Original Title: "Project Overview: Academic Stablecoin Newcomer Angle Protocol"

Author: Li Yuxuan

Section 1: Key Points of the Research Report

1. Core Investment Logic

Angle Protocol features a cleverly designed stablecoin mechanism that organically combines the three demands of stablecoins, margin trading, and single-coin staking mining, thus promising a win-win outcome for multiple parties:

● Provides stablecoin users with the ability to freely mint and redeem stablecoins, ensuring both capital efficiency and security.

● Offers margin trading users a trading venue without funding rates and slippage.

● For users needing single-coin staking mining, they can achieve higher returns.

However, on one hand, its mechanism has not been validated through market fluctuations; on the other hand, even if the core mechanism is validated, the key to the success of stablecoins actually lies in the expansion of use cases. We need to continue observing the use case expansion of Angle.

2. Main Risks

We believe the main risks faced by the project include: insufficient promotion risk, core mechanism failure risk, and oracle and smart contract risks, which can be viewed in detail in Section 3.5 Project Risks.

Section 2: Project Overview

1. Business Scope

Angle Protocol is a decentralized stablecoin project launched on Ethereum, aiming to create a capital-efficient and over-collateralized decentralized stablecoin. In the process of implementing the stablecoin, margin trading users and single-coin staking users were introduced, forming the three current use cases of the Angle protocol. The protocol officially launched on November 4.

2. Development Status

Currently, the stablecoin launched by the protocol is agEUR, which is pegged to the Euro, with collateral supporting USDC and DAI, and a current TVL of $150 million.

Data Source: https://analytics.Angle.money/#/home

3. Team Background

The three core contributors of the Angle team, Pablo Veyrat, Guillaume Nervo, and Picodes (pseudonym), are from France.

According to LinkedIn profiles and articles from a16z, they have been classmates since 2016 when they studied at École Polytechnique in Paris. In 2019, they all went to Stanford University for graduate studies in computer science, during which they met several partners from a16z. No other team members' information was found in public channels, but from interactions on Twitter, the team has at least six members. Veyrat has participated in ETHCC and has been active in recent crypto discussions held in Lisbon.

Moreover, from a series of articles published by the team on their blog, it is evident that the team has a deep analysis and clear understanding of the current market situation of stablecoins and the issues faced by past stablecoin projects.

Overall, Angle is a small but refined young team with a strong educational background, although they have limited experience in the crypto industry.

4. Investment Background

On September 28, Angle Protocol announced that it had raised $5 million in a round led by Andreessen Horowitz (a16z), with other investors including Fabric VC, Wintermute, Divergence Ventures, Global Founders Capital, Alven, and individual investors Julien Bouteloup (a core contributor to Curve) and Frédéric Montagnon.

Section 3: Business Analysis

1. Industry Analysis

Regarding the industry analysis of stablecoins, we have detailed discussions in our recent Track Scan and CELO Research Report. Our views on the stablecoin market are summarized as follows:

● Stablecoins remain a rapidly growing market, with this year's growth far exceeding last year's.

● The growth of decentralized stablecoins is significantly higher than that of centralized stablecoins, being more than three times their growth rate.

● The scale of the stablecoin market does not entirely depend on bull markets; its market cap growth is much faster than the recovery speed of the crypto market.

● Although regulatory scrutiny may soon come down, the golden period for the development of decentralized stablecoins may just be beginning, with the potential to maintain a high growth rate in the future.

2. Project Competitive Landscape

For stablecoin projects, the key to success lies in two points: 1. Whether the stablecoin mechanism is reliable; 2. The use cases, scenarios, and user expansion of the stablecoin.

Given that Angle Protocol has just launched, we will primarily introduce its core mechanism to explore its potential for stability, and then assess its potential for good promotion based on its mechanism and background (including team background and funding background).

According to the official documentation, Angle's users mainly include three categories:

● Stablecoin demanders

● Hedging Agency (HA), who engage in leveraged trading in the protocol in a manner similar to perpetual futures.

● Standard Liquidity Providers (SLP), who provide additional collateral to ensure the protocol's security while automatically earning interest, trading fees, and rewards.

Let’s first understand Angle's stability mechanism:

a. Stability Mechanism

Angle's stability mechanism is relatively simple: after incurring a small fee, the system always allows users to freely mint stablecoins or redeem collateral at oracle prices.

For example, if the current price of ETH is $4000 and the transaction fee is 0.3%, then users can exchange 1 ETH for agEUR worth $3988 at any time. When market demand for agEUR is strong, as long as the premium of agEUR exceeds 0.3% (excluding GAS), it is profitable to mint agEUR from the protocol and sell it to the market. The opposite is also true.

