Tether recently announced its funding of XREX, which targets emerging market trade payments. This spotlighted the Unitas Protocol for emerging market currency stablecoins, co-founded by Wayne Huang, XREX’s CEO.
Today stablecoins are dominated by dollars. It can be useful for SMEs to pay with local currencies as well. Hence, the aim is to provide stablecoins that match the unit of account in emerging economies.
The Unitas Protocol involves the issuance of individual currency stablecoins that are over-collateralized by US dollar stablecoins, a little reminiscent of MakerDAO’s DAI, but with some major differences.
While most fiat currency stablecoins are redeemable for the same currency, the Unitas Protocol aims to back emerging market currencies with US dollar stablecoins.
Provided Unitas gains traction, cryptocurrency exchanges will act as on- and off-ramps. Hence, even though a Unitas currency is redeemable for dollars, users may choose to exchange Unitas currencies directly for local currencies without necessarily needing to go the US dollar route.
How the Unitas Protocol works
Each currency is named after its phone code, so USD91 for the rupee and USD971 for the UAE dirham. In order to buy the USD91 rupee coin, a user provides a US dollar stablecoin, which is converted to the Unitas USD1 and then into USD91. The value of USD91 tracks one rupee. If a user redeems into US dollars, it’s at the prevailing exchange rate.
The major difference between Unitas and MakerDAO’s DAI isn’t just the emerging market currencies. It’s also how the Unitas stablecoins are over-collateralized. Stablecoin users only provide the amount of USD stablecoins they want to convert into emerging currencies. The extra collateral is offered by insurance providers (IPs). They stake additional USD stablecoins, which are locked up for fixed periods. In return the IPs earn a chunk of revenues.
Unitas revenue sources
There are three sources of revenue. First, there are fees for exchanging USD1 with emerging currencies. Second, some of the reserves will be staked with DeFi protocols to earn yield. Third, there are profits from the depreciation of emerging market currencies.
This latter point is a key aspect of the protocol. It is based on the idea that emerging market currencies tend to decline significantly. However, there could also be scenarios when an emerging currency rapidly appreciates. For example, the value of Nigeria’s Naira has fallen off a cliff in the past year. Yet, from its low base in mid-March this year, it appreciated by a third within a month. A concentrated exposure to a few currencies could destabilize the ecosystem.
Tokenomics
Unsurprisingly, the protocol has its own token. The protocol’s share of revenues is used to burn tokens, increasing the token’s value. Instead of burning tokens, if the protocol held more of its revenues as a buffer, it could provide greater stability in times of stress. Provided it survives currency shocks in the early days and the currencies are sufficiently diversified, it would be far less risky if the protocol built up substantial buffers. But that’s not the current design.
Surprisingly, the protocol uses Ethereum with its high gas rate, which could make transactions rather pricey given the target audience is penny pinching SMEs.
Unitas risks
If you look past Unitas’ cleverness, it’s exposed to many risks. It’s backed by a range of stablecoins, so it’s exposed to all of their risks. That’s similar to DAI, which suffered when the USDC stablecoin lost its peg after the collapse of Silicon Valley Bank.
Because the protocol also earns DeFi yield by staking with DeFi protocols, it’s exposed to DeFi risks.
Additionally, the emerging market currency risks have already been described.
It remains to be seen, but one or two currencies such as the rupee or naira might prove particularly popular, so there may be concentration risks.
There are also technical risks. When Unitas launched last year, its smart contracts hadn’t been audited, although it noted that they were ‘experimental’.
In conclusion, Unitas is clever, novel and interesting. However, it’s also complex, and its current design appears risky.
