stop Loss?
A stop loss protects you from losses should the price decrease beyond a certain point. If you are long an asset, and the asset is currently $1, you could put a stop loss at $0.75. If the price increases the stop loss isn’t triggered. If the price decreases to $0.75, the stop loss is triggered and the asset is sold. Stop losses protect your position.
What is Long Liquidity?
If you are long an asset, you have the asset in your possession. You can use this asset only for its intended purposes. Your investment into the asset is locked up, so you cannot use it for any other purpose. If you buy an asset at $1, you have the asset, but you don’t have the $1.
With XAR, you will be able to use this locked up investment of $1 as collateral.
What is Collateralized Lending?
If you are long an asset, you would possibly like to use the asset as collateral, so that you can borrow another asset. For example, if you are long asset A, you could use it as collateral to borrow $1. This allows you to get liquidity from your long position.
If you are long an asset, you can protect yourself against losses with a stop loss, and can provide yourself additional liquidity with collateralized lending.
What is a CSCT?
CSCTs are collateralized stable currency tokens, this is the collective term for all stable currency tokens created by XAR. No generic CSCT tokens will be issued, but there will be a range of different CSCTs based on different currencies.
With XAR you can create collateralized stable currency tokens (CSCTs), for example the CSDT (Collateralized stable Dollar token) and the CSET (Collateralized stable Euro token). Your CSDT is created on XAR according to this decentralized process and is used to secure the network as well as offer the owner returns (up to 30% per annum*) through XAR’s DeFi product offerings.
What is a CSDT?
CSDT is a sustainable, non inflationary staking solution. With a CSDT position, you take an asset that you are long on and use it as collateral. This gives you a maximum of 66% of the asset’s value in liquid USD value, in the form of CSDT. You still own your long asset that you have used as collateral. Should the price of the asset fall to below the asset’s value, you will still have your USD value (however the asset is sold, like in a stop loss), and if the price stays the same or increases, you have liquidity. This is very important, as seen below:
- A CSDT as a long position
- When you put your collateral into a CSDT, you are long that asset. You believe the item will increase in value.
- CSDT is a stop loss
- With CSDT you have an automatic stop loss, should the price decrease you will have the loaned asset. In this case USD.
- CSDT is long liquidity via collateralized lending
- With CSDT you have immediate access to up to 66% of the asset’s value in liquid USD value.
How is this different to staking?
A quick comparison of CSDT to traditional staking is required to understand the benefits of CSDT. Staking plays a very important role in securing the network.
Staking in its current form is unsustainable, and inflationary. This means it creates more supply out of nothing. If there are currently 10 tokens, and inflation is 10%, there will be 11 tokens. When supply increases, price decreases. So if there are only 10 tokens and the price per token is $1, the total available USD for this token is $10. If you increase it to 11, with no additional new source of USD, the price would change to $0.91 This is disadvantageous to early holders, who end up paying more per unit in an increasing supply.
Inflationary staking is unsustainable. If your inflation is 10%, and you have a capped supply so that you can only create 10% more tokens, no more tokens can be created after that point. This means that the incentive to continue earning lifetime rewards disappears.
CSDT solves both of these problems. It protects your downside and provides you with liquidity.
CSDT is a sustainable, non-inflationary staking solution. CSDT is a long and a stop loss, with immediate liquidity.
Who can use a CSCT?
XAR Network is a permission-less decentralized network. Anyone is free to use the network and in turn the products built on top of it. Anyone is able to use the range of CSCTs and to use XAR to create tokens (however there is a fee paid to the network in this regard).
Why would you use CSCT?
You can use XAR to create a collateralized stable token in your desired currency. Currently XAR supports the USD, in the form of the CSDT (Collateralized stable Dollar token). In future XAR will add additional currency pairs, for example: Euro would be represented by the CSET, ZAR by the CSZT, and so on.
The XAR model allows you to get short term liquidity based off of your assets, without selling your assets – and you are able to choose when you want to settle your debt. XAR does not have time limits or monthly repayment terms, you can repay as you choose (or not at all – if you are willing to lose the underlying asset in the event of a liquidation). This is done in a decentralized manner, making sure no one single counterparty has control.
There are additional high risk methods to increase yield on your position by using your CSCT to purchase additional assets and increase your position (this is called leveraged trading on margin). Please note that this method is strongly advised against as it increases risk.
