Zephyr Protocol FAQ
What is Zephyr Protocol?
The Untraceable Over-collateralized Stablecoin Protocol
Zephyr Protocol is a cryptocurrency protocol aiming to combine and refine the best proven privacy and stablecoin protocols. It utilizes a triple asset model consisting of ZEPH, ZSD, and ZRS. ZEPH is the native currency of the network, ZSD is the stablecoin pegged to the value of the USD, and ZRS acts as a reserve token for reserve providers.
What are the underlying technologies that Zephyr Protocol is powered by?
Zephyr Protocol is built by integrating a proven stablecoin solution, Djed, into a modified version of the Monero codebase. Monero, a privacy-focused cryptocurrency, provides the foundation for private and secure transactions on the network for all assets. Djed, on the other hand, brings its over-collateralized algorithmic stablecoin mechanism to enable the creation of a truly private stablecoin, ZSD, within the Zephyr Protocol ecosystem.
Why were Monero and Djed chosen as the basis for Zephyr Protocol?
Monero and Djed were chosen for their unique qualities and proven performance. Monero is widely recognized as the leading privacy coin, offering robust transactional privacy that many other cryptocurrencies cannot match. Djed, inspired by AgeUSD and developed by renowned organizations Emurgo, IOHK, and the Ergo Foundation, is a stablecoin protocol with a proven stability mechanism.
Combining these two powerful components, Zephyr Protocol aims to offer the best of both worlds — the privacy and security of Monero, and the stability and reliability of Djed. This blend enables Zephyr to deliver a unique offering in the crypto space: a private, stable, and secure digital currency, which is particularly essential in an era where privacy and stability in the cryptocurrency markets are highly sought after.
How does Zephyr avoid a “death spiral”?
A “death spiral” often refers to a scenario in which an algorithmic stablecoin protocol is forced to mint an excessive amount of its base coin to maintain the peg of its stablecoin, leading to a downward spiral in the value of the base coin. Zephyr Protocol is designed to prevent such a scenario.
Zephyr Protocol ensures that no additional ZEPH (the base coin) is spontaneously created because the backing of ZSD is over-collateralized by ZEPH in the reserve and importantly: not algorithmic. The supply of ZEPH grows only through scheduled emission. This unique proposition safeguards the stability and value of the network, as the constant emission rate eliminates the risk of sudden inflationary shocks that could destabilize the system.
In other algo stable protocols, the spontaneous and often unlimited minting of base coins is often employed to ensure the stability of the stablecoin, leading to potential death spirals. Fundamentally, Zephyr does not follow this approach.
What are the differences between Zephyr and fiat-backed stablecoins?
Zephyr Protocol and fiat-backed stablecoins represent two distinct approaches to achieving price stability in the volatile crypto market, and they differ significantly in terms of their underlying structure, issuance process, and overall decentralization.
Underlying Asset: Fiat-backed stablecoins, as the name suggests, are backed by fiat currency reserves, typically held by a centralized entity. Each stablecoin is pegged 1:1 with a particular fiat currency, like the US Dollar. On the other hand, Zephyr Protocol’s stablecoin, ZSD, is backed by an over-collateralized reserve of the native ZEPH asset.
Issuance and Redemption: The issuance and redemption of fiat-backed stablecoins involve interaction with the centralized entity that holds the fiat reserve. Users must trust this entity to manage the reserve properly and honor redemption requests. Zephyr, in contrast, is entirely decentralized. Users can directly mint and redeem ZSD within the protocol, without needing to trust a centralized party.
Decentralization and Transparency: Zephyr Protocol is built on a blockchain, offering full transparency and decentralization. Every transaction and operation can be publicly verified on the blockchain, providing users with confidence in the system’s integrity. Conversely, while some fiat-backed stablecoins undergo regular audits, they lack the same level of transparency and are dependent on the trustworthiness of the centralized entity.
Robustness: Zephyr’s reserve system and in-built mechanisms offer a more robust approach to maintaining stability. It eliminates the “death spiral” risk commonly associated with many algorithmic stablecoins. Meanwhile, fiat-backed stablecoins can face challenges such as bank account freezes or regulatory crackdowns, potentially impacting their stability.
Permissionless and Open: Zephyr Protocol operates on a permissionless and open platform, enabling any user, anywhere in the world, to interact with the protocol as long as they have access to the internet. Fiat-backed stablecoins, on the other hand, may have restrictions based on geography or regulations.
What mechanisms are in place to ensure the health of the reserve in Zephyr Protocol?
The Zephyr Protocol incorporates several robust mechanisms to uphold and strengthen the health of the reserve, thereby ensuring system stability.
A key mechanism involves transaction fees collected whenever ZSD is minted or redeemed. These fees gradually accumulate in the reserve, thereby increasing its value over time and promoting the stability of the ZSD stablecoin.
The price of ZRS is calculated based on current reserve ratios; when the reserve ratio drops, the price of ZRS decreases and incentivizes users to become reserve providers.
