Introduction:
The H2O team is excited to announce using Reflexer's codebase. We feel this is a perfect opportunity to bring algorithmic stableassets to the forefront of DeFi.
What are stable assets?
Before getting into the technicals behind RAI, we need to distinguish between stablecoins and stableassets. We define stablecoins (i.e., USDC and USDT) as pegged assets and RAI/H2O as real stableassets. Stableassets play an integral role in the development and evolution of the DeFi ecosystem. The annual stableasset adjusted transaction volume for 2021 was over $5 Trillion, a 370% increase from its 2020 figure. The ability to generate yield on crypto assets while limiting the adverse effects of market volatility through stableassets contributed to this growth in volume. Naturally, this has drawn the attention of regulatory agencies. Stablecoins, such as USDT and USDC, which are pegged to the dollar and more centralized in nature, have realized most of this regulatory scrutiny - presenting an opportunity for real stableassets such as RAI and H2O.
What is RAI?
Reflexer's mission is to "Build non-pegged, and governance minimized stableassets that are completely detached from fiat." Let's dive into the technicals to learn how RAI accomplishes this mission. RAI can stay non-pegged to a particular asset using a managed float regime. Supply and demand factors dictate the exchange rate (the market's rate at which you can convert one currency to another). Specifically, interactions between SAFE users (use their ETH to generate RAI) and RAI holders (speculate on RAI or use it in other apps and protocols) determine the target exchange rate. If the market price deviates from this target, the protocol transfers value between SAFE users and RAI holders while incentivizing both parties to bring the market price back to the target price. The deviation from the fixed exchange rate model (the model pegged stablecoins use) gives RAI more flexibility in rewarding its market participants, avoiding trade imbalance, and ensuring stability. It also offers RAI protocol the discretion to set a target exchange rate based on real-time market dynamics.
RAI vs. DAI:
It's also important to compare and contrast RAI with other algorithmic stablecoins. Maker Dao's DAI influenced some of the fundamental principles of RAI. The most critical aspect is collateral assets back both stableassets. For example, users deposit collateral assets into Maker vaults to mint DAI. Similarly, SAFE users deposit ETH as collateral to generate RAI. The crucial difference is the underlying asset that determines their values. DAI adheres to a 1:1 exchange rate with the US Dollar, while RAI uses a Reflex Index determined by the market.
Why H2O?
H20 is a friendly fork of Reflexer's RAI following this exact stabilization model. The one key difference is that H2O will not be backed by ETH but backed by $Ocean and soon also by data tokens. The Ocean token will back H2O at launch, but H2O will be collateralized by datatokens starting in Q3 2022. Thus, H2O will serve as a stable medium of exchange and unit of account in DeFi data marketplaces. The H2O team is excited about the future of DataFi, and even more thrilled about the impact H2O will have on the data marketplaces.
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