A simple example: A Fantom holder could be holding FTM from the ICO with the belief that due to the impressive technology it could possibly increase in value long term. He wants some value/money short term, but is obviously not interested in selling his FTM and losing out on the possible long term benefit. Enter XAR, a way for this holder to use his FTM as collateral and in turn mint value (CSDTs) against it to use short term. A more complicated way of saying this is that this holder is going long Fantom, while getting short term liquidity. The above example is applicable to all supported currencies.
Is this a bit confusing? Please read the other FAQs and head over to our blog.
The XAR model allows you to get short term liquidity (in the form of CSCT) based on your locked assets (without selling your assets). There are two ways to move your collateral. Firstly, you can reclaim your underlying assets when the CSCT is paid back by you. Secondly, you can forfeit your underlying assets when your collateral is liquidated due to your collateralization ratio falling below a specified rate.
Are my assets safe?
Your assets are safe as they are managed in a decentralized manner, on chain. You are also the owner of the private keys. At no point will XAR, its employees and affiliates ask you for this information. Please be sure to keep this information safe. Your assets are however exposed to risk as noted in this document. Please be sure to check your collateralization ratios.
How do I generate returns?
Now that I have my newly minted CSDT, what can I do with it? You can now stake this CSDT in order to generate returns.
You can earn returns by acting either as a validator or as a delegator. A validator is a member of the community who has a thorough understanding of devops, is running their own node, and is ensuring that this node has an uptime as close to 100% as possible and accepts the serious risk of having funds slashed if their uptime is not managed efficiently. Validators receive proportional rewards from the distribution module determined by their stake compared to all stakes (amount of CSCTs staked). A delegator is someone who doesn’t understand the intricacies required to be a validator or doesn’t want to run a node, and thus simply delegates his tokens to a validator for a share of the returns. Delegators receive proportional rewards less the commission paid to the validators for running the nodes. The default commission paid to validators is 10%, however validators can change their own commission in accordance to rules.
The distribution module collects the following:
- Interest from borrowed assets
- Stability fee from minted CSCTs
- Liquidation fee from overcollateralized CSCT liquidations
- Transaction fees
- Governance fees
- Crisis fees
- Token issuance / minting / burning fees
As a delegator I would receive rewards from the distribution module (as above) proportional to my staked amount compared to the staked amounts of the entire system, less the fees paid to the validators to run the nodes.
How can I use a CSCT?
You can head over to https://wallet.xar.network to create CSDTs (The USD CSCT – XAR will support other currency pairs in future). You will deposit the supported assets in order to begin the process. Once you have chosen your appropriate collateralization ratio (the higher the better, but we recommend 200%+) you are able to mint your CSDT. Because of the volatility of the underlying assets it is always recommended that you borrow less. If you have any questions or would like to know more, please join our communities. We have a friendly community of public users and admins willing to help. You will also find a CSDT calculator to provide you clarity on your position, your liquidation price, and the possible returns.
Are there fees to use a CSCT?
Yes, the stability fees are paid to the CSCT from minted CSCT.
What is collateralization? And how does this impact me?
In very general terms, collateralization occurs when a borrower pledges an asset as recourse to the lender in the event that the borrower defaults on the initial loan – but luckily this complicated definition is not necessary for us right now.
In the context of XAR, collateralization is the process where the user provides underlying value (e.g. BTC) to a the blockchain in order for XAR to mint new assets (CSCT) for the user. The number of new CSCTs minted is decided by the user, but it is constrained by the liquidation ratio.
Your newly minted CSCTs could then be used to generate returns. Thus, you can leverage your crypto holdings by using them as collateral to secure your loans of CSCTs.
The rule of thumb is to ensure that your collateral is ALWAYS higher than the minimum collateral required for the value of CSCT that you are minting. The minimum collateralization ratio in XAR is fixed at 150%, there is no maximum. This ensures that the value of the newly minted tokens is always less than the original value(collateral) you provided. The CSDT calculator can give you clarity on specific values.
This is very important for a few reasons:
Firstly the underlying assets are volatile. It is best not to expose yourself or your funds to unnecessary risk, as unfortunately there is always some risk. If the underlying assets decrease in value it moves you closer to the liquidation point, and therefore closer to forfeiting your underlying collateral unless you increase the collateral deposited.
Secondly, based on blockchain-based decentralized finance models, it’s always appropriate to mint an amount that is less than the collateral. This means that the collateral value exceeds the value of the loan (the value a of your newly minted assets) – this process is called overcollateralization.
Please remember that as long as you have outstanding debt and maintain an acceptable collateralization ration, your underlying assets will remain locked by the system. If you want your underlying collateral assets back, simply repay the CSDTs that were issued to you and the system will release the collateral assets. This maintains the integrity of the system.
What kind of collateral can I use?
On launch XAR will support only Fantom (FTM), we will however propose additional options in future including Bitcoin, Ethereum, Binance Coin and our partner stable coins.
What are the risks?
Few things in life hold no risks, but XAR has spent a significant amount of time lowering the risks to you where possible. But please note, there are risks.
When using CSCTs we advise you to follow the guidelines of collateralization procedures, and to not go lower than a 200% collateralization ratio. We do allow collateralization of up to 150%, but this ratio does increase the risk greatly.
You can view your liquidation price through our easy to use calculator found at https://wallet.xar.network
Let’s take FTM as an example. At the time of writing the price of one FTM is $0.0128/FTM. Should I choose to collateralize at the minimum of 150% my liquidation price would be $0.0128/FTM, this means that should the price fall in any way my position would be liquidated and put up for auction at a 5% discount. If the price stays the same or increases the position will not be liquidated. However, should I choose the minimum recommended amount of 200%, my liquidation price is $0.0095/FTM, this means that should the price fall by $0.0033 my position would be liquidated and put up for auction at a 5% discount. The latter is definitely the safer option, and the range continues to increase the greater the liquidation ratio is increased. Please use the calculator to determine the liquidation price relevant to your holdings, and keep an eye on your holdings to avoid liquidation.
This liquidation will occur if you reach below your liquidation price, regardless of your permission. This liquidation price is determined by your collateralization ratio. The liquidation process is automated and cannot be reversed by XAR. XAR also cannot reverse any transactions if an incorrect address is used or if an error is made.
XAR is also not able to protect against the risks of the underlying assets. We have no control over external market forces, and you have to make sure to protect your private keys.
You can reduce these risks of liquidation by overcollateralizing your holdings (ratio higher than the minimum), keeping an eye on your liquidation price, repaying your debt when possible, and possibly even by keeping a reserve to increase your collateral and thereby reduce your liquidation price should the need arise.
What is liquidation?
See more information on liquidations under What are the Risks.
Liquidation will occur if you reach your liquidation price, which is determined by your collateralization ratio.
Upon reaching the liquidation price, your XAR collateral position will be posted for purchase at a 5% discount as a XAR Auction, available for purchase by any member of the public.
The liquidation process is automated and cannot be reversed by XAR.
This is why the collateralization ratio is so important. This liquidation process protects the underlying value of the CSCT at all times, ensuring the underlying value is always more than the minted value and thereby ensuring stability of the CSCT price. The system will keep an eye on your liquidation price through the use of multiple independent oracles. This ensures that the price feed cannot be manipulated easily, as you would need to manipulate the entire market and independent oracles in order to manipulate the CSCT price. This aggregating of prices from different independent oracles also protects you from being liquidated due to flash crashes on single exchanges.
You can always lower your liquidation price by adding more funds (collateral) onto the chain, or simply repaying the loan. There is also a liquidation fee paid upon liquidation.
Please remember it is the users responsibility to keep an eye on their position and liquidation price.
You can view your liquidation price through our easy to use calculator found at https://wallet.xar.network
You can also keep an eye out on your current position and liquidation price here:
Am I forced to pay back my CSCT if my collateral increase in value?
Not at all. However, even though you are able to withdraw anything above the collateralization minimum, we recommend not doing so. As your collateral increases in value your collateralization ratio will also increase thus reducing your risk. If your collateral decreases in value your collateralization ratio will decrease thus increasing your risk. This is why we always recommend a 200%+ collateralization ratio.
Does XAR Network have an explorer?
Yes, please view the explorer here: https://explorer.xar.network.
How do I check that XAR has the funds they say they do?
This is the beautiful thing about blockchain, the technology forces the users to provide full transparency. We believe in full transparency. This information is freely available to anyone who wants to verify it.
Please head over to https://explorer.xar.network to verify the network integrity.
Image by Alexas Fotos on Pixabay