Zephyr Protocol — Artemis v1.2.0 Release

We are excited to announce the release of Zephyr Protocol - Artemis v1.2.0 , introducing major enhancements to improve functionality, user adoption, and security. This update includes critical protocol changes, fee adjustments, and the latest Monero developments.

The Artemis v1.2.0 update comprises of two hardforks; v4 and v5.

Github Releases Page

https://github.com/ZephyrProtocol/zephyr/releases/tag/v1.2.0

Hardfork v4

Activated at block 294000

Activates the new pricing record format to save previous reserve ratio values in the pricing record.

Hardfork v5

Activated at block 295000

The reserve ratio moving average is now derived from an average of previous reserve ratio values over a 24 hour period, made possible from the pricing record changes in Hardfork v4. Collecting the pricing records from the 1000 blocks between hardforks allows for the new moving average figures to be calculated.

This method smooths out fluctuations when Zephyr Stable Dollars are minted or redeemed, and removes the possibility for a bad actor to manipulate the reserve ratio by minting/redeeming ZSD which would previously immediately affect both the spot and the moving average reserve ratios. In order to support lowering the miniting/redeeming fees for ZSD this was a required change, as the higher fees was the factor that diswaded this behavior.

Old Calculation:

RR_Spot = (Zeph_Reserve * Spot_Price) / ZSD_Circulation
RR_MA = (Zeph_Reserve * MA_Price) / ZSD_Circulation

rr_ma Immediate ZSD mints result in instant rr_ma crush

New Calculation:

RR_Spot = (Zeph_Reserve * Spot_Price) / ZSD_Circulation
RR_MA = (sum of past 720 RR_Spot values) / 720

Fee Adjustments:

• Mint ZSD: 2% → 0.1%
• Redeem ZSD: 2% → 0.1%
• Mint ZRS: 0% → 1%
• Redeem ZRS: 2% → 1%

Background

From inception, the 2% fees for minting and redeeming were known to be barriers of entry into the Zephyr Protocol ecosystem, but were in place for security and anti-protocol manipulation measures.

One of Zephyr Protocol's key innovations to our Djed implementation was to use dual asset pricing in terms of spot and moving average, where actions taken (minting/redeeming) result in using the “worst” of the 2 prices. The goal of this is to avoid any protocol manipulation via oracle front running.

Oracle front running is manipulating the price; firstly minting stables at a high price, driving price down, redeeming stables for more base coins, then driving the price back up and repeat!

In other Djed implementations the 2% fee is now standard and the main reason for this is to counter the oracle front running risk.

Zephyr Protocol’s dual asset pricing system addresses this risk better, meaning the purpose of the fees for us was to have additional measures to protect from unknown types of manipulation and provide another incentive structure for ZRS holders, as they collect this fee at the cost of potentially hampering some ZSD adoption.

Reflections

We took a conservative approach. Djed implementations are proven to work and we didn’t want to stray too much away from the proven design; and the dual asset pricing approach was already something significantly new.

Initially it felt as though a 2% minting fee (and later an additional 2% redemption fee == 4%) paid was a fair price given what Zephyr Protocol was offering over competition:

• Private Stablecoin
• Proven implementation
• Decentralized protocol

On the surface it is. In practice, taking a 4% hit for many is not worth the cost. Also with the variance in divergence of the spot and ma pricing on both sides of the trade has a pseudo fee aspect too which can be related to the 24-hour change. If the ZEPH price is +/- 5%; the spot and ma divergence is going to sit within the range of 0–3% as the ma price is the average of all the previous prices for the day.

Changes

• Minting and Redeeming ZSD (Zephyr Stable Dollar): Fees reduced from 2% to 0.1%, making it cheaper to mint and redeem stablecoins.
  • This is to lower the bar for entry and to drive adoption rates. We don’t want to completely remove the fee as it is an important incentive to keep for ZRS holders. ZRS holders will benefit from increased ZSD minting and redemption rates.

We can’t predict that the effect will be direct with 20x+ minting and redemption rates which would directly cover the fee reduction but it is important to remember that ZRS holders still benefit the most from ZEPH price appreciation which driving any increased adoption into ZSD will naturally cause.

The objective is to enhance adoption wherever possible. This will facilitate arbitrage trading with liquidity provided for ZSD markets, which is essential for maintaining the ZSD peg on exchanges. The peg is achieved through arbitrage both on exchanges and within the protocol.

• Minting ZRS (Zephyr Reserve Share): Introducing a 1% fee; Redeeming ZRS Reducing fees from 2% to 1%
  • ZRS has proven to be extremely desired due to its returns. Throughout a turbulent market and a significant downturn in ZEPH price (increasing the ZSD price in terms of ZEPH); The ZRS rate has held strong.

Upstream Updates

It is imperative that we stay up to date with Monero’s improvements and changes. If our codebase deviates too much it becomes increasingly difficult to incorporate the exciting upcoming changes from Monero into Zephyr! A lot of this work has been done and can be seen on the co-authored GitHub commits.

Naming Change

The update was initially named v1.1.0, but due to a recent bug fix, it has been renamed to Artemis v1.2.0.

Bug Fix Information

We resolved a syncing issue caused by rollback/pop_blocks where the reserve reward was not being removed correctly for blocks with larger than median weights. This led to different reported circulating amounts, causing tiny pricing record discrepancies.

In order to maintain chain continuity, included in this bug fix was a patch to the reserve supply at height 274662 to support the ongoing chain and allow nodes to sync.

Conclusion

The upcoming Zephyr Protocol v1.2.0 hard fork introduces critical changes to enhance the protocol’s functionality, user adoption, and security. These changes aim to lower barriers to entry, promote ZSD adoption, and maintain the ZSD peg through improved liquidity and arbitrage opportunities.

Future Development

Our next mission is to add a yield mechanism for ZSD holders. Our early concept is outlined here: https://zephyrprotocol.com/blog/2024-05-30-Zephyr-Protocol-ZSD-Adoption-Chicken-and-Egg

We are eager to get to work on this exciting and groundbreaking update to Zephyr Protocol!