Minting From System Gains
Real USD’s main competitive advantage is its real estate backing. This unique backing has two primary benefits:
- 1.The real estate is tenanted and produces yield.
- 2.Real estate increases in value.
A major improvement in the release of Real USD is the automated minting of new USDR against system gains. As assets in the treasury increase in value, pushing the collateralization above 100%, instead of holding that value in the appreciated assets, we immediately realize the incremental value and use it to add new property to the treasury. We do this by minting new USDR 1:1 against those gains, every 1% increase to collateralization above 100%, and then using that USDR to purchase additional real estate through the Tangible marketplace. Having passed 100% collateralization, these gains can be minted to new Real USD without risking the peg or a 100% token backing.
Moving gains immediately into additional real estate benefits the system in multiple ways:
- 1.We can more quickly boost the yield above the 8.5% target rate. In a category where yield is the primary value prop, we believe this improvement will drive increased adoption of Real USD. For every 10% gain in property prices we expect to see an approximate .85% gain in yield, assuming a 8.5% yield on the individual property.
- 2.Moving the gains out of volatile digital assets and into stable, yield-producing assets strengthens the system and better insulates it from the cycles of the cryptoeconomy.
With this new approach, we accelerate USDR’s overcollateralization with real world assets, strengthening the system while simultaneously increasing the yield. At times, some of the Real USD minted against gains will be used to incentivize yield by swapping it for DAI and adding that money to the incentive vault.
With the current treasury composition, the two assets that have the potential to appreciate in value over time are the TNGBL token and tokenized real estate. Below we’ll look at a few examples on how minting against system gains benefits USDR token holders as well as the system overall.
Example 1: Real Estate Appreciation
In the second scenario we’ll look at how the system responds when the price of property fluctuates. The baseline is 100% collateralization where the real estate allocation is 50% spread across 50 units. All of the current real estate holdings are in tranche #1.
Over a period of time, the property in the treasury appreciates by 20%, as real estate is 50% of the collateralization, this is a net 10% gain on the backing. The 50 units in tranche #1 are now 60% of the total backing of USDR, pushing the collateralization rate to 110%. As the total units remain the same, the yield remains the same.
By minting against these gains, Real USD can realize that 20% appreciation in value and reallocate it into new units, thus increasing the yield. The 10 points of net value gained in tranche #1 is used to purchase 10 new units for tranche #2, moving that value to tranche #2. Real estate still comprises 60% of the backing, the collateralization rate remains 110%, but 10 new units have been added to the treasury, increasing the yield by 85 bps. More units = more yield.
Now let’s see what happens when the value of the real estate starts to fall:
Over a second period of time, the value of real estate falls by 10%. This reduces the value of the assets in the USDR treasury, lowering the collateralization rate to 104%. However, because the gains had already been realized and used to purchase new property, the decline in value does not impact the recently improved yield.
Example 2: TNGBL Appreciation
In the first scenario, we’ll look at a rise and fall in the price of TNGBL.
We start with the price of TNGBL doubling over a period of time, expanding from 10% to 20% of the backing. This pushes the collateralization rate for USDR to 110%. The additional collateralization makes USDR stronger, however keeping the incremental value in TNGBL brings no additional financial benefit to USDR holders. Further, like many other digital assets, the price of TNGBL is much more volatile than real estate and can easily lose whatever gains it had made.
Instead of holding that new value in TNGBL, Real USD will immediately convert it into real estate. New USDR is minted against the appreciation in TNGBL, growing the market cap 1:1 against this value. The USDR is then used to purchase new real estate in the TNGBL marketplace.
This process shifts the value accrual from TNGBL to real estate with two primary benefits:
- 1.Unlike TNGBL, real estate produces yield. By shifting this 10% gain value from TNGBL to real estate, we can increase the yield by 10%, adding nearly 85 bps to the yield. This is a huge benefit to USDR holders.
- 2.By moving the gains from TNGBL to real estate, the value is locked into the stability of a real world asset. If the TNGBL price subsequently falls the gains have already been realized.
Continuing in the example, let’s explore the impact of a 50% drop to the price of TNGBL.
TNGBL now constitutes only 5% of USDR’s backing and the collateralization rate falls to 105%, but the real estate portion is still 10% larger than it was prior to TNGBL’s initial move up. Had the TNGBL gains not been shifted to real estate, the rise and fall of TNGBL would have been a circular move with no lasting benefit to the system, collateralization falling back to 100%, no incremental RWAs or yield.
These new updates remove the v1 feature that automated a burn of TNGBL in the treasury based on the token price and average price it was used to mint USDR. In USDR, any percentage gain in TNGBL is turned into an equivalent gain in real estate, keeping the allocation of TNGBL in the treasury at approximately 10%. This new minting functionality deprecates the previous v1 burn function.