The new stablecoin RAI, favored by V God and 0x_b1, has launched, and its price is not tied to the value of fiat currency

Currently, most DeFi lending protocols operate on an over-collateralized basis, making it particularly important to ensure that the prices of collateral assets do not experience significant fluctuations, thus protecting users from asset liquidation.

RAI, a stable asset developed by Reflexer Labs and backed by ETH, is a solution to reduce or delay asset volatility, providing other DeFi protocols with such low-volatility assets as underlying assets. It recently launched on the Ethereum mainnet. Block explorer records show that Vitalik Buterin and 0x b1 have also purchased RAI tokens worth millions of dollars on Uniswap.

Recently, Owen Fernau, a columnist for The Defiant, wrote a detailed analysis of the RAI project and its workings. Below is the translated text:

RAI is a stablecoin suitable for pure decentralists, now live on the Ethereum mainnet. It is not pegged to fiat currencies and has no fiat backing; its design is entirely run by computer programs. If RAI had a physical banknote, it would say: "In Code We Trust."

RAI is a stable asset solely backed by ETH. Unlike other stablecoins issued by central banks, RAI relies on algorithms to maintain price stability without being pegged to external prices like the dollar. Its main feature is minimal governance, operating with as little human intervention as possible, which is why the founding team, Reflexer Labs, refers to RAI as the "God of Money."

In the DeFi world, although the community distrusts stablecoins pegged to fiat currencies like the dollar, fiat-backed stablecoins have become a pillar of the emerging financial system. RAI addresses this contradiction. DAI initially was also minted by collateralizing Ethereum's native asset ETH to create a stablecoin pegged to the dollar, but after November 2019, it added other collateral assets that included fiat currencies, while RAI aims to be a truly decentralized, censorship-resistant alternative.

Global Reserve Asset

RAI's initial goal is to become a substitute for fixed currencies, used as collateral and a stable reserve asset in DeFi. Over time, its builders hope RAI can also become "the standard of Ethereum, the native unit of account in the Ethereum ecosystem," as Reflexer Labs member Ammen Soleimani wrote in an article titled "Money God RAIses." However, RAI's long-term ambitions are even greater.

"If RAI achieves its purpose in DeFi and begins to gain adoption globally, it could bring credible neutrality to the management of a stable global reserve asset," Soleimani wrote.

According to stats.reflexer.finance, RAI is a fork of Maker's multi-collateral DAI. At the time of writing, over 28k ETH is locked, generating 7.4M of outstanding RAI. The current market price is $3.42 (redemption price is $3.14), with a total market cap of $16 million.

However, according to RAI's mechanism, its price based on the dollar is not important. The redemption price of RAI is adjusted for low volatility based on the value of the collateral, so 1 RAI = 1 RAI.

Non-Governance Token

Reflexer Labs plans to announce a liquidity mining program for the RAI/ETH Uniswap v2 pool in the coming weeks, as well as the Reflexer non-governance token FLX.

The official blog also stated that it has not yet been determined whether mining rewards will be provided for the initial batch of RAI/ETH LPs.

Works Like a Spring

To achieve relative stability, RAI initially has an arbitrary target price, which is its redemption price. When RAI's market price deviates from the target price, its algorithmic controller automatically sets an interest rate to counteract price changes, incentivizing people to bring RAI back to its target price.

"It works a bit like a spring: the further RAI's market price is from the target price, the stronger the interest rate becomes, and the greater the incentive to bring RAI back to balance," Soleimani wrote.

The protocol uses something called a PID controller to stabilize the asset. A PID controller is a control loop mechanism widely used in industrial processes, combining three functions to maintain a certain value. For example, a car's cruise control is a control loop mechanism where the engine must output different power to maintain a constant speed when going up and down hills.

Redemption Rate

While the interest rate is an approximate value, the protocol uses something called the "redemption rate" as a variable for its PID controller.

RAI has both a public market price and a redemption price. The latter refers to the rate at which RAI can be exchanged for locked ETH within the RAI protocol. If both prices are the same, the system is in a balanced state.

When the market price exceeds the redemption price, the control mechanism activates, continuously increasing RAI's redemption rate.

The increase in the redemption rate incentivizes those locking ETH (RAI borrowers) to buy RAI now, as their liquidation costs have risen. Theoretically, this will align RAI's market price with the redemption price.

This balancing effect also works in the opposite direction; if RAI's market price is higher than the redemption price, the redemption rate will become negative. This incentivizes RAI holders to sell, as the decrease in the redemption price effectively acts as a negative interest rate. At this point, the market price should match the newly lowered redemption price.

Global Dream

A semi-stable crypto asset not bound by any national monetary policy could be a solution to the macroeconomic problem of the Triffin Dilemma.

The Triffin Dilemma involves potentially contradictory incentive mechanisms when an asset, like the dollar, serves both as a national currency and as an international reserve. The currency's controllers must suppress domestic inflation while addressing the demand for international liquidity. The monetary policies required to achieve these goals are often misaligned.

RAI aims to solidify its algorithmically controlled "God of Money" status, freeing any nation's currency from this dilemma.

Reflexer Labs announced last week its $4.1 million funding round, led by Pantera Capital and Lemniscap, with other investors including MetaCartel Ventures, The LAO, and at least two former MakerDAO team members. This funding round follows an earlier $1.68 million round in August, led by Paradigm, with participation from Standard Crypto, Compound founder Robert Leshner, and a16z former partner Jesse Walden's new crypto venture firm Variant Fund.