Reintroducing the Alpaca Protocol: Introducing the stablecoin AUSD to expand its territory, with governance mechanisms and GameFi as highlights in 2022

DeFi, Decentralized Finance, is currently one of the most important applications of blockchain, greatly accelerating the development of Ethereum. Currently, Ethereum's high gas fees and inefficiency still hinder financial inclusion. Many retail investors are starting to learn about and use DeFi through Binance Smart Chain (BSC) due to its strong association with the leading exchange, Binance, making it the second-largest smart contract public chain in terms of total value locked (TVL) after Ethereum.

"Lending protocols" are a critical foundation of DeFi, providing real economic activities and improving capital efficiency. Alpaca Finance ALPACA is a key lending protocol supporting BSC, continuously iterating and introducing new products and optimizing user interfaces.

In December, Alpaca Finance announced the launch of "auto-farming stablecoin" AUSD, incorporating the concept of DeFi 2.0 with a more robust mechanism and cybersecurity foundation, aiming to provide better capital efficiency and returns. In the same month, they also introduced a token locking mechanism similar to the one used by the cross-protocol asset champion Curve Finance: ALPACA Governance Vault.

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This article will introduce the new product launched by Alpaca Finance in December: AUSD, as well as Samsara, the Director of Strategic Marketing at Alpaca Finance, addressing questions regarding potential risks and token economics.We believe that the low gas fees provided by BSC, combined with the security and stability of Alpaca Finance, will further expand the dominance of BSC in mainstream asset lending and stablecoin exchange protocols.

Get to Know Alpaca Finance Quickly

• Alpaca Finance is a BSC lending protocol that was launched with a fair launch in the first quarter of 2021fair launch.
• As of the deadline, it is the fourth-largest protocol for locking assets on BSC, with approximately $970 million in value as of November 16, 2021locked assets.
• The team consists of dozens of members with years of experience in traditional finance and blockchain backgrounds.
• With up to 16 contract audits, there are no adverse security records.
• The lending function allows fund providers to earn interest, while borrowers can borrow assets to engage inleveraged yield farming withdifferent trading strategies to maximize returns.
• Lenders' certificates, ibTokens, can be re-staked to earn ALPACA rewards or other cooperative tokens.
• In September 2021, the introduction of NFTs was announced, which can be used to enhance platform functionality and participate in future GameFi products.
• In December 2021, the concept of DeFi 2.0 was introduced with AUSD and the Curve long-term lockup mechanism with the Governance Vault
• Highly interactive Chinese and English community support, with core members actively engaging with the community in the English group and Chinese group.

Automatic Farming Stablecoin: AUSD, Earn While Borrowing!

AUSD, like most collateralized stablecoins, such as DAI, requires over-collateralization. This means you can only borrow stablecoins less than the value of the collateralized digital assets to prevent liquidation in case of a drop in the collateral's value.

Borrowers of stablecoins typically need to pay fees, such as stability fees in MakerDAO, or use reward tokens from lending platforms to subsidize borrowing rates, like XVS in Venus.

Automatic Farming Stablecoin - AUSD enables users to earn interest on the collateralized assets while borrowing stablecoins. For example, by collateralizing USDT, you earn USDT interest and also earn yield farming rewards in ALPACA.

Since the stable fee for borrowing AUSD is lower than the "collateral asset interest" and "collateral yield," it is essentially interest-free borrowing. As of the deadline, AUSD is initially launched with BUSD collateral for a trial amount of 1000 BUSD:

AUSD collateral fee rate plan:

Various Flexible Uses of Borrowing AUSD

After borrowing AUSD, users have multiple uses:

• Conservatively stake AUSD to earn additional rewards.
• Conservatively sell AUSD for borrowing assets to increase borrowing positions or borrow more AUSD.
• Risks include selling AUSD for other assets to open high-yield leverage farming positions.
• Risks include selling AUSD for other assets to deploy in external protocols.

In essence, AUSD provides a service for negative interest-rate borrowing, allowing users to utilize the borrowed funds for various purposes. For example, borrowers can stake the borrowed AUSD in the AUSD/BUSD liquidity pool on PancakeSwap and then stake the LP token in Alpaca to earn rewards.