This is quite similar to the stability mechanism of centralized stablecoins. Centralized stablecoins like USDC also guarantee a 1:1 two-way exchange between the issued stablecoins and collateral, with the difference being that the collateral for centralized stablecoins is generally fiat currency or fiat-equivalent assets in the real world. Additionally, due to the limitations of fiat payment systems and cost considerations, the redemption and minting of centralized stablecoins are not real-time.

The system's continuous opening of stablecoin minting and redemption allows for smoother adjustments to supply and demand, thereby enhancing the liquidity and stability of the stablecoin. This approach is the most user-friendly for stablecoin users.

However, the issue is that users do not mint agEUR with over-collateralization, which raises a question: how does the system ensure that there is always enough collateral available for users to redeem if the price of the collateral drops? For example, consider the following scenario:

At $4000 for ETH, A mints agEUR worth 10 ETH, and the system holds 10 ETH (worth $40,000), with liabilities of $40,000 in agEUR (excluding fees).

● When the price of ETH rises to $5000, the value of the 10 ETH held by the system increases to $50,000, while the liabilities remain at $40,000, keeping the system in a healthy over-collateralized state.

● However, when the price of ETH drops to $3000, the value of the 10 ETH held by the system decreases to $30,000, while the liabilities remain at $40,000. If there are no HAs present, the system cannot maintain the redemption of all circulating agEUR.

Thus, simply adopting this model is not feasible. To address this issue, Angle first introduces HAs (Hedging Agencies). In the above example, HAs are users who are bullish on ETH and can deposit ETH and engage in long trades. After incorporating HAs, the process changes to:

At $4000 for ETH, A mints agEUR worth 10 ETH. B comes in to go long on ETH, bringing in 5 ETH. At this point, the system has liabilities of $40,000 in agEUR and holds 15 ETH, of which 10 ETH is for agEUR redemption, and the remaining 5 ETH is the collateral surplus brought by B.

● When the price of ETH rises to $5000, the value of the 15 ETH held by the system increases to $75,000, while the liabilities remain at $40,000. The ETH needed for agEUR redemption in the protocol is still worth $40,000, which is 8 ETH. The original 2 ETH for agEUR redemption then becomes B's profit.

● However, when the price of ETH drops to $3000, the value of the 10 ETH originally held by the system decreases to $30,000, while the liabilities remain at $40,000. At this point, of the 5 ETH brought by B, 3.3 ETH are needed for agEUR redemption, leaving B with only 1.67 ETH as collateral.

In this scenario, although the collateral has dropped by 25%, the protocol overall still maintains a safe over-collateralized state.

The over-collateralization brought by HAs constitutes the first safety cushion for the stability of the Angle system. Overall, an increase in collateral value will benefit HAs and strengthen the system's safety cushion; conversely, a decrease in collateral value will lower the overall collateralization ratio of the system, but as long as there are enough HAs, the system's health can still be ensured. For HAs, engaging in long trades on ETH in Angle also has significant advantages: 1. They do not need to pay funding rates, which is a notable benefit for long-term holders of long positions, as annualized funding rates for perpetual futures trading on CEX often exceed 100%; additionally, the trading price directly uses oracle prices, eliminating the need for AMM and thus avoiding slippage; finally, due to their contribution to the protocol's security, they can also earn $ANGLE rewards distributed by the system.

However, the above solution still has a significant issue: during a bear market where ETH is in a downward trend, HAs may not be very enthusiastic about going long on ETH. If there are not enough HAs to provide collateral by going long on ETH, the system's safety cannot be guaranteed. Therefore, Angle also introduces Standard Liquidity Providers (SLP):

As the name suggests, SLPs primarily provide liquidity within the protocol. SLPs can deposit collateral into the protocol to provide liquidity for stablecoin users who wish to redeem their collateral. Among the three parties—stablecoin users, HAs, and SLPs—the priority for redemption is stablecoin users > HAs > SLPs, meaning that in times of insufficient liquidity in the protocol, SLPs face greater risks. As compensation for this risk, SLPs can earn the protocol's revenue (including fees for users minting and redeeming stablecoins, as well as fees for HAs opening and closing positions). Additionally, Angle plans to reinvest the collateral (e.g., through Yearn or Compound) and distribute all investment returns to SLPs after retaining profits. Since the "principal" portion of the investments also includes the collateral provided by stablecoin users and HAs, the returns SLPs receive here also have a "multiplier effect," meaning SLPs can earn additional investment returns. Finally, SLPs can also earn $ANGLE rewards distributed by the system.

