Introducing XAI: Cross-silos stablecoin


Pronounced /zī/, XAI is an over-collateralized stablecoin with a soft peg to the US Dollar. With the approval of SiloDAO, XAI will serve as the second bridge asset alongside ETH in the Silo lending protocol. Instead of borrowing ETH to go from asset A to B, users will be able to collateralize XAI to borrow any token asset in the protocol.

The name XAI pays tribute to [Wei DAI](Wei Dai - Wikipedia, a computer engineer to whom we all owe a debt of gratitude for his immeasurable contributions to cryptography and cryptocurrencies.
The letter X denotes two attributes of the stablecoin:

  • Bridging: XAI is an accepted collateral across all silos just like ETH is today.
  • Extendability: The SiloDAO can extend credit lines of XAI into any silo.

Adding XAI as a second bridge asset to the Silo protocol requires the passing of an executive governance proposal as we detail later in this post.

How does XAI work?

The SiloDAO is the only entity that controls XAI. Via executive proposals, the SiloDAO can choose to mint unlimited XAI and deposit it into any number of silos. Similarly, the DAO can burn XAI that is extended to any silos via governance proposals. When the DAO mints XAI into a silo, it effectively determines XAI’s backing. Similarly, when the DAO burns XAI in a silo, it changes XAI’s backing.

Let’s look at an example.

Suppose the SiloDAO mints XAI into the bridge silo (XAI-ETH silo). By doing so, the DAO chooses to back XAI by ETH only. If the SiloDAO later decides to mint XAI into the USDC silo, for example, the DAO extends the backing of XAI to include USDC in addition to ETH. Conversely, if the DAO burns the XAI minted into the USDC silo, the action changes XAI’s backing from ETH and USDC to purely ETH.

In brief, the DAO sets the backing of XAI by controlling two functions:

  • Credit Extension: The function determines token assets that can be collateral to borrow XAI into circulation (existence);
  • Credit Retraction: The function that removes XAI credit lines from silos by burning XAI out of circulation;

Performing both functions require that the DAO decide on the amount of XAI that will be minted or burned. Having the ability to perform those functions allows the SiloDAO to respond to market conditions swiftly and effectively.

Price Stability

XAI is an overcollateralized stablecoin that is softly pegged to USD. This means we expect XAI value to hover around 1 dollar most of the time. Users must overcollateralize a token asset in order to borrow XAI. The overcollateralization serves as a stabilization mechanism to control the impact of price fluctuations of the collateral token. When collateralized positions approach under-collateralization, a liquidation event takes place that protects the protocol from accruing bad debt.

The Silo protocol treats XAI to equal 1 USD to allow for arbitrage opportunities when the price of XAI deviates from the peg. Let’s look at two scenarios:

  • Users can always borrow and repay XAI at $1. When the market price of XAI is below $1, borrowers can arbitrage the price by purchasing XAI at a discount and repaying their loans.
  • When the XAI market price trades above $1, users can borrow new XAI into existence and sell it on the market. Once the price of XAI has decreased, they can repay standing loans.

The SiloDAO controls the borrow interest rate of XAI across all silos, effectively controlling the circulating supply for XAI by increasing or decreasing borrow interest rates.

Borrowing XAI

In the first phase, XAI will be available to borrow in two silos:

  1. XAI-ETH silo: Users deposit ETH and borrow XAI at a fixed interest rate of 0.1% per annum.
  2. USDC silo: Users deposit USDC and borrow XAI at a variable interest rate. The interest rate is determined by the dynamic interest rate model for stablecoins.

Credit Lines

Credit lines is the process of allowing silos to borrow XAI into existence using the base assets of those silos. In the beginning, two credit lines of 10M and 5M XAI will be extended to the XAI-ETH and USDC silos respectively, and as such XAI can only be borrowed with ETH and USDC collateral.

As XAI AMM liquidity grows, we will be extending additional credit lines to more silos, allowing XAI to be borrowed into existence by more token assets.

Note that as additional credit lines are extended to different tokens, the backing of XAI will change. For example, if the DAO were to extend a 5M XAI credit line to the LUSD silo, the backing of XAI would theoretically change to 50% ETH, 25% USDC, and 25% LUSD.

In the case that a large credit line is extended to a highly volatile and low liquidity asset, there is a risk that XAI may become undercollateralized if a large borrow position cannot be smoothly liquidated. Subsequently, the DAO must be highly judicious in deciding which silos receive credit lines and the size of the credit line afforded to these silos to minimize the possibility of an under-collateralization event.

Revenue Maker

The beneficiary of any interest earned on the borrowed XAI is the SiloDAO treasury. This provides a new revenue stream that grows in proportion to the total amount of borrowed XAI in the Silo protocol.

Building AMM liquidity for XAI

The SiloDAO accrues all paid interest for borrowing XAI. With larger borrowed amounts of XAI, the DAO’s revenue grows, allowing it to expand its incentive programs to multiple venues.

Key to creating large demand for XAI is building deep liquidity on one of the AMMs such as Curve. Deep AMM liquidity facilitates larger liquidation volumes at the peg, allowing the DAO to extend XAI credit lines into new silos. Additionally, larger AMM liquidity will enable users to swap token assets for XAI to deposit into silos where demand on borrowing XAI exists.

Given the importance of having deep XAI liquidity, we suggest the following roadmap:

Phase 1

The reason we have minted 5M XAI to USDC pool is to enable the core team, via the DAO’s development fund, to borrow XAI and seed a liquidity pool to help with liquidation. The plan is to deposit $1.7M USDC to borrow 1.5M XAI. We will then use 1.5M USDC to create XAI-USDC Univ3 pool with $3M liquidity.

Phase 2

While we are implementing phase 1, we will be working to get a gauge for a XAI-3CRV pool. The goal is to build a deep liquidity for XAI to maintain its soft peg. Once the gauge is voted, we will use vlCVX to attract deep liquidity to the pool.

Phase 3

Our protocol will soon be home to many token assets, potentially growing the demand for bridge liquidity (XAI or ETH). Consequently, we need to make sure to grow the depth of XAI AMM pool significantly to meet the growing demand. We believe at this stage we need a $50-100M liquidity pool for XAI. To achieve the goal, we might need to use some of the DAO’s holdings of SILO to maintain a certain level of incentives for our Curve pool. The community will have enough time to discuss the best ways to scale up our AMM liquidity before we affect plans.

Next steps: Governance proposals

Once the community has deliberated this community proposal, the core team will create the following executive proposals:

Proposal 1: Add XAI to the Silo Protocol as as a Bridge Asset

The proposal adds XAI to the Silo Protocol as a bridge asset. Adding bridge assets is a built-in function in the protocol (see image below) that requires no further development. If the community votes to add XAI as a bridge asset, users will be able to use XAI as collateral to borrow other assets in the protocol immediately.

Proposal 2: Extend Credit Lines to Two silos

The proposal extends two credit lines:

  • 10M XAI will be extended to the XAI-ETH bridge silo. The bridge silo consists of two assets: XAI and ETH, and is the premier way to mint XAI into existence at a fixed interest rate of 0.1% per annum. Note this silo is the only one consisting of two assets.

  • 5M XAI will be extended to the USDC silo. Like other silos in the protocol, the USDC silo will consist of 3 assets at this stage:

  • Base asset: USDC

  • Bridge asset 1: ETH

  • Bridge asset 2: XAI