On the horizon, the decentralized finance (DeFi) space is set to take over the financial industry, rule and reign. Innovations such as yield-generating stablecoins have been introduced and are going to change the way DeFi works.
One of such projects is Overnight. We reached out to Maxim Ermilov, founder at Overnight to explain the concepts behind yield-generating stablecoins. Here is what he had to say.
Maxim Ermilov Founder At Overnight
Maxim Ermilov is the founder of Overnight, a decentralised protocol behind yield-generating stablecoin USD+. USD+ is pegged to/instantly redeemable in USDC. It is 100+% backed by low-risk, highly liquid, yield-generating DeFi assets. USD+ accrues yield to your wallet daily, no staking required; it enables great and novel use-cases, like boosted liquidity mining, leveraged yield-farming, it is great as a treasury asset and for daily transfers, like payroll. Overnight is backed by world class investors, including Hack VC (Alex Pack), FJ Labs, Ryan Selkis (founder of Messari), Brian Tubergen (founder of Coinlist), Sandeep Naiwal (co-founder of Polygon), Paul Holland.
What are yield-generating stablecoins?
It is a coin that is pegged to the dollar, in our case to USDC, and is also generating yield.
The advantage of yield-generating stablecoins is that nothing is required from the holder – no staking, nor unstaking – the yield just accumulates in one’s wallet daily.
It is a convenient, safe, and non-time consuming way to get some yield on one’s temporarily available cash.
How is the USD+ pegged to the USDC?
The mechanics of the peg is identical to that of the SEC-regulated money market funds, where a unit of a MMF is regulated to be always worth 1 USD. USD+ is at any point in time at least 100% collateralized by liquid yield generating DeFI assets that can be redeemed for USDC.
The portfolio backing USD+ is constructed with a risk-first approach, i.e. assets are selected to avoid losses even on a daily basis. This avoids depegging down.
Whatever profit is generated through the day is paid out to the holder at the end of the day.
This avoids depegging up.
Thus, the peg is maintained.
What are non-algorithmic stablecoins?
Non-algorithmic stablecoins are coins pegged to USD that have collateral behind them. Stablecoins can be 100% collateralized by fiat, like USDC or overcollaterized by onchain assets, like, e.g. DAI.
The advantage of USD+ is that it is as capital efficient as centralized stablecoins like USDC, and as decentralized as DAI.
It is also generating yield for the holders as opposed to USDC/USDT that generates yield for the Circle/Tether.
How are yields generated with the USD+ stablecoins?
The yield comes from the collateral, and it is deployed across a set of yield-generating strategies, including collateralized lending, e.g. AAVE and stable-to-stable liquidity pools.
The logic is to choose immediately liquid assets (convertible into USDC on demand), minimum risk, and then optimize for returns.
What is the mechanism of collateralization of the USD+?
You can mint and redeem USD+ for USDC. When you mint, the protocol behind USD+ receives your USDC and invests it across a set of pre-determined yield-generating strategies.
When you redeem, the opposite happens. The key is that it is all onchain, humans are not involved in the portfolio management.
The strategies and their weights in the portfolio can be proposed by anyone but controlled by the community.
How are payouts made to USD+ holders?
The yield/profit are calculated once a day.
It is essentially the excess of the value of the assets over the number of USD+ in circulation. The protocol mints the amount of USD+ equal to the daily profit.
The excess USD+ is then distributed to USD+ holders through a mechanism called ‘rebase’. For all practical purposes, the balance of USD+ that you see simply increases.
How does the USD+ ecosystem work?
The most straightforward use-case for USD+ is liquidity management, i.e. individuals and treasuries holding its spare cash in USD+ and using USD+ for cryptopayments, like payroll etc.
Beyond that we see 3 use-cases for USD+: (1) liquidity mining in pools like Boosted pools by Balancer or Curve pools (2) USD+ as a means of collateral for interest free loans like those provided by Qi DAO/Mai finance and (3) Leveraging USD+ as the asset for cross-chain bridges like Rainbow or Wormhole bridges.
What are your plans for multichain expansion?
We see USD+ as an infinitely scalable decentralized stablecoin that should be present on most chains, it is also ideal as a cross-chain asset.
We plan to expand to another EVM-compatible chain, like Fantom, Avalanche, and Arbitrum, before going to the mainnet.