It is worth mentioning that in Angle's design, there is also a mechanism for "governance token support for stablecoins" in emergency situations, which allows the governance token $ANGLE to be used as collateral for the protocol when the collateral provided by HAs and SLPs cannot meet user redemption needs. This mechanism is commonly used in many under-collateralized stablecoins. In Angle's design, this module will not be activated under normal circumstances.

The introduction of HAs and SLPs reflects the composability of DeFi. Angle effectively combines the three scenarios of stablecoins, margin long trading, and single-coin yield farming, benefiting multiple parties:

● For stablecoin users, they can mint stablecoins in a decentralized manner on Angle and can freely redeem stablecoins for collateral at any time without incurring interest.

● For HAs, they can engage in similar interest-free leveraged trading / coin-based perpetual contract (long) trading on Angle. Compared to conducting such trades on CEX, they do not need to pay funding rates or interest, only incurring certain transaction fees, making it more user-friendly for long-term holders of such positions; moreover, the trading price directly uses oracle prices, eliminating concerns about slippage. Of course, their collateral and trading objects will be restricted—collateral and trading objects can only be the collateral recognized when minting Angle stablecoins.

● For SLPs, they can capture fees within the protocol and, through the multiplier effect, capture returns from the protocol's collateral investments. At the same time, they also bear greater liquidity risks.

● For the protocol, HAs and SLPs provide "redemption surplus" for the protocol, as the existence of HAs and SLPs allows the protocol to achieve overall over-collateralization while generating stablecoins without requiring users to over-collateralize, thus combining capital efficiency with protocol security.

Due to space limitations, we have not listed all the details of the Angle protocol design. In fact, Angle has quite a few intricate designs surrounding the system's collateralization ratio, such as how different collateralization ratios affect the fees for stablecoin users minting and redeeming, as well as the fees for HAs opening and closing positions, thereby guiding the participation willingness of stablecoin users and HAs; different collateralization ratios also affect the external investment strategies of collateral, etc. Friends interested in the design of the Angle protocol can visit https://docs.Angle.money/ for more information.

b. Focus on the Non-Dollar Stablecoin Market

When we talk about stablecoins in the cryptocurrency space, we are actually referring to dollar-pegged stablecoins, as the entire industry is currently priced in stablecoins pegged to the dollar. Although the dollar also holds an advantage in traditional foreign exchange markets, its market share is not as high as in the crypto world.

Due to the lack of a credible and scalable Euro stablecoin, the current value of the Euro stablecoin market is only $250 million, with a 24-hour trading volume of $15 million, accounting for only about 0.002% of the dollar stablecoin market value. In 2020, the dollar depreciated by 10% against the Euro, meaning that Europeans had to earn over 10% on their dollar stablecoins in 2020 just to barely achieve a balance in Euros. For all non-dollar users, the relative fluctuations of their local currency against the dollar are an obstacle that needs to be overcome.

In fact, the collateral currently supported by Angle only includes DAI and USDC, and the only stablecoin supported for generation is agEUR. Therefore, in its current product form, Angle is more like a trading tool for Euro users in the crypto world: users bullish on the Euro can exchange DAI or USDC for agEUR; users bullish on the dollar can use DAI or USDC as collateral to go long on the dollar. This is also a relatively clear use case for agEUR at present.

The Angle team chose to peg the Euro with the stablecoin agEUR as its first issued stablecoin, aiming to target the blue ocean and niche market within the stablecoin field while better acquiring users. Moreover, in their plans, they intend to expand to other fiat currencies, such as the Swiss Franc, Japanese Yen, British Pound, South Korean Won, etc., with this consideration in mind.

Thus, apart from the core mechanism of the product, the differentiated market choice is also a significant feature of Angle's stablecoin.

c. Protocol Revenue and Distribution

The protocol's revenue includes the following components:

● Fees paid by stablecoin users for minting and burning stablecoins, which fluctuate between 0.2% and 0.4% based on the current collateralization ratio of the system.

● Fees paid by HAs when opening and closing positions, which also fluctuate between 0.2% and 0.4% based on the current collateralization ratio of the system.

● Returns from the protocol's collateral FARM.

Revenue is currently distributed to two parties: 1. SLPs, 2. The protocol surplus fund. Each pool will set different distribution ratios; currently, 40% of the fees generated from the USDC pool will be allocated to SLPs, and 60% to the surplus fund; for the DAI pool, 20% will go to SLPs, and 80% to the surplus fund.

Overall, since the protocol incorporates stablecoin holders, HAs, and SLPs, and is essentially a combination of stablecoins + coin-based perpetual contract trading + single-coin mining, the sources of the protocol's revenue are quite broad, and the stability of revenue will also be stronger.