Additionally, the protocol has a maximum reserve ratio of 800%. This upper limit restricts the minting of new reserve coins (ZRS) once the reserve ratio reaches this cap. This safeguard protects the existing ZRS holders from potential dilution and helps strike a balance between growth and stability within the protocol.
These combined mechanisms actively work to enhance the reserve’s strength, fostering stability and resilience within the Zephyr Protocol’s economy.
What happens if the reserve ratio falls below 100% (worst-case scenario)?
If the reserve ratio happens to fall below 100%, indicating a shortfall of ZEPH in the reserve to fully back each ZSD, each ZSD will be only able to be redeemed for its share of what is actually in the reserve.
Importantly, any redeeming action taken in this worst-case situation serves to improve the network state and not exacerbate it. The fees collected during this period, along with the discrepancy between the spot and moving average price of ZEPH, contribute to enhancing the overall system stability and restoring the reserve ratio.
In addition, in extreme scenarios where a sharp drop in ZEPH’s value causes the reserve ratio to stay below 100% even after considering the accumulated fees, the Zephyr Protocol’s treasury fund comes into action.
This fund, composed of 500,000 ZEPH, can supplement the reserve to ensure that ZSD remains fully collateralized.
In Djed, this limitation is referred to as a “Haircut” for Stablecoin Holders: when the peg is lost, the SC holders suffer financial losses.
Debt-for-equity swaps are an identified solution for this.
Since keeping the value of stablecoins is an ultimate goal of the system, it is undesirable to cut it when the SC the peg is lost without any compensation. Thus, it is suggested to compensate a user with reservecoins on the equivalent amount of retained basecoins. This exchange resembles what is known as “debt-for-equity swaps” in the traditional financial world.
Zephyr Protocol aims to implement a system to compensate ZSD redeemers in this worst-case scenario, which may be debt-for-equity swaps as outlined in extended Djed or a system inspired by it.
What are the long-term goals of Zephyr Protocol?
Zephyr Protocol is designed with the vision of revolutionizing the stablecoin industry. It seeks to act as a hedge against protocols that rely heavily on central entities. The project aims to merge the best of stablecoin and privacy protocols to facilitate anonymous cash transactions and storage with stability. In the long run, the project aims to get ZSD adopted as a quote pair similar to USDT and BUSD.
What is Zephyr Protocol's view on expanding exchange listings?
Yes, securing more exchange listings is a focus for Zephyr Protocol. Exchange listings are crucial in determining the price of ZEPH for the pricing oracle and will aid in increasing the protocol’s visibility and liquidity. Exchange listings are also a simple but effective way of increasing reach and exposure to the project. Our goal is not only to aquire ZEPH listings but ZSD listings too! In the long term, ZSD markets will be important for adoption and to disrupt and take market share from other stablecoins in the space.
How is Zephyr Protocol funded?
Zephyr Protocol operates with a treasury fund of 500,000 ZEPH and a governance fee of 5%. These sources of funding ensure continuous development, marketing efforts, and operational activities. This financial structure is designed to support the protocol’s longevity and robustness.
The fund is strategically allocated to cover a wide range of essential activities:
- Listing Fees and Investments: Ensuring that Zephyr is listed on reputable exchanges to enhance liquidity and market presence.
- Liquidity: Providing initial liquidity to stabilize the market and support ZephUSD mints.
- Development Work: Covering the costs of initial and ongoing development efforts to maintain and improve the protocol.
- Emergency Interventions: Addressing unforeseen market events such as flash crashes to protect the protocol’s integrity.
- Marketing and Influencers: Engaging in strategic marketing campaigns and collaborations with influencers to increase visibility and adoption.
- 3rd Party Development and Design: Outsourcing specialized tasks such as website development and logo design to professional third-party service providers.
- Team Compensation: Ensuring that the team remains motivated and financially supported to continue their development efforts.
- Intrinsic Incentive for Continued Development: Providing a sustainable model for the team’s ongoing commitment to the project.
The block reward is designed to replace and bolster the initial 500,000 ZEPH, ensuring the continuation of the above activities and providing flexibility for future investments. This structure creates an intrinsic incentive for the team to maintain a long-term vision for Zephyr's success.
Transparency and Privacy Considerations
While we acknowledge the calls for increased transparency, it is crucial to balance this with the privacy-centric nature of Zephyr Protocol. Disclosing specific details about the fund’s usage can lead to unnecessary speculation and market volatility.
For example, selling assets to secure a listing on an exchange like we have done was a strategic decision that benefited our investors. However, pre-announcing such moves under strict NDAs could lead to market manipulation and void contractual agreements. Our primary goal is to ensure the protocol’s stability and long-term growth, which sometimes necessitates confidential strategic decisions.
Ensuring Alignment
We understand that the presence of significant funds may cause concerns about potential market impact. However, it is important to note that the development team has the most to gain from Zephyr’s success. The governance fee of 5% and our significant stake in Zephyr Reserve Shares (ZRS) align our incentives closely with the protocol’s continued success and longevity.
Our funding model ensures that we can weather market fluctuations and remain dedicated to our development roadmap! This commitment is evident in our consistent efforts to build and improve the protocol without the influx of fund from an ICO or VC funding.
