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ITSA lists RAI Stablecoin in Tokenbase

 

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.

ETH total deposited collateral vs. time
Figure 1: Eth collateral locked over time (source: https://dune.com)

How does RAI work?

 

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.

  • Redemption price: The internal value of RAI in the system. In other words, the price to mint and repay RAI debt. In equilibrium, the redemption price should be equal to the market price.
  • Redemption rate: the rate of change of the redemption price. It can be measured as APR (annual percentage rate). The redemption rate can be positive or negative.

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.

RAI market vs. redemption price — all time chart
Figure 2: Currently RAI price fluctuates +/- 2% of the redemption price. (source: https://dune.com)

Secondary token (FLX)

 

Just like Maker, the RAI protocol has a secondary token called FLX. FLX has two main functionalities:

  1. FLX owners are the first line of defense in case RAI enters a death spiral. FLX is the lender of last resort in the system. Similar to the Maker protocol, the RAI system will have a surplus and debt auctions. Debt auctions will autonomously mint and auction new FLX to cover the loss.
  2. Ungoverning the RAI system: It sounds unintuitive, but the idea behind the governance token is to reduce the governance around the protocol and further decentralize all components of the system.

Challenges and risks

 

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.

Weekly RAI transaction volume is dropping (chart)
Figure 3: Weekly RAI transaction volume (source: https://dune.com/)
CDPs created by day is dropping (chart)
Figure 4: CDPs created per day (source: https://dune.com/HggqX/Reflexer-RAI)

 

The classification of RAI according to the ITC:

 

RAI stablecoin ITSA Tokenbase entry
Figure 5: The RAI Tokenbase entry (Source: https://itin.itsa.global/PZT580KV3 )

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.

FLX token:

 

FLX governance token ITSA Tokenbase entry
Figure 6: Tokenbase entry of FLX token (Source:https://itin.itsa.global/N0T6Z9PR5 )

The International Token Standardization Association (ITSA) e.V.

 

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.

  • The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
  • The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
  • ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

 

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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.