Actual revenue situation: From the launch on November 4 to now, the protocol surplus fund has accumulated a total revenue of $1.2 million. This revenue is relatively high, but mainly due to the stablecoin minting incentivized by $ANGLE token mining, which is a one-time profit. The sustainability of future revenue and profits is worth observing.

d. Work Status and Potential Analysis in Expanding Stablecoin Use Cases

Currently, the number of token holders and daily active users is in the hundreds:

Data source for agEUR contract interaction analysis: https://etherscan.io/token/0x1a7e4e63778b4f12a199c062f3efdd288afcbce8#tokenAnalytics

The current number of interactions and token holders is not large, but this is mainly due to the short time since launch and the impact of high GAS fees on ETH.

The team has been active in collaborating with other projects, including:

● The team is in discussions with Curve to add the agEUR-sEUR trading pair;

● A proposal to add FEI as collateral for agEUR is currently awaiting progress in community discussions;

● A proposal to add FRAX as collateral for agEUR is still in the community discussion stage;

● Selling agEUR-ANGLE LP through Olympus PRO is currently under community voting;

In terms of potential, the investment from a16z should provide significant support for Angle in expanding stablecoin use cases and connecting with collaborative projects.

Additionally, the investment from Curve's core contributor Julien Bouteloup may also be noteworthy. Curve has now become the cornerstone of the entire DeFi ecosystem, especially for stablecoin projects, and all stablecoin projects are actively collaborating with Curve, hoping to launch on Curve, thereby forming a yield stacking based on Curve LP, providing solid use cases for their tokens.

3. Competitive Situation Analysis

Current top 12 stablecoin projects by market cap Source: Coingecko

The top 12 decentralized stablecoins by market cap include DAI, UST, MIM, FRAX, LUSD, and FEI.

In terms of mechanisms, these six stablecoins can be divided into two categories: 1. DAI, MIM, and LUSD, which are characterized by over-collateralization. 2. UST, FRAX, and FEI, whose stability relies on the backing of "volatile" tokens (LUNA, FXS, TRIBE) within their systems.

Compared to the aforementioned decentralized stablecoin protocols, Angle's competitive advantage mainly lies in its mechanism. Under ideal operation of its mechanism:

● For stablecoin users, since minting stablecoins does not require over-collateralization, Angle's stablecoins are more capital-efficient than over-collateralized stablecoins represented by DAI, MIM, and LUSD.

● The mechanisms of UST, FRAX, and FEI are, to some extent, self-fulfilling, meaning that user confidence in the stablecoins comes from their volatile tokens. Therefore, when user confidence is low, there may be a risk of de-pegging (in fact, UST de-pegged due to LUNA's drop below UST's market cap; FEI remained de-pegged for a long time after launch due to high PCV; and Frax's USDC collateralization ratio has always been above 80%, so we can consider that Frax is essentially collateralized by USDC). In contrast, Angle's circulating stablecoins remain over-collateralized, making them "safer" for stablecoin users.

Angle's competitive disadvantage mainly stems from being a latecomer. Given the strong network effects of stablecoins, newcomers need to have substantial fundamental advantages and very realistic yield advantages to capture market share from predecessors.

Angle is launched on Ethereum rather than building a public chain around stablecoins like Terra or Celo, which means that Angle's use case expansion mainly depends on developments within the Ethereum (and sidechain) ecosystem. As emphasized earlier, we believe that for stablecoins, the recent success of MIM, the most prominent stablecoin in the Ethereum ecosystem, has come more from the expansion of token use cases rather than innovations in stablecoin mechanisms.

Furthermore, there are inherently few Euro use cases in the entire Ethereum ecosystem, which is also a challenge that Angle, currently only offering a Euro-pegged stablecoin, must face.

4. Token Model

The governance token of the protocol, $ANGLE, has a total supply of 1 billion tokens, distributed as follows:

● 40% for liquidity mining, allocated to stablecoin users, HAs, and SLPs.

● 20% to the DAO treasury;

● 18% allocated to the core team, released linearly over 36 months.

● 12% to current and future strategic partners of Angle, for funding, project consulting, and valuable community members.

● 10% to early investors, released linearly over 36 months.

For the protocol, the token's roles include:

1. Governance: $ANGLE holders are responsible for parameter adjustments, deploying new stablecoins, accepting new collateral types for specific stablecoins, collateral FARM strategies, and the proportion of revenue sharing with SLPs, as well as protocol upgrades and integrations.

