RAI is an overcollateralized stablecoin that is not pegged to any fiat currency. Launched in February 2020, RAI tries to tackle the problem of maintaining a stable peg at any cost. The protocol is a fork of Maker’s DAI with a few changes. By not being pegged to a fiat currency RAI allows for higher volatility than traditional stablecoins while giving investors and traders relatively high stability. The second feature of RAI is that all Collateralized Debt Positions (CDPs) are only backed by ETH. By this, the developers try to reduce the protocol’s dependence on centralized assets.
Authors: Valentin Kalinov, Christian Viehof
When we talk about stablecoins, the main thing that comes to mind is that a stablecoin is pegged to a fiat currency. The most common peg is, of course, the US dollar. However, maintaining the peg of a stablecoin sometimes becomes challenging. Depending on the type of collateralization, different stablecoins show different volatility. The most stable ones are also the most centralized (e.g., Tether), while algorithmic stablecoins can be highly volatile and sometimes at risk of losing the peg and entering a death spiral (e.g., Empty Set Dollar). The RAI protocol argues that there is a price to be paid for that kind of stability, and there are benefits associated with not having a fixed exchange rate. One benefit of RAI is the flexibility of being able to devalue or revalue its token and the second; is discretion where the protocol can incentivize or disincentivize capital inflows.
RAI trades on the secondary market such as Uniswap or centralized exchanges. The token also offers a redemption price which is the RAI target price or the so-called moving peg.
The redemption price changes over time depending on the current RAI market price and the redemption price. The difference between the two is used to set the redemption rate. For example, if RAI trades (on secondary markets) above the redemption price, the protocol would output a negative redemption rate which will influence the redemption price of the token. There are two perspectives on how the redemption rate affects the RAI market: (1) the RAI token holders and (2) the CDP owners. If the peg goes down, meaning the redemption price is negative, RAI token holders would be incentivized to sell their tokens; otherwise, they would lose value. If the redemption rate is positive more people would be incentivized to buy RAI. On the other hand, CDP owners are also part of an incentive structure where if the redemption price goes down, this would mean that the peg would also be going down; thus, the Collateral Ratio (CR) of the CDP would rise. In such a scenario, a CDP owner would be able to mint more RAI tokens without the additional risk of lowering their CR. The extra mint should drive the RAI price to go down because it increases the total circulating supply of RAI tokens. It should be noted that the borrowing rate is different from the redemption rate in the system. The borrowing rate is an interest rate charged to open a CDP, and it is usually fixed or bounded.
Just like Maker, the RAI protocol has a secondary token called FLX. FLX has two main functionalities:
After we underwood the concept of RAI, there are a few questions that come to mind. Holding RAI while the system devalues the token can be considered a loss for the holder. Why would anyone hold RAI during devaluation? This would depend on the rest of the market. During devaluation would be more beneficial to hold a fiat pegged stablecoin like DAI. On the other hand, devaluation incentivizes users to open more CDPs because the value of the debt shrinks compared to the value of the collateral. An interesting use case for RAI is its use as collateral in DeFi. Since ETH can be too volatile and risky as collateral, RAI can be alternative collateral due to the fact that it dampens the price volatility of ETH and offers traders higher price stability. Looking at the charts, it seems that RAI is losing traction in the crypto market. The transaction volumes have been on a downtrend since inception, and the number of CDPs created is shrinking.
Economic Purpose (EEP): RAI is listed as a unpegged payment token (EEP21UP) since it is not pegged to any fiat currency or asset.
Industry Type (EIN): The issuer of RAI is active in the field of Payment Services and Infrastructure (EIN06PS).
Technological Setup (TTS): RAI is an Ethereum ERC-20 Standard Token (TTS42ET01). The Class “Ethereum ERC-20 Standard Token” captures every token that is implemented by means of the ERC-20 Standard on top of the Ethereum blockchain.
Legal Clam (LLC): The RAI token does not entitle its holder to any legal claim or rights against the issuing organization, therefore it is listed as a No-Claim Token (LLC31).
Issuer Type (LIT): The dimension “Issuer Type” provides information on the nature of the issuer of the token. RAI is built by Reflexer Labs, Inc., its Issuer Type is a Private Sector Legal Entity (LIT61PV).
Regulatory Framework (EU) (REU): The dimension “Regulatory Status EU” provides information on the potential classification of a token according to the European Commission’s proposal for a Regulation on Markets in Crypto Assets (MiCA, Regulation Proposal COM/2020/593 final). The RAI token qualifies as a Utility Token (REU51UT) according to the definition provided in Article 3 (5) of Regulation Proposal COM/2020/593 final.
The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.
If you like this article, we would be happy if you forward it to your colleagues or share it on social networks. More information about the International Token Standardization Association can be found on the Internet, on Twitter, or on LinkedIn.
Valentin Kalinov is an Executive Director at International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database, including a classification framework and unique token identifiers and locators. He has over five years of experience working at BlockchainHub Berlin in content creation and token analysis, as a project manager at the Research Institute for Cryptoeconomics at the Vienna University of Economics and token analyst at Token Kitchen. You can contact Valentin via valentin.kalinov@itsa.global and connect on Linkedin if you would like to further discuss ITSA e.V. or have any other open questions.
Christian Viehof is an Executive Director at the International Token Standardization Association (ITSA) e.V., working to create the world’s largest token database including a classification framework and unique token identifiers and locators. He completed his Bachelor in Economics at the University of Bonn, the Hong Kong University and the London School of Economics and Political Science with a focus on Behavioral Economics and Finance. Currently pursuing his Master of Finance at the Frankfurt School of Finance and Management, you can contact him via christian.viehof@itsa.global and connect with him on Linkedin, if you would like to further discuss ITSA e.V. or have any open questions.
Copyright © 2021 International Token Standardization Association. All rights reserved. Imprint & Data Protection