Introduction to AUSD
AUSD (AlpacaUSD) is an auto-farming stablecoin that earns passive yields for you in the background. Now, instead of paying for loans, you can get loans while earning on your collateral.
AUSD is overcollateralized, decentralized, and reinforced with multi-layered pegging mechanisms so that it does the one thing stablecoins are supposed to do--remain stable at $1.
Lenders in Alpaca Finance can collateralize their deposits(ibTokens) to borrow AUSD, which they can use inside and outside Alpaca Finance to earn additional yields. Lenders are thus able to continue earning Lending APR and Staking APR, while also borrowing AUSD to use as they see fit, unlocking even higher profit potential and greatly increasing the flexibility and use cases of their capital.
Some potential uses of AUSD include:
- Staking AUSD to earn additional yields
- Selling AUSD into lending assets to leverage up lending positions (can also borrow more AUSD)
- Selling AUSD into other assets to open high-yield leveraged yield farming positions
- Selling AUSD into other assets to deploy in external protocols
AUSD makes lending in Alpaca Finance more capital efficient and flexible than in any other lending platform, fortifying Alpaca Finance's place as a leading DeFi 2.0 protocol.
AUSD is fully backed with robust risk management parameters. The stablecoin is overcollateralized by a collection of top digital assets including ETH, BNB, USDT, BUSD, BTCB and TUSD.
AUSD is a fork of the battle-tested MakerDAO, with many improvements. Some of the key features are:
Farmable Collateral Module: For most lending protocols, users have to choose between staking their assets to earn yields or staking their assets as collateral to borrow against. With AUSD, users no longer have to make this tradeoff. We have structured our AUSD smart contracts in such a way that while the collateral can be used to borrow AUSD, it can also earn Lending APR in our platform, which can also compose with other protocols, meaning that in the future, the collateral can potentially earn additional yields for the users on external protocols.
Because the Lending APR alone is much higher than the stability fee for AUSD(2% for most collateral types), the loans are effectively better than interest-free, they are yield-bearing auto-farming loans.
Efficient pegging: Being overcollateralized is not enough to maintain a stablecoin peg. In the case of MakerDAO, they can also adjust borrowing interest on DAI up and down for the collateral assets. In a situation where DAI's price goes above $1, Maker can lower borrowing interest, incentivizing users to mint new DAI which creates selling pressure to bring DAI's price back down to the $1 peg. In the case where DAI goes below $1, Maker can increase borrowing interest, incentivizing users to buy back DAI to close their borrowing positions because they have become more expensive, which creates buying pressure to bring the price back up to $1. AUSD also has this mechanism.
Moreover, AUSD also has an internal Stable Swap Module, similar to Maker’s Price Stability Module (PSM), which allows users to buy and sell AUSD for BUSD at a rate of 1:1 with low fees. This facilitates arbitrageurs in maintaining the peg at $1.
Robust and Gentle Liquidation: AUSD uses gentle liquidation, meaning when an AUSD borrowing position faces liquidation, only a small portion of the position is liquidated until it is brought back to health. The max liquidation size is limited to the Close Factor, currently set to 25% of a position’s Debt Value. This gentle liquidation model results in lower associated costs and liquidation risk for AUSD borrowers, while still preventing the risk of bad debt.
AUSD also uses a robust atomic liquidation model. This has advantages over Maker DAO’s Dutch auction model, because AUSD’s model is simpler and better optimized for preventing bad debt.
Handling of Bad Debt: While we have made sure to set up the protocol structure and parameters to be very conservative, we will also have a backstop in place to handle the unlikely event of bad debt. When we launch our governance vault within the next 1-2 months, we will also launch an Insurance Plan. In this plan, in the case of a loss event such as bad debt, 50% of the Protocol APR going to the governance vault will be set aside as remuneration for this event, until the loss is covered. This way, the risk of bad debt will not only be minimized but also have coverage.
AUSD's code is completely open sourced and can be reviewed in our Github repository here: https://github.com/alpaca-finance/alpaca-stablecoin
As always, security is our highest priority. AUSD smart contracts have passed audits from three professional security firms.