Congratulations on your successful $850,000 pre-seed! What’s next for Overnight?
We aim to grow by establishing liquidity pools with Balancer, Curve, mStable, potentially, Uniswap as well as partnering with lending protocols like MAI finance, MIIM etc.
We look to expand multichain, secure a partnership with one of the major bridges.
From the product perspective, developing insurance and linking that to governance are very much demanded by our ecosystem.
How are the mechanics that govern the USD+ similar to money market funds?
The mechanics of the peg is identical to the regulation of the money market funds that effectively requires MMFs to “never break the buck”.
Given upcoming regulation of the stablecoins we see the compliant mechanics of USD+, i.e. the mechanics that is understood well by the regulator, to be a factor that helps USD+ grow.
What’s the backstory behind Overnight’s creation?
I have been in traditional finance all my life with firms like JPMorgan, Morgan Stanley and 17 years with BCG’s global Financial Institutions practice.
Across Paris, London, Singapore and Moscow.
I then joined Stanford’s executive programme whose slogan is “Change life, change organization, change the world”.
Since then I turned entrepreneur with Overnight being my second business.
I chose the DeFi space for my new venture as, being a fintech specialist, I wanted to build in a domain that I’m an expert in and something that would be global day 1.
Global both in terms of customer base and the team distribution. In the entire fintech space, only DeFi provides such an opportunity
Please, can you tell us about the team behind Overnight?
The team is fully remote which allows us to attract talent globally: exceptional engineers based in Russia and Ukraine, marketing team based in Switzerland and business development team in the US.
What are the other use-case scenarios for the USD+?
We see USD+ as ideal treasury asset, ideal for liquidity management purposes of DAOs and Individuals.
As I said we see 3 use-cases for USD+: (1) liquidity mining (2) collateral for interest free loans (3) cross-chain bridge asset.
When liquidity mining, an investor typically provides tokens into an AMM expecting a share of fees and rewards. With USD+ the liquidity minor receives fees, rewards and yield from USD+.
This is obviously attractive for liquidity miners, but is also attractive for AMMs, who could use it to optimize reward costs.
The collateral use case is also quite interesting.
Typically, when pledging one’s assets, the borrower is concerned with volatility and the risk of liquidation that implies.
When pledging USD+ the risk of liquidation is minimized, allowing up to x9 leverage, with reasonable risk.
Last but not least are the cross-chain bridges.
There are billions of assets locked in the bridges and not working, i.e. not producing yield.
When bridging USD+, USD+ locked in the bridge works and produces yield, making bridges way more capital efficient.
We obviously see a lot of use-cases on the centralized exchanges and generally in the traditional fintech space.
What’s the rationale behind Polygon choosing the USD+ for its benchmark?
Benchmarks are very important in finance – they provide a reference point to understand what is high or low yield, how much premium is being paid for risk undertaken etc.
A common question that I often get -Ïs 9% on my deposit in USDC good deal or not? – I can’t answer without a benchmark.
If you open WSJ, you will see an entire section on interest rate benchmarks, including, until recently, Libor rates including its Libor Overnight Benchmark.
Something like this does not exist in DeFi, but should. Hence, we have built PoLybor Overnight, an Overnight interest rate benchmark on Polygon. USD+ is used as a basis as it is the only instrument that provides reliable measurement, in particular, is transaction data driven.
What is the USD+’s overall effect on the DeFi space since its introduction?
USD+ is in the public beta state.
How is the USD+ risk free?
USD+ is not risk free.
It is better to be thought of as the minimum risk one can take to enjoy some DeFi yields; it is ideal for those who want to have exposure to DeFi but are not comfortable with crypto’s volatility and diffucult UX/UI.
Related: Are Stablecoins the Future?
Do you have any other plans for funding rounds this year? Please, can you tell us about them?
We are very grateful for the backing we have received from Hack VC and FJ Labs as well as our angel investors so far.
We are not fundraising at the moment and are focusing on building.
We will consider further financing before expanding multichain.
Are there any other web3 projects you’re involved with at the moment?
Where do you see Overnight in the next half-decade?
In a lot of countries, e.g. Latin America, Eastern Europe, because of inflation people tend to save in dollars rather than the local currency, and can’t rely on local banks to preserve their assets.
I hope that USD+, one day, will become the way for people to preserve and accrue their wealth, rather than lose their life savings in another devaluation or a banking crash.