Introducing Fluid Protocol
A decentralized lending platform inspired by Liquity, powered by Fuel Network
Stablecoin Landscape
Stablecoins have demonstrated the ability to maintain stability without compromising decentralization. This has been empirically proven by protocols such as Liquity, which successfully combines stability and decentralization in a robust and efficient system.
Even though popular and centralized stablecoins like USDC and USDT currently boast the highest user base and market share, the web3 industry has experienced firsthand the importance of maintaining decentralization and price stability at the protocol level. This approach is crucial for withstanding volatile market conditions and regulatory turbulence, ultimately fostering a resilient economy capable of enduring the test of time.
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Various design models for stablecoins have been tested in real-world scenarios, reflecting diverse approaches to achieving stability and robustness. Some of these models are proven, outperforming their peers and gaining widespread adoption. On the other hand, specific stablecoin projects have encountered significant challenges, ultimately leading to their demise. The industry has been able to draw valuable lessons from both the successes and failures of these projects, resulting in a richer understanding of best practices and potential pitfalls.
Fluid Protocol is one such project that has learned from the experiences of its predecessors, adapting and refining its architecture to build on the strengths of established stablecoin protocols such as Liquity. Liquity is an innovative decentralized borrowing protocol that allows users to obtain loans in a stablecoin (LUSD) against collateral. The novel protocol features capital efficiency, low fees, and censorship resistance, making it an ideal model for Fluid to base its mechanism design on.
For those unfamiliar with Liquity, we encourage you to delve into their documentation and explore the intricacies of the protocol, as it will provide valuable context for understanding Fluid’s design choices, which we will make public through our documentation soon. Key features of Liquity that have influenced Fluid Protocol include:
Collateralization: Both protocols rely on over-collateralization to ensure the stability of the stablecoin, requiring users to deposit assets worth more than the value of the stablecoins they receive.
Decentralization: Similar to Liquidity, Fluid prioritizes decentralization, removing the need for a central authority or DAO to manage the system and reducing the risk of censorship or manipulation. Additionally, immutable smart contracts are inherent to the long-term design of the protocol. LUSD, and in the case of Fluid Protocol, USDF, cannot be frozen, blacklisted, or manipulated by anyone other than the owners of the tokens.
Automated and Algorithmic: Both protocols employ algorithmic methods to maintain the stablecoin's peg of 1 USD, relying on incentives and market forces to keep the value of the stablecoin stable.
Efficiency and Low Fees: Fluid Protocol aims to emulate Liquity's commitment to providing users with cost-effective and efficient financial services, striving to minimize fees and transaction costs.
By studying the documentation and understanding Liquity's design principles, users can gain valuable insights into the mechanisms that underpin Fluid’s architecture. This knowledge will enable them to appreciate the unique innovations and improvements Fluid brings, positioning it as a promising stablecoin project in the rapidly evolving Fuel ecosystem.
We're eager to be among the pioneering projects on the Fuel Network and fully appreciate the responsibility that comes with it. With numerous layer 2 solutions currently available and many more in development, it's fascinating to envision which utilities will rise to prominence on each layer 2. For instance, one layer 2 blockchain may emerge as the go-to platform for NFTs or DeFi, while others cater to different purposes.
Fuel Network presents a versatile canvas that can be leveraged for a wide array of use cases, including those previously unattainable due to constraints on transaction throughput and fees. Regardless of the industry's direction, every ecosystem requires a native and decentralized stablecoin to meet the diverse needs of a world that demands a stable store of value.
Introducing USDF and FPT
Fluid Protocol operates via a dual-token system, with USDF serving as a native decentralized stablecoin and FPT functioning as a utility token. The platform centers around three critical use cases: borrowing, liquidity provisioning, and staking. By leveraging Ethereum's security and Fuel Network's parallel transaction execution capabilities, loans are issued interest-free via USDF, which is pegged to the US Dollar. As opposed to other decentralized stablecoins, USDF is fully redeemable at face value for the underlying collateral at any time.
Fluid will be genuinely open, fast, and reliable. No sign-up, no tracking, a fully permissionless and governance-free protocol that allows anyone around the world to access capital regardless of their credit or other factors. This, we believe, is what DeFi is all about. Fluid aims to deliver fast, capital-efficient, and cost-effective transactions for users across the Fuel Ecosystem.
Use Cases - Borrowing, LP, Staking
• Borrowing
Access New Possibilities with Collateral-Supported Loans
Like existing stablecoin systems, users can mint and borrow USDF when depositing their collateral; however, other systems are burdened by complicated governance mechanisms needed to preserve the US dollar peg, typically supported by manually updating fees or interest rates. Fluid replaces this need by algorithmically updating redemption and loan issuance fees to support the peg.
Borrowers can use USDF to acquire additional assets or diversify their portfolios, unlocking new investment opportunities. The borrowing process is permissionless and accessible anytime, facilitated by secure and audited smart contracts.
Troves
Troves are a core component of certain decentralized finance (DeFi) platforms that allow users to leverage their assets as collateral and borrow stablecoins. By creating a Trove, or a borrowing pool, users can access liquidity in a decentralized and permissionless way by minting USDF. Troves are comparable to Vaults or Collateralized Debt Positions (CDPs) on other DeFi platforms. No interest is charged, and users only pay one-time issuance fees set by Fluid’s algorithm at the base rate plus 0.5%. The total borrowing fee will never exceed 5%.
A Trove has two primary balances:
Collateral: This is an asset the user locks up by depositing their collateral to secure their loan. The collateral provides a buffer for the protocol in case the borrower defaults or the value of the borrowed stablecoin declines.
Debt: This is the amount of stablecoin (e.g., USDF) the user borrows against their collateral. The debt is denominated in the stablecoin and must be repaid by the borrower to close the Trove.
Users can adjust the balances in their Troves by adding more collateral or repaying their debt. As these balances change, the collateral ratio, which is the ratio between the value of the collateral and the debt, changes accordingly. A higher collateral ratio implies a safer position, reducing liquidation risk. A user can close their Trove by fully repaying the debt. Doing so releases the collateral back to the user, effectively ending the loan.
Troves offer a flexible and decentralized method for users to access liquidity, enabling them to leverage their assets and participate in various DeFi activities. As with any financial tool, it is essential to manage the risks associated with using Troves, such as maintaining a healthy collateral ratio to avoid liquidation.
• Stability Pool (Liquidity Providers)
USDF Deposits
Stability providers play a crucial role in the Fluid Protocol ecosystem. Its primary use is to cover the debts incurred by liquidated accounts, which is the network term for the closure of a Trove. By depositing USDF into the Stability Pool, stability providers receive collateral from liquidated positions and ongoing allocations of FPT. The necessary amount of USDF is removed from the pool to cancel out the debt, and then the locked collateral is distributed proportionally to the pool's stakers. These are known as "liquidation gains. The protocol rewards stability providers in proportion to their contributions, ensuring a fair and resilient system.
Liquidations
Liquidations in Fluid Protocol ensure system solvency and maintain that the total supply of USDF is fully backed. The Stability Pool, funded by users depositing USDF, is the first line of defense for the system, whereby users receive collateral from liquidated Troves at a discount and are rewarded with FPT tokens. If the Stability Pool is empty, a secondary redistribution mechanism takes over, proportionally distributing debt and collateral from liquidated Troves to existing ones.
Fluid uses partial liquidations, where the Stability Pool repays a portion of the Trove's debt in exchange for collateral, ensuring users are retained in the protocol and reducing systemic risk. Liquidations can be triggered manually or through bots, providing an incentive for maintaining a state of equilibrium within the protocol.
• Staking
FPT Deposits
Users can stake FPT, Fluid’s utility token, to the staking contract to earn rewards based on fees generated from borrowing (loan issuance) and redeeming collateral assets. With no fixed staking duration, users can withdraw their tokens anytime. Utility tokens and derivatives cannot be used as collateral. This ensures a secure system where stakers' rewards are determined by their stake relative to the total staked amount when fees are distributed.
Redemptions
USDF holders can redeem their stablecoins for underlying collateral at any time, at face value. The redemption process considers the proportion of each collateral type and their respective market prices. A redemption fee is charged, determined by the base rate, and the redeemed USDF amount as a share of the entire stablecoin supply. The minimum redemption fee is 0.5%, subtracted from the redeemed USDF, reducing the amount of collateral the redeemer receives. This mechanism enables arbitrage opportunities when USDF trades below its peg, helping maintain the stablecoin's value.
Governance and Immutability
Fluid is designed to be governance-free and immutable in the long term. Protocol parameters are either predefined and immutable or algorithmically controlled by the protocol itself, rendering governance unnecessary. While Fuel Network is still in its infancy, launching without upgradeability is not viable. The long-term roadmap for Fluid Protocol involves completely removing contract upgradeability, ensuring total immutability.
Scope of Reach
As the Fuel Ecosystem and the stablecoin landscape evolves, Fluid is well-positioned to adapt and cater to the growing needs of its users. The potential market for USDF is vast, encompassing various sectors such as working capital, hedging, collateralized leverage, merchant receipts, cross-border transactions, remittances, charities, NGOs, gaming, and prediction markets.
By offering a secure, efficient, and transparent platform, Fluid aims to revolutionize the DeFi landscape within the Fuel Ecosystem. What adds to this excitement is that the Fuel Network itself will transform what is possible with blockchain technology, eliminating barriers like transaction costs, settlement speeds, and security concerns.
How Fluid Protocol Fits into the Fuel Ecosystem
A cryptocurrency that maintains price stability is essential for serving as a reliable medium of exchange in numerous decentralized applications. As a result, the potential market for USDF is vast, with its adoption anticipated to increase across various sectors. However, even the most robust stablecoin must prove itself in the real world to succeed. To achieve this, we will embark on this journey with our community, striving to deliver an exceptional product that embodies the core principles of DeFi that we all cherish and support.
Fluid Protocol's USDF, as a decentralized stablecoin, will play a pivotal role in facilitating seamless transactions and serve as the backbone for many DeFi applications. Fuel Network's groundbreaking approach to blockchain technology fosters an environment where ultra-fast, low-cost transactions are the norm, paving the way for unprecedented use cases to reshape the DeFi landscape. This exciting new paradigm holds immense innovation potential, unlocking new possibilities that will redefine how we perceive and interact with blockchain technology. The future is bright for USDF, Fluid Protocol, and Fuel Network, as we push the boundaries of what is possible in the ever-evolving world of decentralized finance.
Final Thoughts
Fluid Protocol is dedicated to delivering a comprehensive, secure, and user-centric decentralized borrowing platform within the Fuel Ecosystem. By providing a robust and reliable stablecoin, we aim to enable users to discover new financial opportunities and make the most of the expanding DeFi landscape. As we approach the launch of our documentation and publish future articles, we are excited to share further details and technical specifications with the community, emphasizing our unwavering commitment to innovation and transparency.
Join the Fluid Protocol Mission
Building upon the established credibility of Liquity, Fluid Protocol is gearing up for the highly anticipated Fuel Mainnet launch. We eagerly await the formation of new partnerships, collaborations, and integrations that will propel both Fluid and Fuel Network to new heights within the DeFi sphere.
We invite you to join Fluid’s Discord community to stay informed about the latest advancements and become an integral part of this remarkable journey. Let's delve into the new era of DeFi and unveil the myriad of opportunities that Fluid Protocol and Fuel Network have in store.