Analysis Zephyr: A new stablecoin protocol built on Monero and combining privacy and overcollateralization

撰写：深潮 TechFlow

Recently, there has been a new move in the stablecoin track.

The rapid rise of the privacy stablecoin protocol Zephyr, the market value of the token ZEPH has increased 5 times to $3,000w in 1 month, why can it stand out in the highly competitive stablecoin market?

! [Analyzing Zephyr: A New Stablecoin Protocol Based on Monero, Combining Privacy and Overcollateralization] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-a2595b39b1-dd1a6f-cd5cc0.webp)

First of all, Zephyr is built on Monero, and even the wallet is the same.

ZEPH is the base currency of the protocol with a total supply of 18.4 million and a current circulating supply of 1.35 million. The Zephyr protocol runs on the RandomX Proof-of-Work (PoW) algorithm, which is designed to optimize general-purpose CPUs and support decentralized and egalitarian mining. However, Zephyr has a block time of 120 seconds, which makes it have a slightly slower emission curve than Monero. This choice was made to reward early adopters and limit their dilution, slowing initial emissions and mitigating any inflationary impact on the ZEPH price, thereby enhancing the stability of the algorithmic stablecoin system. The chart below shows the emissions compared to Bitcoin and Monero:

! [Analyzing Zephyr: A New Stablecoin Protocol Based on Monero, Combining Privacy and Overcollateralization] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-497fe5a754-dd1a6f-cd5cc0.webp)

At its core, the Zephyr protocol is an over-collateralized, cryptocurrency-backed stablecoin protocol, a concept that is perfected by the innovative Djed protocol.

Inspired by AgeUSD and developed by well-known organizations Emurgo, IOHK, and the Ergo Foundation, Djed is a stablecoin protocol with a proven stability mechanism.

Its principle can be summarized as an autonomous bank that buys and sells stablecoins at a price range pegged to the target price, and the stability mechanism has been tested by the market, and the zephUSD behind it has basically not been unanchored.

HOW ZEPHYR AVOIDS THE “DEATH SPIRAL”

Although the collapse of Luna has been around for some time, the “death spiral” is still an unavoidable topic for stablecoins, so how can ZEPHYR avoid it?

A “death spiral” typically refers to a situation in which an algorithmic stablecoin protocol is forced to mint an excessive amount of the underlying token to maintain its stablecoin peg, resulting in a downward spiral in the value of the underlying token.

The Zephyr protocol ensures that no additional ZEPH is spontaneously created, as ZephUSD’s backing is over-collateralized in reserves by ZEPH, and importantly: the stablecoin’s core mechanics are not algorithmic-dependent. The supply of ZEPH grows only through regular emissions. Such an approach safeguards the stability and value of the network, as a constant emission rate eliminates the risk of sudden inflationary shocks that could destabilize the system.

In other algorithmic stability protocols, spontaneous and unlimited base token minting is often employed to ensure the stability of the stablecoin, leading to a potential death spiral. Fundamentally, Zephyr doesn’t follow this approach.

Zephyr Protocol v1.0.0

On October 1, 2023, Zephyr Protocol achieved a critical hard fork with two new assets enabled on the Zephyr blockchain. Zephyr Stable Dollar ($ZSD) and Zephyr Reserve Share ($ZRS).

$ZSD is a privacy stablecoin, and ZEPH offers overcollateralization and provides support.

! [Analyzing Zephyr: A New Stablecoin Protocol Based on Monero, Combining Privacy and Overcollateralization] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-c1305bca38-dd1a6f-cd5cc0.webp)

$ZSD Key advantages over other stablecoins:

Privacy:$ZSD The amount, recipient, and destination address are hidden in the transaction. Decentralization:** Other stablecoins (i.e., USDT) are operated by centralized entities, which runs counter to the decentralized spirit of DeFi. No Base Coin Inflation: Algorithmic stablecoins must mint base coins to maintain their peg, resulting in inflation. $ZSD is not algorithmically pegged, but is backed by cryptocurrency. Overcollateralized:** When minting $ZSD, >400% ZEPH in the reserve is required to support $ZSD. USDT is backed by <1% of Treasury bonds. It turns out that :the Zephyr protocol is inspired by the proven Djed protocol, which has been implemented with SigmaUSD (Ergo) and Djed (Cardano) for years. Low transaction fees:* The cost of transferring $ZSD

Zephyr Reserve Share ($ZRS) holders receive a portion of the block reward in each block as a premium to support Zephyr’s Stable USD ($ZSD). Reserve providers are effectively betting on Zephyr in terms of value and adoption.

