Today, MetaCartel Ventures – the DAO-based venture capital fund – announced its first major investment into Reflexer Labs and its project RAI, a reflex bond bringing volatility-minimization to the underlying asset.
— METACARTEL VENTURES (@VENTURE_DAO) May 18, 2020
While stablecoins have quickly grown to prominence over the past two years, we’ve seen some issues arise surrounding their respective designs. For example, major fiat-backed stablecoins like Tether, USDC, and others require counter-party trust.
While they serve a purpose in the ecosystem, the notion of a trusted fiat-backed stablecoin largely goes against the ethos of DeFi and crypto at large. Remember, the goal of open finance is trust-minimization.
— Adam Cochran (@AdamScochran) May 18, 2020
With that, we’ve seen other alternatives emerge like Maker and Dai – a crypto-native stablecoin collateralized by a pool of diversified assets (ETH, USDC, BAT, and WBTC as of writing). While DAI doesn’t rely on a single counterparty, the core issue with Maker is the reliance on MKR holders to properly govern and direct the protocol, creating a degree of plutocracy and trust in the governance group the overarching system.
As a result, the core problem with many of the popular stablecoins in the crypto ecosystem is the reliance on trust – either in a counterparty or a governance group.
These problems have opened up the opportunity in the crypto ecosystem for governance minimized, trustless stablecoin that is aligned with the long-term goal in DeFi of trust-minimized finance.
Enter the Reflex Bond
In essence, a reflex bond is an asset with a more stable representation of the underlying collateral. Therefore, by creating a reflex bond collateralized by Ether, users can gain dampened exposure to the price of ETH over time.
This idea opens up a new range of opportunities for ETH-based collateral in the broader ecosystem. For one, institutional investors are largely turned-off by the significant volatility with crypto assets. The nascent asset class simply has too much volatility for institutional investors to allocate even a fraction of their portfolio. However, with Reflexer Lab’s RAI, legacy investors can gain exposure to ETH with minimal volatility.
Today I’m pumped to be publishing the RAI whitepaper.
We aim to build a framework for launching Reflex Bonds, a new category of asset that provides stability relative to its underlying collateral.https://t.co/PuT52uidF3
— ameen.eth👹is out of melee range (@ameensol) May 18, 2020
More importantly, the mitigated volatility enables a stronger case for single collateral stablecoins. For those unfamiliar, MakerDAO has elected to support multiple assets (via Multi-Collateral Dai) in order to diversify the asset pool backing DAI. By having a diversified portfolio of assets, Dai can actually become more stable as it is less affected by any significant volatility in crypto markets – one of the driving reasons behind Maker’s fall from grace on Black Thursday.
With Reflex Bonds, ETH can act as a more stable collateral asset for stablecoins and other synthetic assets at large. With that, the ecosystem can fulfill one of the core envisionments in DeFi for a trust-minimized stablecoin as well as having a viable, trustless collateral type for the range of synthetic assets beginning to emerge, like a synthetic S&P 500.
Assuming reflex bonds can be implemented in a secure fashion, they may become a critical piece for the long-term success of open finance. The ability to have ETH with dampened volatility allows the asset to act as a significantly better form of trustless collateral for DeFi rather than pure ETH.
Importantly, Reflexer Lab’s approach will focus on governance minimization, allowing the asset type to proliferate with minimal trust and human intervention. While governance may play a more involved role as the project looks bootstrap in its early phases, the core mission is to calcify the protocol in the long-term and migrate towards governance minimization – a core difference in approach between Maker and Reflexer Labs.
1/n The whitepaper about RAI the reflex bond is published! Check it out 👇🏻https://t.co/QxEbP68vTU
— Stefan Ionescu (@stefan__ionescu) May 18, 2020
While the first product for Reflexer Labs will be the Reflex Bond, we can assume that following a live implementation, the team will look to build out a trustless stablecoin with ETH-based reflex bonds acting as the single collateral type.
With many of the MetaCartel Ventures investment partners having a ground-level view of what’s going on in DeFi, today’s investment from the venture DAO is a key signal for the broader DeFi ecosystem.
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.