ZETA protocol is a protocol that can issue stable index/ETF tokens based on yearn.finance’s Vault[1]. Users can operate a variety of investment portfolios depending on the type of ETF.
ZETA V1 features:
-ETF token based on stable coin and mirroring token
-ZUSD is using yVault (yearn.finance)’s DAI,USDT,USDC,TUSD strategy. users can benefit from yield farming and compound interest.
-Index, basket assets arbitrage trading opportunity
-Issue & withdrawal of permissionless index tokens
Motivation
Yield farming has led to explosive growth of DeFi applications that have not existed before in Ethereum history. The background behind the explosive growth is due to various factors such as DEX and landing protocol, but the constant scalability of the asset infrastructure has made DeFi’s TVL (Total Value Locked) reach a phenomenal figure of $10B. TVL, which is the core data value of DeFi, can be thought of as a measure that can simply capture the value of the protocol, but in another sense, it is an index that can check the bandwidth of the protocol. In other words, the bandwidth referred to in this sentence indicates how much spatial growth capacity of the DeFi ecosystem has. In other words, the wider the bandwidth, the more space there is for the entire DeFi ecosystem to grow.
DeFi economy bandwidth(Left: Token Right: Protocol) [2]
DeFi prior to the explosion of Yield Farming was limited to ETH, a native token, due to lack of interoperability with protocols and asset infrastructure. In the current Ethereum DeFi ecosystem, landing protocols, oracles, DEX and etc have the potential to expand bandwidth as interoperability between protocols like “Lego” is created. In other words, this explosive growth was possible because there was a token asset infrastructure in Ethereum. In particular, as stablecoins, bitcoins, and real assets (gold, silver, real estate) are issued on Ethereum, not only ETH but also various token assets are contributing to expanding DeFi’s economic bandwidth like network effects.
Figure 1: Left: October 19, 2019 Right: September 10, 2020 [3]
Looking at Figure 1, the difference between last year and present is that a lot of outstanding tokens have been issued to Ethereum. This increases capital efficiency by integrating with many applications. As a result, the dependence of ETH, the native token of the DeFi protocol, has been reduced.
Stable coin issued by Ethereum [4]
Bitcoin issued on Ethereum [5]
Currently, as the demand for landing and yield farming for Ethereum DeFi surges, stable coins have been issued for $12B and wrapped bitcoins have been issued for 106K. Ethereum on-chain issuance of stablecoins and bitcoins can be a growth booster for the DeFi ecosystem. In order to constantly issue external assets on Ethereum, the DeFi bandwidth needs to expand more than now. DeFi, which is borderless and without permission, needs to solve the following three problems in order to expand its bandwidth to the next level.
- Assets are very fragmented.
- Asset understanding is also complicated.
- Because each asset has different characteristics, the risk attributes are also different.
In the current token ecosystem, stablecoins and bitcoins are very fragmented. Looking at the stable coins that can be used for DeFi applications, there are more than 10 types such as DAI, USDT, USDC, TUSD, HUSD, BUSD, PAX, and SUSD. In addition, ETH trading pairs such as ETH/DAI, ETH/USDC, ETH/BUSD, and ETH/HUSD are provided to representative CeFi exchanges Coinbase, Binance, and Huobi instead of ETH/USD pairs. The barriers to entering DeFi are very high because users need to understand what characteristics each of these fragmented assets have.
DAI price volatility data [6]
Fragmented stable coins have different liquidity that can be operated for each stablecoin, and liquidity risks exist. For example, if dollar liquidity is urgently needed in markets such as the Black Thursday crisis, stable coins with low liquidity and high utilization are likely to drop out of the pegging price. In particular, for stablecoins, liquidity providers and arbitrage traders play an important role for the dollar pegging. Since there is no liquidity provision temporarily, a liquidity black hole will occur, and the price of stablecoins will temporarily fluctuate.
And each stablecoin has a different issuance mechanism and there are risks. For ordinary users, only one or two stable coins are used. For example, if you have USDT and USDC, the potential risks are as follows.
USDT: If one day USDT is made unavailable due to US regulations or the actual dollar is not supported, the crypto ecosystem using USDT as a value measure and exchange medium will have a very big impact.
USDC: If the US government forces an address with USDC to be blacklisted, the USDC for that address will be permanently unavailable. This example is a very extreme situation, but it is too high to ignore the potential risk.
To summarize the above example, users should be able to easily access crypto assets before accessing the DeFi application. In addition, DeFi assets must be able to hedge potential risks and at the same time have elements that can expand DeFi bandwidth.
ZETA creates a single ETF token from fragmented tokens such as dollar-based stablecoin and bitcoin. The ETF aims to improve the efficiency of the crypto capital market by combining complex and fragmented assets into one, allowing users to easily access it. We also believe that ETFs have the potential to expand the DeFi bandwidth.
Why ETF?