! [Analyzing Zephyr: A New Stablecoin Protocol Based on Monero, Combining Privacy and Overcollateralization] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-c2a4610c92-dd1a6f-cd5cc0.webp)

Incentives for Reserve Providers:

Leveraged Positions:* As the price of Zephyr rises, the value of ZEPH in the reserve also means that there is more equity available Conversion Fees:* As adoption grows and protocols are used more frequently, more fees will be incurred, increasing reserve assets. Block Reward :*20% of the block reward goes directly into the Reserve, backing the Reserve and providing another way for ZRS to appreciate. Spot & MA Divergence: Due to the dual pricing of Zephyr assets, users will use a “poor” exchange rate between the spot price and the moving average price. This mechanism is used to prevent manipulation, but it also has the added benefit of helping the reserve.

This incentive structure is called “pseudo-staking rewards” for $ZRS on the Zephyr protocol.

Example of asset collaboration within the Zephyr ecosystem

Let’s use two user scenarios to understand the mechanics and functions of the Zephyr protocol. For the sake of simplicity, we’ve excluded fees and other additional protocol features in these examples:

Scenario 1: When the price of the base currency (ZEPH) rises

Let’s say Alice is a user with 100 ZEPH who is looking for value stability.

On the other hand, Bob owns 200 ZEPH and is looking to increase his assets, so he bets on the future value of ZEPH.

Bob becomes a reserve provider, depositing his 200 ZEPH into the Zephyr protocol and minting reserve tokens ($ZRS). As long as the reserves are above the minimum reserve ratio, these tokens can be exchanged for the underlying ZEPH reserves at any time.

Alice deposits her 100 ZEPH into the protocol and mints $100 worth of stablecoins ($ZSD).

Now, the total reserve is equal to 300 ZEPH. Four weeks have passed, and the price of ZEPH has increased by 10%.

Excited by the recent price spike, Alice decided to close his exposure. She exchanged $100 in stablecoins and withdrew $100 worth of ZEPH. When the ZEPH price was $1.10, her stablecoin was exchanged for 90.90 ZEPH, leaving 209.1 ZEPH in the protocol reserve for subsequent use.

Bob wants to secure a profit, exchanging his reserve tokens for the remaining reserves, receiving 209.1 ZEPH. As a result, Bob made a profit of 9.1 ZEPH by becoming a reserve provider, while Alice maintained value stability by minting stablecoins.

Scenario 2: When the price of the base currency falls

Now, let’s take a look at the situation where the ZEPH price drops. Let’s say Alice and Bob start out with the same amount of stablecoin/reserve tokens as in the previous example. After four weeks, the price of ZEPH had dropped by 10%.

Alice decides to exchange her stablecoin for $100 worth of ZEPH. When the ZEPH price is $0.90, she receives 111.12 ZEPH, leaving 188.88 ZEPH in the protocol reserve.

Next, Bob decides to close his reserve token exposure and receives the remaining reserve tokens, receiving the remaining 188.88 ZEPH in the reserve. In this case, Bob instead lost 11.12 ZEPH by providing reserves to the protocol, while Alice kept its value stable relative to the USD through a stablecoin ($ZSD).

From the above example, it is not difficult to see that Zeph, ZSD, and ZRS work together to form a stable flywheel:

• Zeph - Base coin with a limited supply
• ZSD - Stablecoin
• ZephRSV - Earn block rewards and a portion of the profits paid for those minting and redemptions

However, there are always regulatory risks associated with privacy coins. Many governments do not endorse privacy coins, which may limit the attractiveness of privacy coins to the average crypto user, which is a problem that ZEPHYR is currently struggling with. The solution Zephyr came up with was to integrate with decentralized exchanges (DEXs), but it remains to be seen if this approach will work.