Celo Stability Protocol Walkthrough

Introduction and Background

Judy Piper, an engineering partner at C-Labs, welcomes the audience to Part 5 of the Cello Tech Talk series. C-Labs is working on Celo, a mobile-first full-stack blockchain platform with a mission to create a financial system that fosters prosperity for everyone. The purpose of the Tech Talk series is to provide educational sessions and share knowledge with the community. Previous sessions are available on Celo’s Crowdcast and YouTube channels.

Roman Crossman’s Role and Interest in Celo

Roman Crossman, who leads the Protocol Economics team at C-Labs, shares his background and interest in working on Celo. He was immediately drawn to the project’s potential positive impact on people’s lives. Roman had the opportunity to meet C-Labs’ CTO and CEO, which solidified his motivation to contribute.

Why Stablecoins?

Celo’s mission to create a monetary system that enables prosperity for all requires stable value assets on the platform. Stablecoins have a simple expansion and contraction mechanism, maintaining a stable value pegged to an external asset. However, traditional stablecoins are centralized and rely on USD and bank accounts. Celo aims to combine the best features from different stablecoin categories into a new setup.

Celo’s Stability Protocol

Celo’s Stability Protocol is a crypto-collateralized senior share hybrid. It uses a reserve with crypto assets, such as Bitcoin, and a senior-style asset to stabilize the value of the stable token. The reserve collateral is not native to the platform. Instead of using USD, Celo substitutes collateral worth one USD, which requires a Celo USD or credit on the blockchain. The protocol relies on user interactions to drive expansions and contractions, making it decentralized.

How Uniswap and Hummingbot Support Stability

Celo utilizes Uniswap-style exchanges to ensure prices adjust on-chain in response to trading. This helps prevent arbitrage opportunities and maintains stability. Hummingbot, an on-chain liquidity provider, helps maintain liquidity and brings the price back to the market rate after significant trades, ensuring subsequent users interact with the protocol at the correct price.

Protection Mechanisms: Spread and Bucket Setup

To protect against oracle rate errors and impermanent loss, Celo employs a spread mechanism. The spread creates a buffer zone between the oracle rate and the prices at which users can trade with the reserve. It also safeguards the reserve from significant trading activities. The bucket setup determines the total size of the reserve and stability mechanism. It balances the speed of adjustment for the sella dollar supply and reserve protection.

Smart Contracts and Stability Fee

Celo utilizes various smart contracts, including the stable tokens contract compliant with ERC-20 standards. The stability fee, although currently inactive, charges a fee on holding stable tokens, reflecting the economic concept of demurrage. Additionally, the hummingbird protocol not only assists with stability but also improves on-chain liquidity.

Challenges and Community Involvement

The stability system poses long-term challenges. Celo encourages community involvement through Celo Improvement Proposals (CIPs) and seeks to automate the reserve fraction parameter through governance proposals. Exploring ideas for allowing non-reserve liquidity providers is another area of interest. Celo plans to provide a deep dive session on the governance process in an upcoming Tech Talk.

Conclusion and Q&A

Judy Piper concludes the session, thanking the participants and mentioning that the recording will be available. Questions are answered regarding the availability of the recording, the stability fee, and the evaluation of fair market value in the presence of spreads.