Portfolio Insights — Thala
A Robust Dominant Stablecoin Built on Move
Why do we need a stablecoin built on Move?
As outlined in our end of year review, one of our core investment principles revolves around decentralization and censorship resistance. A decentralized economy requires a decentralized stablecoin. We are also incredibly confident that Move-based blockchains like Aptos and Sui will form the basis of a strong and vibrant developer ecosystem looking to build the next generation of Web3 applications to onboard a billion users. As such, we are very much aligned with Thala Labs’ vision to not only develop a more robust decentralized stablecoin, but to also catalyze the growth of the entire Move ecosystem.
In the wake of the Terra implosion last year, we conducted a deep dive into the stablecoin market and found existing models to be flawed. The centralized nature of fiat-based stablecoins such as USDT and USDC pose censorship risks, whereas over-collateralized stablecoins such as DAI lack capital efficiency. By iterating on existing collateralized debt position (CDP) models, we believe that a decentralized currency in the Move ecosystem can reduce liquidity risks and propel on-chain activity on Aptos and beyond.
How does Thala’s Move Dollar (MOD) and other Thala’s Products work?
Move Dollar (MOD)
MOD is an over-collateralized stablecoin, backed by a basket of native and multi-chain assets — including liquid staking derivatives, liquidity pool tokens, deposit receipt tokens, and more. In the future, real world assets (RWAs) will be added to the collateral list.
The basic design of MOD will be:
- Users mint (or in other terms, borrow) a value of stablecoins less than the value of the collateral, such that the value of collateral in the system always exceeds the value of stablecoin in circulation.
- Users with an open vault will be given the option to redeem MOD for $1 (minus redemption fee) worth of collateral, such that the effective price floor is $1.
- MOD holders can deposit MOD in the Stability Pool to get rewards, and the Stability Pool will be used to stabilize the value of MOD.
- When the collateralization of a user’s vault falls under what is deemed safe for the backing of MOD, a liquidation process will occur.
- First, the MOD in the Stability Pool will be used to buy back the collateral, and the collateral will be distributed to the MOD providers in the Stability Pool.
- If there is not enough MOD in the Stability Pool to buy back the collateral, the liquidated collateral will enter a Dutch auction.
- When the collateral is liquidated, only part of the collateral will be liquidated, and it will be liquidated until the value of the user’s collateral returns to a safe level, instead of all the collateral being liquidated at once.
For collateral pricing, Thala utilizes a tiered oracle design so that even if one of the oracles is down, there are still other live oracles. The price from the primary oracle is always preferred unless the price feed reports a stale price or detects unusual price movements. Thala has two options for primary oracles, one is Pyth, and the other is our very own portfolio company Switchboard.
The main role of Thala Swap is to help stabilize the value and improve access to MOD. While reviewing the reasons behind why some stablecoin projects failed to gain traction, it was obvious that one key crucial factor is the usability of the stablecoin. If there are no use cases and composability with a particular stablecoin, there is no reason for users to hold it. Thala Swap helps to foster the demand for MOD by allowing for composability with other crypto assets and tokens within the Move ecosystem.
Thala Swap has three pools in its design:
- Weighted Pools are pools that swap tokens by enforcing a Constant Weighted Product invariant, which means that the product of the weights of tokens is set to a parameter, which helps the pool to determine the price of tokens.
2. Stable Pool is a pool type that allows assets that converge on a value of “1” relative to each other to be exchanged with low price impact and low fees.
3. Built on top of ThalaSwap, ThalaLaunch leverages a special pool type called Liquidity Bootstrapping Pools (LBPs). LBP is a subset of weighted pools. The weight range of assets in the pool and the time required to move the weight can be set arbitrarily by pool creators. After a pool creator obtains permission, a fund pool will be established and automatically balanced by the LBP manager contract. It’s expected that Thala will launch its own governance token through this platform. As other projects on Aptos begin to release tokens, ThalaLaunch evidently serves as a powerful way to create cross protocol integrations Day 0, as well as accrue revenue back to Thala.
At present, Thala expects the MOD Liquidity Yield to be 5~10%, while for LBP (usually a new small-scale token), it can be 50% or even 100%
Thala has its native token THL, which is the governance token of Thala. Holders may initiate proposals, vote on issues, and propose potential changes in protocol parameters — playing a key role in shaping the direction of the protocol.
While the protocol will be initially governed by the core team, Thala will transition to a Decentralized Autonomous Organization (DAO) model once necessary governance frameworks are in place.
THL also will have a voting enabled version (veTHL) designed to ensure deep alignment in protocol voting and value. To also develop liquidity on THL and create further use for the stablecoin, veTHL is an 80/20 THL/MOD LP token. LP token holders will able to lock the THL/MOD pool token for up to a year to gain utility like:
- The ability to create and vote on key protocol parameters, including those affecting the protocol treasury which is the initial recipient of all fees
- Receive discounts or rebates on protocol fees
- Access to special channels in the Discord
What sets Thala apart?
The large market size of the Move Ecosystem
Besides Aptos, recently there are other blockchains that are built using the Move language, including Mysten Labs Sui, Solana Move VM. The ease of deployment and development along with their high performance makes Move blockchains incredibly scalable. Identifying that the lack of a native Move stablecoin was a glaring gap in the market, Thala seeks to capitalize on that by building a dominant robust stablecoin in this ecosystem much like how other stablecoins like DAI did in the EVM ecosystem.
The major advantage of MOD is its collateral diversity; they have planned to accept RWAs as MOD collateral, and are also working on integrating credits, T-Bills, real estate debt instruments, and blue-chip equities as collateral. Compared with digital assets, physical assets have lower volatility and are more tangible which can perhaps offer more residual value. This is crucial because we believe DeFi needs to bridge the gap to the rest of the global economy which includes real world assets.
Focus on security and risk management
To ensure the safety and stability of the overall system and the stablecoin’s peg, Thala is constructing a comprehensive, transparent evaluation of proposed collateral types that ranges from smart contract, counterparty, market volatility & liquidity risk. You can read more about their framework here.
Most notably, they have implemented an Emergency Redemption Mode (ERM) which essentially prioritizes security for holders as it allows MOD holders to directly redeem MOD for collateral after an Emergency Processing Period. ERM is a process that can be used as a last resort to directly enforce the Target Price to holders of MOD and Vaults, and protect Thala against attacks on its infrastructure and periods of extreme and prolonged market instability and irrationality. It activates a system-wide redemption mechanism that settles all ongoing protocol mechanisms.
An Integrated AMM
As mentioned, the AMM has direct integrations with $MOD to ensure it has constant sources of deep liquidity, however there’s even more valuable synergies between MOD and Thala Swap. Given enough liquidity, key liquidity pool tokens (LPTs) such as $MOD-$USDC, can be used as a collateral type to mint $MOD, opening up strategies that allow users to leverage their position and earn higher yield. This mechanism functions similar to the G-UNI DAI/USDC vault on MakerDAO which has seen great traction due to the large amount of leverage possible. And if recursive borrowing through ThalaSwap and the CDP isn’t attractive , certain LPTs can be staked directly on the AMM to boost liquidity provision rewards.
The Future Roadmap of Thala
As of writing, MOD and ThalaSwap are gearing up for mainnet app launch in early Q1 2023. Subsequently, Thala will be focusing on its collateral diversity and its cross-chain deployment. This includes adding RWAs to the MOD collateral list, and deploying on other Move-based chains such as Sui, Solana Move VM, and Sei. Thala will continue to diversify as they may continue to develop more stablecoins in the future such as Euros and Canadian dollars. Thala will also be working towards a greater degree of decentralization with community governance via their future native token THL and the Thala DAO.
We look forward to working closely with Thala in the future to continue building toward a fully decentralized stablecoin and collateral-diversified stablecoin in the Move ecosystem.
Written By Henry Ang, Mustafa Yilham, Allen Zhao & Jermaine Wong