How to bring traditional assets on-chain in a trustless manner is one of the biggest challenges the DeFi world is facing. In the past, two pain-points include ever-increasing transaction costs and the lack of buying demand. Asset veracity and transaction processes cannot avoid taxation and audit costs. Second, digitized traditional assets aren’t liquid enough compared to traditional markets.
High liquidity assets tend to have a low return, and low liquidity assets have a high return.
“Cash” is the most liquid asset, so the returns on holding cash are extremely low or even negative. “Property” is in the middle, with medium returns and risks. “Venture investment fund shares” have a long lock-up period and weak liquidity, but the expected return is correspondingly higher. Therefore, relatively low-yielding but stable “assets”, such as real estate and bonds, are great fits as underlying collateral for mortgages.
The Duet Protocol
Duet protocol (Duet) is a multi-chain synthetic asset protocol that enables on/off-ramp between traditional real assets and high-growth crypto assets.
A duet in music refers to a piece of music where two people play different parts or melodies. Similarly, Duet protocol allows traders to replicate the returns and the fluctuation of real-world tradable assets in a decentralised finance ecosystem.
Traditional assets are “Flat Assets”, with strong liquidity but low interoperability. However, the “core assets” of web3.0 will need transparency and programmability, or virtual assets such as NFTs; we call these “Sharp Assets”. Some of them have already been digitized, such as Security Tokens, but digitizing alone is not enough to make them sharp.
The next stage of DeFi is to link “Flat Assets” and “Sharp Assets” to mint stable “Neutral Assets”, such as DuetUSD, DuetEUR, or directly mint “Sharp” synthetic assets. Powered by Duet DAO, the Duet protocol relies on community governance to set parameters such as adding new collaterals and elect committees (such as risk control, tech), to jointly vote on proposals.
To onramp the “Flat assets” to the blockchain world, our method is to directly use the existing digital assets in the blockchain world to synthesize by over-collateralization:
1. DuetUSD, DuetEUR, DuetJPY, etc., as standardized investment tools, in the initial stage, we also accept USDT as a stable currency in the system;
2. BTC, stocks, ETFs, commodity futures, NFT, and other assets that have well liquidity or acceptance would also be eligible collateral.
Duet Protocol accepts a wide array of high-quality assets as underlying assets that cover over $1.3 trillion in market value. Duet Protocol also accepts unique collateral, including LP tokens and lending deposit tokens to improve the capital efficiency of users’ funds and improve the composability of the agreement.
In the Duet synthetic asset model, oracle-generated prices can be used in place of depositing underlying assets, lowering friction for creating financial derivatives. To help DeFi mature, it is crucial to include asset classes that are less correlated with digital assets. From Tesla stock to gold, deploying high-quality synthetics on-chain is about to be realised with Duet.
1) Stablecoin & dAsset Minting Contract
The agreement locks the assets deposited by users, scans the quotation of the decentralized oracle and mints the corresponding Duet stablecoin or “dAsset” (synthetic asset) according to the pledge rate (loan-to-value ratio) of different assets.
For example, if you want to mint Tesla’s stock:
- Deposit 1 ETH worth $1,500 (or any supported asset) and $150 worth DUET, lock it into a smart contract (Collateralized Debt Position, CDP) as collateral.
- According to collateral parameters (LTV of 1/3), a Tesla stock token dTSLA worth $550 can be generated (~0.85 shares at the current price of 650 USD per share).
- To reclaim collateral, repay 0.85 shares of dTSLA and get back the locked 1 ETH and the same amount of DUET token as when you deposited it.
2) Interest Yield Module
To increase capital efficiency, part of the user’s collateral will be injected into credible third-party interest-bearing protocols such as Curve, AAVE, and PancakeSwap. Initially, 50% will be deployed and 50% will be reserved. This proportion may be adjusted via governance in the future. Accrued interest will be used to purchase DUET from the open market and sent to the foundation for future distribution and allocation.
3) Collateral liquidation agreement
The clearing agreement will obtain a quotation from the oracle every 5 seconds/time. When the position is underfunded beyond the first liquidation level, the user will have a buffer period of 30 minutes to replenish the collateral, before the assets in the user’s CDP will be auctioned off via third party swap protocols to liquidators. When the mortgage rate is lower than the hard liquidation line, assets will be seized and sent directly for liquidation. Initially, stable collaterals will have 5% liquidation fees and non-stable currencies 15%.
We will first establish pools on popular AMMs such as Uniswap, Sushiswap, and Pancake Swap. However, in the future, an in-house AMM may also be built.
5) Staking and governance voting pool
Anyone can initiate a proposal discussed in the forum or community, but more than 10,000 DUET tokens need to be pledged to initiate a governance vote. When creating a proposal, the community can submit its vote within a pre-designated voting period. If the proposal receives a majority vote, the proposal will be sealed for development.
The Duet Token
Duet Token (DUET), the governance token of Duet, undertakes the following functions:
- Used as collateral to mint “Neutral Assets” (stablecoins) and “Sharp Assets” (traditional financial assets)
- Boost capital utilization while enhancing system robustness following our unique algorithm.
- Provide liquidity mining rewards for dAssets in swaps or lending.
- Voting governance, powered by Snapshot, covers new assets and system parameters.
- Fee payments in the minting ecosystem.
Rewards for holding DUET
- Asset reverse minting fee(returning collateral from dAssets)
- Yield Sharing from re-staking of user’s collateral
- Staking and participation in governance incentives
- Handling fees incurred in financial activities such as Swap and lending
- Part of the return on the spread of asset liquidation
The total supply of Duet tokens is capped at 420 million, of which the team and early investors only retain 15% of the share, 80% Of tokens will be released to ecological participants through Prelude mining, LP mining, airdrops, etc. The distribution is as follows:
The Duet Stablecoin launch will be divided into two phases:
Polyphony phase: In the Polyphony stage, the Duet system will incorporating ETH, BTC, BNB, and other assets into the collateral, the protocol will maintain a fairly high over-collateralization ratio, while minting stablecoins anchored to fiat currencies such as USD, EUR, JPY, and CNH.
Chord phase: Multiple chord progressions makes more music dynamic. In the second stage, we will support high-quality physical assets such as stocks, gold, and real estate.
Stability of dAssets
At times, the price of synthetic assets may deviate from market prices, reflecting market sentiment. If most traders are bullish on an asset, synthetics may trade at a premium due to its minting cost. There are two mechanisms that can promote synthetic asset price pegging:
1. Funding Rate Fees
If the price of synthetic assets is higher than spot, minting will be incentivized with a funding rate. Conversely, if the price of the synthetic asset is lower than the spot price, the act of minting the asset will be charged.
If dAssets deviate significantly from spot price, arbitrageurs will be able to arbitrage in two ways:
- When dAsset price is too high, buy the physical market, mint dAsset in the Duet and sell it, and wait for the price difference to converge, sell it in the spot market, and buy dAsset in the on-chain market to redeem the collateral to make a profit.
- When the price of dAsset is low
The Oracle mechanism is the Achilles heel of almost all DeFi protocols, as most smart contracts rely on oracles for quotations or liquidations. To reduce oracle risk, the Duet protocol obtains prices and other off-chain data from multiple providers (Chainlink, MakerDAO, Band, Nest, Coinbase, Binance), and takes the median value as a trusted quotation. Outliers are discarded and will not affect our agreement to adopt the correct quotation, which can prevent potential Oracle single points of failure. The Duet protocol also supports time-weighted average TWAP or transaction volume-weighted average VWAP to mitigate potential Flash Loan attack risks.