2. Revenue acquisition: All revenue from the Angle system has a share ratio controlled by the DAO between SLPs and the surplus fund. The surplus fund is controlled by the DAO, and it is explicitly stated in Angle's documentation that, when appropriate, it may buy back $ANGLE similarly to how MakerDAO buys back MKR.

3. Incentivizing user behavior: By using $ANGLE tokens to incentivize stablecoin users, HAs, and SLPs, the protocol can better attract users and maintain its security.

5. Project Risks

We believe the risks of the project, in descending order of importance, are as follows:

a. Insufficient Promotion Risk

The excellence of the stablecoin mechanism is one aspect; more importantly, is the expansion of use cases. Although there is a strong investment background, the team's member backgrounds and current configuration indicate that while the team shows strong capabilities in product and development, it has not demonstrated operational promotion capabilities.

Additionally, the scarcity of Euro scenarios within the entire DeFi ecosystem is also a hidden concern for Angle's use case expansion.

b. Core Mechanism Failure Risk

Although the protocol's core mechanism is ingeniously designed and has established a comprehensive risk parameter and management system, the protocol has been online for a relatively short time and has not yet undergone significant market fluctuations. For stablecoin projects, if they deviate from their peg shortly after launch, it can severely impact the project's image and use case promotion (e.g., FEI).

c. Oracle and Smart Contract Risks

Angle relies on oracles for two main aspects: 1. Pricing during minting and burning based on oracle prices; 2. HA trades executed at oracle prices. Oracle attacks are one of the most common forms of DeFi attacks. Although Angle has written a dedicated article to explain their understanding of oracle risks and has implemented a series of measures to prevent oracle attacks (such as integrating both Chainlink and UniswapV3 oracles, requiring a minimum interval of one hour between HA buy and sell transactions, etc.), Angle's smart contracts have been audited by Chainsecurity and Sigma Prime, and there was a three-month testing period on the testnet before the mainnet launch, which was quite thorough.

Thus, this risk is relatively small but cannot be completely eliminated.

Section 4: Valuation

1. Five Core Questions

What stage is the project in its business cycle? Is it in the mature stage or the early to mid-development stage?

The project is in the early stage of its business cycle, having launched its product only 10 days ago. Although it has an excellent mechanism design, it remains to be seen whether it can face complex and unpredictable risks.

Does the project have a solid competitive advantage? Where does this competitive advantage come from?

The project mainly relies on its excellent mechanism design and funding background to achieve a good business cold start. The team also has a strong understanding of the stablecoin market. In the week since its launch, it has been actively collaborating with other projects, showing the team's enthusiasm for business development. However, whether these advantages can be maintained in a competitive environment remains to be seen.

Is the project's medium to long-term investment logic clear? Does it align with industry trends?

Stablecoins have a broad market space, and the currently dormant regulatory policies targeting stablecoins are more favorable for decentralized stablecoins. Additionally, the project focuses on non-dollar stablecoins, thus entering the current niche market for stablecoins.

Overall, the project's medium to long-term investment logic aligns with industry trends.

What are the main variable factors in the project's operations? Are these factors easy to quantify and measure?

The main variable in the project's operations is the expansion of use cases for its stablecoin. For stablecoin projects, confirming the effectiveness of the mechanism is just the first step; the key to the development of stablecoin projects is whether they can drive demand for stablecoins through collaborations with other projects (like MIM) or by creating their own ecosystem (like UST).

These factors are easy to quantify and measure, as they can be assessed through the issuance status, activity levels of the stablecoin, and the progress of collaborations with other projects.

What is the management and governance structure of the project? How mature is its DAO?

The project's DAO module went live on November 6, and there are currently not enough cases to assess its maturity. From the current situation, discussions in the project governance forum are active, and the core team pays considerable attention to community feedback.

2. Valuation

The project has been online for a short time, especially for stablecoin projects, where the existence of farming can lead to significant distortion in business data at launch. Therefore, we will not conduct a valuation assessment of Angle at this stage.

3. Summary

Angle Protocol features a cleverly designed stablecoin mechanism that organically combines the three demands of stablecoins, margin trading, and single-coin staking mining, thus promising a win-win outcome for multiple parties:

● Provides stablecoin users with the ability to freely mint and redeem stablecoins, ensuring both capital efficiency and security.

● Offers margin trading users a trading venue without funding rates and slippage.

● For users needing single-coin staking mining, they can achieve higher returns.

However, on one hand, its mechanism has not been validated through market fluctuations; on the other hand, even if the core mechanism is validated, the key to the success of stablecoins actually lies in the expansion of use cases. We need to continue observing the use case expansion of Angle.