Repeatedly borrowing and lending AUSD can bring in dividends from leveraged borrowing. For example, with BUSD, the leverage can go up to six times, resulting in a 60% APY:

1. Deposit BUSD and receive ibBUSD tokens.
2. On the AUSD page, use ibBUSD as collateral to borrow AUSD.
3. Sell AUSD to receive BUSD.
4. Deposit BUSD and receive ibBUSD tokens again.
5. Repeat step 2.

Note 1: The AUSD page allows direct deposit of BUSD to receive ibBUSD and borrow AUSD, with a similar logic for convenience.

Note 2: The AUSD position management page has a well-designed UI to help understand overall positions and risks.

Of course, users can also engage in riskier operations, such as using AUSD for leveraged yield farming or exchanging it for other assets in external protocols. However, users must ensure they have enough AUSD when redeeming collateral assets.

After December 27, 2021, AUSD can be utilized more comprehensively to execute different strategies:

Potential Risks of AUSD: Instability, Liquidation, and Flash Loan Attacks

As AUSD is an over-collateralized stablecoin, with collateral mostly consisting of stablecoins and high-market-value coins, it is considered better than poor collateral or algorithmic stablecoins. AUSD also takes inspiration from MakerDAO; when its value is above or below $1, it adjusts borrowing interest rates to stabilize the market.

Extreme market conditions or manipulation of protocol price sources could trigger massive collateral liquidation or even defaults, resulting in user losses due to short-term events. AUSD handles liquidating borrower positions "mildly," meaning only a small portion is liquidated when triggered, set at 25% of the debt value until the position recovers. With conservative overall parameter settings, the probability of defaults is very low. Additionally, Alpaca uses Chainlink and Band as data sources to prevent price manipulation, along with a 15-minute price feed delay mechanism.

"But what about flash loan attacks?" Flash loan attacks always involve borrowing and lending protocols, where assets can be borrowed at low cost for a short period to manipulate and drain the assets of lending protocols. Samsara, Alpaca Finance's Director of Strategic Marketing, stated, "Most DeFi protocols to some extent can or allow flash loans. If so, why are some protocols attacked while others are not? This is because attacked protocols did not prioritize code security, allowing flash loans to exploit vulnerabilities."

Samsara emphasizes that AUSD cannot be used for flash loan attacks. Alpaca Finance has undergone 16 security audits, receiving the highest cybersecurity ratings with no previous security issues. Furthermore, Alpaca's leverage mining farms and lending products do not accept flash loans; users can only use AUSD forarbitrage or liquidating positions, both of which do not constitute attacks. Alpaca's protocoldoes not have the logic that flash loans can manipulate.

Benefits for ALPACA Holders

Samsara, the Director of Strategic Marketing at Alpaca Finance, stated that ALPACA is not a meme coin but one of the most user-friendly DeFi protocols on BSC. Its main mission is to improve the platform, create new products, and not interfere with token prices. Alpaca's products result in repurchasing and burning ALPACA tokens, while sharing profits with ALPACA holders. As the platform and user base grow, the natural deflation of the token will lead to price appreciation.

In recent weeks, it has entered a deflationary state, with about one million ALPACA being burned weekly, approximately 0.5% of the total supply, maintaining a six-week currency tightening as of the deadline. In terms of product development, upcoming improvements will enhance earnings and provide feedback to ALPACA holders:

• Introduction of AUSD
• Governance Vault
• Other future plans including governance, P2E games, and NFT markets

The design of AUSD directly impacts ALPACA by collecting fees for repurchasing and burning, with income sources from stable fees of AUSD, liquidation rewards, and auto-farming performance fees. The first two are essential mechanisms for collateralized stablecoins, with stable fee revenue comprising 50% of the annualized 2% for most collateral and 4% of the liquidation value. The complete reward is 5%, which will be shared with ALPACA. The yield from auto-farming stablecoin collateral, 9%, with 5% going back to ALPACA.

The utility of ALPACA as a governance token will soon be realized. Starting December 21, 2021, ALPACA tokens can be locked in the governance vault to earn higher rewards and profit-sharing. Lockup periods range from as short as one week to as long as one year, with users receiving xALPACA tokens representing governance voting rights and weekly ALPACA rewards along with rewards in other tokens from the Graze pool. This long-term lockup model to reduce selling pressure and increase user stickiness has already proven effective in the current largest protocol, Curve.

Complete design chart of AUSD: