Introducing Zephyr Protocol - The Untraceable Stablecoin

We are pleased to introduce Zephyr Protocol, a private stablecoin protocol that blends the principles of privacy and stability to create a truly well-needed digital currency. At its core, Zephyr is built upon the powerful and proven framework of the Minimal Djed protocol, integrating Monero’s advanced privacy features with a stablecoin system; offering users the industry’s first privacy-focused, over-collateralized stablecoin.

From the combined intellectual prowess of Emurgo, IOHK, and the Ergo Foundation, the Djed protocol came to life. It derives its inspiration from AgeUSD and serves as the architectural backbone for Zephyr Protocol. Our vision with Zephyr is to take the essence of Djed and infuse it with the privacy features of Monero, thereby designing a stablecoin ecosystem that guarantees anonymity while ensuring asset stability.

The Zephyr Protocol Ethos

At the heart of the Zephyr Protocol is an ethos rooted in respect for the giants that have paved the way in the cryptocurrency space. We believe in leveraging proven solutions, constantly innovating, and creating value where it truly matters. Instead of reinventing the wheel, our approach focuses on assimilating the very best the industry has offered.

Indeed, every cryptocurrency owes a debt to Bitcoin. Similarly, Zephyr Protocol stands proudly on the shoulders of these giants, particularly the minds behind Monero and Djed. Monero has proven to be the best in private cryptocurrency, and Djed is the most robust algorithmic stablecoin solution. Haven Protocol also deserves special recognition, paving the way for oracle solutions in cryptonote currencies.

Zephyr is aiming to create an ‘ultimate’ version that integrates the cream of the crop. We see ourselves as both a beneficiary of past development and a catalyst for future innovation.

Our mission is to blend stability and privacy to revolutionize traditional anonymous cash transactions and storage. By melding the robustness of a proven stablecoin solution with privacy in mind, we aim to bring the best of both worlds to our users. In this sense, while Zephyr Protocol may not claim to reinvent the wheel, it certainly aspires to refine it, ensuring it rolls smoother, farther, and with greater precision than ever before.

An Overview of the Zephyr Protocol Mechanism

Zephyr Protocol operates on a unique principle. Users can mint or redeem stable (ZSD) and reserve (ZRS) coins in exchange for the base coin (ZEPH). A pricing oracle determines the price for stable coins, while a formula based on the current reserve data determines the price for reserve coins.

When users mint new stable or reserve coins, the exchanged base coins (plus fee) add to the Zephyr reserve. This reserve ensures over 400% collateralization at all times, providing backing for the stablecoin holders. In the case of collateralization falling below 400% due to price fluctuations, users cannot mint new stable coins, but the reserve coin price drop incentivizes users to buy reserve coins at a reduced rate.

Reserve coin holders have the right to redeem their coins for the reserve’s equity, proportional to their reserve coin holdings. As users mint and redeem stablecoins, the accumulated fees bolster the reserve, serving as profit for the reserve coin holders. A maximum reserve ratio of 800% prevents dilution for the reserve coin holders.

For a more detailed explanation, stay tuned for the upcoming Zephyr whitepaper in early June. Meanwhile, those interested in the mechanism’s finer details can delve into the DJED whitepaper here.

Zephyr Protocol in Practice

Let’s illustrate the mechanics of Zephyr Protocol with two user scenarios. For simplicity, we exclude fees and other additional protocol features in these examples:

Scenario 1: When the Base Currency (ZEPH) Price Increases

Consider Alice, a user with 100 ZEPH, looking for value stability. On the other side, we have Bob, who owns 200 ZEPH and wants to increase his holdings, betting on ZEPH’s future value.

Bob becomes a Reserve Provider, depositing his 200 ZEPH into the Zephyr Protocol and minting ReserveCoins. These coins are redeemable for underlying ZEPH reserves at any point, as long as the reserves are above the minimum reserve ratio.

Alice, seeking stability, deposits her 100 ZEPH into the Protocol and mints 100 USD StableCoins. Now, the total reserve equals 300 ZEPH. Imagine four weeks pass, and the price of ZEPH increases by 10%.

Alice, excited about the recent price spike, decides to exit stability. She redeems her 100 USD StableCoins and withdraws 100 USD worth of ZEPH. With ZEPH price at $1.10, her StableCoins are redeemed for 90.90 ZEPH, leaving 209.1 ZEPH in the Protocol reserves.

Bob, wishing to secure his profit, redeems his ReserveCoins for the remaining reserves, receiving 209.1 ZEPH. Thus, Bob profits 9.1 ZEPH by providing reserves to the Protocol, while Alice, by minting her StableCoins, maintains value stability.

Scenario 2: When the Base Currency (ZEPH) Price Decreases

Now, let’s look at the scenario where ZEPH’s price drops. Assuming Alice and Bob start with the same amount of StableCoins/ReserveCoins as in the previous example, after four weeks, ZEPH’s price decreases by 10%.

Alice decides to exit her StableCoins, redeeming them for 100 USD worth of ZEPH. With ZEPH price at $0.90, she receives 111.12 ZEPH for her StableCoins, leaving 188.88 ZEPH in the Protocol reserves.

Next, Bob decides to exit his ReserveCoins, receiving the remaining 188.88 ZEPH in reserves. In this situation, Bob has lost 11.12 ZEPH by providing reserves to the Protocol, while Alice, through her StableCoins, has maintained value stability in relation to USD.

In essence, the ZRS holders take on a leveraged position, betting on the value of ZEPH via increased adoption. This leverage is fundamental to how ZRS holders make a profit.

Technical Specs

Zephyr Protocol runs on the RandomX proof-of-work (PoW) mining algorithm, designed to optimize general-purpose CPUs and support decentralized and egalitarian mining. With a block time of 120 seconds, Zephyr’s emission curve, however, is slightly slower than Monero’s. This choice was made to reward early adopters and limit their dilution, slowing down the initial emission and mitigating any inflationary impact on the ZEPH price, thereby bolstering the stability of this algorithmic stablecoin system.