30 May 2023
DeFi on Bitcoin Part 2: Introducing UWU Protocol
Join us in exploring the rapidly evolving intersection of Bitcoin and DeFi. In this article, we dive into the UWU Protocol, a pioneering Stacks project designed with a distinct focus on simplicity, elegance, and decentralization.
DeFi on Bitcoin is something that retail crypto participants will be hearing more about in the coming days and weeks. In the spirit of keeping our community ahead of retail, we have been covering Stacks projects that are working hard to bring DeFi to Bitcoin on the Stacks layer. If you missed our previous articles on ALEX and VELAR, I definitely encourage you to check those out!
In today’s article we will be discussing the UWU Protocol (Twitter), yet another Stacks based project that is bringing financial services to Bitcoin.
In preparation for this article, I had the occasion to speak with Bought, the creator of the UWU Protocol. Early in the conversation a theme, a guiding principle if you will, became apparent. The UWU protocol is built on the idea that the user experience, simplicity & elegance of the protocol are at the heart of this project, starting with the idea that most stablecoins are unnecessarily complex.
Bought provided a compelling case when explaining that the more moving parts involved, the higher the likelihood that something can go wrong, and that this is true with stablecoins as well as protocols in general. Let us not forget the importance of stablecoins in DeFi, and how often stablecoins aren’t actually all that decentralized. After all, if your stablecoin issuer is relying on centralized entities, the potential that your wallet could be blacklisted by your stablecoin issuer is a real possibility.
With this focus on simplicity, elegance, and decentralization in mind it's time to take a closer look at what the UWU protocol offers, and how it addresses these concerns.
Quite simply, the UWU protocol revolves around two coins:
- UWU Cash - a stablecoin that is over-collateralized with STX
- UWU Share (xUWU) - a utility token that captures all protocol revenue, which is distributed by the protocol to xUWU holders.
UWU Cash (UWU) is the overcollateralized, decentralized, and governance free stablecoin of the UWU protocol. It is “soft pegged” at $1.00, and backed by $1.50 worth of STX tokens. When Bought says that UWU is unstoppable, he means it.
UWU Share (xUWU) is the utility token of the UWU Protocol. It is used to capture 100% of the fees generated by the protocol and distribute these fees to the holders of the UWU and xUWU tokens every two weeks. This is facilitated by the Fee Claim smart contract which allows holders to claim their fees once per claim period. Any unclaimed fees are transferred to the following claim period, where it will be distributed to the users that claim at that time. xUWU tokens will be distributed to users of the protocol, with a max supply of 100,000.
The UWU protocol allows its users to participate in the protocol in the following ways:
- Borrowing - The UWU protocol allows users to take a loan against up to 66% of their deposited STX interest free
- Participation in Liquidations - In order to ensure sufficient collateralization, the UWU protocol sells deposited STX to repay debt. This allows users to buy STX at reduced prices in exchange for repaying the debt of liquidated vaults (we will get to vaults in the next section).
- Earning Fees - the UWU protocol charges a 1 time 1% fee for borrowing. The revenue generated from this fee is distributed to the xUWU holders on a Bi-weekly basis.
- Use of UWU - this stablecoin serves as the decentralized store of value/payment method that can be distributed worldwide without the need for intermediaries. This also allows for other developers to build further use cases on the UWU protocol, or to use it in their own protocols.
From here let us take a look at the borrowing and liquidation functions of the UWU protocol and how they work.
At the heart of the borrowing function are the user vaults. These vaults are associated with the user’s Stacks address, and each Stacks address can have up to 20 vaults associated with it simultaneously.
The vault contains two balances: the deposited STX on hand represents the collateral securing the loan, and the UWU token representing the debt against the collateral. Users can adjust these balances by adding more collateral or repaying the debt. Users can close their vault at any time by paying off the debt associated with said vault.
The health of the loan is measured in the collateral ratio of the debt vs the value of the collateral. Since STX is an asset with a fluctuating value, each loan is over-collateralized. This essentially means that in order to stave off liquidation, a vault must maintain a collateral ratio of at least 150%
Liquidations are the mechanism by which this entire system works, as the risk of liquidation is ultimately what ensures that the UWU coin remains sufficiently collateralized. In the event that a vault finds itself under the 150% collateralization ratio, the collateral within the vault is sold and the vault is subsequently closed by the protocol. Some key takeaways of this liquidation function are as follows:
- Collateral is not auctioned.
- Multiple users can liquidate a single vault.
- All of the collateral in a liquidated vault is sold.
- There are no grace periods or partial liquidations.
- No fees are charged by the protocol to the buyers of a vault’s collateral.
While the UWU Protocol is still in Beta testing, it is clear that even in its current ideation there are massive opportunities to be found for the users of this platform. Whether freeing up collateral to take advantage of other opportunities in the market, jumping on the opportunity to obtain discounted STX, or just holding the tokens to earn fees. This is what utility in the age of new use cases for DeFi looks like. I encourage you all to test UWU Protocol, drop in their Discord, and check out their growing community.
Thank you so much for reading, and be on the lookout for the next installment of Flagship’s DeFi on Bitcoin series. If you dig this, make sure you come to stop by the Flagship Discord and say hi. Until next time, Captain Jack signing off.
Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.