What is XAI?
Pronounced /zī/, XAI is an over-collateralized stablecoin with a soft peg to the US Dollar. XAI serves as the second bridge asset alongside ETH in the Silo lending protocol. Users can now collateralize and borrow XAI - this creates a new path for cross-asset lending and opens up new use cases like leverage, shorting, and borrowing to farm in every silo.
The name XAI pays tribute to Wei DAI, a computer engineer to whom we all owe a debt of gratitude for his immeasurable contributions to cryptography and cryptocurrencies. The letter X denotes two attributes of the stablecoin:
- Bridging: XAI is an accepted collateral across all silos just like ETH is today.
- Extendability: The SiloDAO can extend credit lines of XAI into any silo.
Adding XAI as a second bridge asset to the Silo protocol requires the passing of an executive governance proposal as we detail later in this post.
The SiloDAO is the only entity that controls XAI. Via executive proposals, the SiloDAO can choose to mint unlimited XAI and deposit it into any number of silos. Similarly, the DAO can burn XAI that is extended to any silos via governance proposals. When the DAO mints XAI into a silo, it effectively determines XAI’s backing. Similarly, when the DAO burns XAI in a silo, it changes XAI’s backing.
Let’s look at an example.
Suppose the SiloDAO mints XAI into the bridge silo (XAI-ETH silo). By doing so, the DAO chooses to back XAI by ETH only. If the SiloDAO later decides to mint XAI into the USDC silo, for example, the DAO extends the backing of XAI to include USDC in addition to ETH. Conversely, if the DAO burns the XAI minted into the USDC silo, the action changes XAI’s backing from ETH and USDC to purely ETH.
In brief, the DAO sets the backing of XAI by controlling two functions:
- Credit Extension: The function determines token assets that can be collateral to borrow XAI into circulation (existence);
- Credit Retraction: The function that removes XAI credit lines from silos by burning XAI out of circulation;
Performing both functions require that the DAO decide on the amount of XAI that will be minted or burned. Having the ability to perform those functions allows the SiloDAO to respond to market conditions swiftly and effectively.
XAI is an overcollateralized stablecoin that is softly pegged to USD. This means we expect XAI value to hover around 1 dollar most of the time. Users must overcollateralize a token asset in order to borrow XAI. The overcollateralization serves as a stabilization mechanism to control the impact of price fluctuations of the collateral token. When collateralized positions approach under-collateralization, a liquidation event takes place that protects the protocol from accruing bad debt.
The Silo protocol treats XAI to equal 1 USD to allow for arbitrage opportunities when the price of XAI deviates from the peg. Let’s look at two scenarios:
- Users can always borrow and repay XAI at $1. When the market price of XAI is below $1, borrowers can arbitrage the price by purchasing XAI at a discount and repaying their loans.
- When the XAI market price trades above $1, users can borrow new XAI into existence and sell it on the market. Once the price of XAI has decreased, they can repay standing loans.
The SiloDAO controls the borrow interest rate of XAI across all silos, effectively controlling the circulating supply for XAI by increasing or decreasing borrow interest rates.
In the first phase, XAI will be available to borrow in two silos:
- 1.XAI-ETH silo: Users deposit ETH and borrow XAI at a fixed interest rate of 0.1% per annum.
- 2.USDC silo: Users deposit USDC and borrow XAI at a variable interest rate. The interest rate is determined by the dynamic interest rate model for stablecoins.
Credit lines is the process of allowing silos to borrow XAI into existence using the base assets of those silos. In the beginning, two credit lines of 10M and 5M XAI will be extended to the XAI-ETH and USDC silos respectively, and as such XAI can only be borrowed with ETH and USDC collateral.
As XAI AMM liquidity grows, we will be extending additional credit lines to more silos, allowing XAI to be borrowed into existence by more token assets.
Note that as additional credit lines are extended to different tokens, the backing of XAI will change. For example, if the DAO were to extend a 5M XAI credit line to the LUSD silo, the backing of XAI would theoretically change to 50% ETH, 25% USDC, and 25% LUSD.
In the case that a large credit line is extended to a highly volatile and low liquidity asset, there is a risk that XAI may become undercollateralized if a large borrow position cannot be smoothly liquidated. Subsequently, the DAO must be highly judicious in deciding which silos receive credit lines and the size of the credit line afforded to these silos to minimize the possibility of an under-collateralization event.
The beneficiary of any interest earned on the borrowed XAI is the SiloDAO treasury. This provides a new revenue stream that grows in proportion to the total amount of borrowed XAI in the Silo protocol.