ETFs are the most innovative products in the financial sector over the past 30 years. ETFs in traditional finance are securities that are issued by a consignment company on the basis of which assets of similar definitions are organized into baskets and then paid to the trustee bank. This year, there was a new capital inflow of $428 billion to the ETF, and the global ETF AUM (Asset Under Management) surpassed $7 trillion for the first time. The following are the characteristics that can be seen in the financial markets why people refer to ETFs as innovative products.
1.Ease of investment
Investors can easily judge the direction of investment in the market even without a deep understanding of individual stocks belonging to the ETF.
2. Long-term profitability due to low transaction costs
General stock-type funds incur a lot of operating costs because the manager operates the fund by buying or selling stocks by receiving cash payments. ETFs have a structure in which investors pay the stocks in the stock basket to the management company, so management fees are low. The ETF fee (0.23–0.66% per year) is cheaper than that of regular funds (2–3% per year). Regarding the low fee effect, it can be seen that a distinct difference is revealed, especially in the case of long-term holding of funds. If it is a long-term investment aiming at the market rate of return, an ETF investment with a lower fee is effective.
3.Investment efficiency according to dispersion effect
Usually, it is difficult for individual investors to form a portfolio that can benefit from diversification if the investment amount is not large. ETFs can easily solve this diversification problem. ETFs that follow the QQQ index are certificates for stock baskets comprising 100 NASDAQ-listed stocks, so buying one ETF can have the same effect as buying 100 NASDAQ-listed stocks. Therefore, ETFs made it possible to diversify investments with small investment funds.
4.Transparency in fund operation
Since ETFs are forced to disclose their asset composition on a daily basis, it can be said to be highly transparent compared to general fund products. Therefore, investors can check the asset composition of the ETF by inquiring the PDF (Portfolio Deposit File) details, which are open portfolios, even if they do not look for the constituent information of the underlying index. Based on this, real-time i-NAV (indicative Net Asset Value) calculation is also possible.
Anyone can participate in the ZETA protocol operator and LP, and can organize ETFs in a democratic way. You can also use ETFs regardless of your status or region. This believes that combining DeFi with traditional financial ETFs could lead to new options in the capital markets.
ZUSD mechanism of the ZETA protocol
ZETA is a protocol that issues a number of profitable fragmentation tokens as one ETF on Ethereum. This part will focus on ZUSD, the first ETF token of ZETA’s mechanism.
Index tokens and ETF tokens on the market must be staked in their own protocol to generate profits. General staking protocols earn tokens by depositing in the landing protocol or by yield farming. The deposit interest of the landing protocol depends on the design of the interest curve, but is fundamentally less than the profit generated by yield farming. In addition, in the protocol that operates the yield farming strategy, when the user deposits liquidity, it is a structure in which a token is obtained in proportion to it. Tokens generated from yield farming can be withdrawn only through contracts. However, as the contract structure complexity increases for each protocol, the Ethereum network fee also increases. This can put a great burden on users. Therefore, users have little motivation to have ETF tokens.
ZUSD is an ETF token composed of DAI, USDC, USDT, and TUSD based on yVault to create a stable and profit-maximizing ETF. yVault is designed to maximize profitability, starting with convenience for users. In addition, in order to make the profits sustainable, the community emphasized security and constructed a stable strategy to reduce the risk to users as much as possible. yVault is already one of the key projects in the mighty YFI ecosystem and is in a unique position in the field of DeFi asset management. ZUSD does not use the yCRV vault and uses DAI, USDT, USDC, TUSD strategies in yVault.
To issue ZUSD, users do not need to deposit all four stable coins. For example, if you only put DAI, you can issue ZUSD at the current price. The detailed issuance formula is as follows.
ZUSD price formula
Price: Refers to stablecoin price data in Chainlink[7] Oracle.
Weight: Ratio of the corresponding stablecoin to all deposited stablecoins.
The asset characteristics of ZUSD can diversify the potential risk of stablecoins. And because yVault is used, the value of the deposited asset increases by the amount of interest generated. In other words, the price of ZUSD may fluctuate depending on the value of the basket. When the value of ZUSD is devalued or appreciated, the arbitrage strategy also increases.
Conclusion:
The small ball launched by the YFI community has created a new chapter in the DeFi ecosystem. The vision presented by YFI inspired ZETA very much. ZETA plans to build on the YFI ecosystem and issue ZUSD as well as ZAssets (EX:ZBTC) in the future. Our goal is to cooperate with the open community to create a decentralized asset operating organization with a transparent and fully automated mechanism. It will also contribute to DeFi’s economic bandwidth expansion.
References
[1] https://docs.yearn.finance
[2] https://thedefiant.substack.com/p/ether-is-the-best-model-for-money
[3] https://defipulse.com
[4] https://coinmetrics.io
[5] https://www.duneanalytics.com
[6] https://dai.stablecoin.science
[7] https://feeds.chain.link/
