CAP overview: New stablecoin protocol on MegaETH

Author: Decentralized Finance Dave

Compiled by DeepFlow TechFlow

The rise of the online platform economy has helped many small startups grow into today’s tech giants, all based on a seemingly counterintuitive phenomenon: they don’t own any assets required for their core business. The most classic examples are Uber, which doesn’t own any vehicles in its fleet, and Airbnb, which doesn’t own any rooms on its platform. These companies use the power of the market to accurately match service demanders with providers, whether it’s short-distance travel in the city or temporary accommodation. Compared to traditional enterprises that need to deal with complex logistics such as vehicle maintenance and licensing approvals, these platforms can focus on optimizing technology, improving user experience, and increasing efficiency, thereby achieving unlimited business expansion.

The on-chain world also has similar dynamics. On the one hand, there are users seeking profits, and on the other hand, there are protocols and participants providing profits. These protocols promote high annualized yield (APY) through various strategies. However, whether it is leveraging through collateralized debt positions (CDP), interest on treasury bills (T-Bills), or basis trading and other market strategies to obtain profits, a single strategy will encounter bottlenecks when delivering at a large scale.

Two (limited) design stories

Traditional projects usually rely on endogenous design, and their income comes from the platform’s usage demand. For example, the lending market and perpetual contracts rely on users’ leverage willingness, while the token flywheel effect requires continuous purchase of governance tokens by new investors. However, if the platform lacks demand (whether it is leverage demand or token purchase demand), liquidity supply will not be able to generate income. This design is similar to Ouroboros, unable to transcend itself to achieve sustainable development.

And for newer exogenous strategies, the protocol often poses the wrong question: which strategy can achieve the largest scale expansion? In fact, no strategy can expand infinitely. When alpha is exhausted, all strategies will eventually become obsolete, and developers will have to go back to the design stage.

So, what issues should stablecoins pay attention to? As the core hub of capital formation, stablecoins need to consider how to efficiently allocate capital and how to safeguard the security of user funds. To achieve true success, the blockchain ecosystem needs a flexible and secure stablecoin solution.

CAP Entry

CAP is the first stablecoin protocol that outsources yield generation programmatically and provides comprehensive guarantees.

Who makes up the CAP?

The CAP system consists of three types of participants: Minters, Operators, and Re-stakers.

Minters (: Minters are stablecoin users who hold cUSD. cUSD can always be exchanged for its underlying collateral assets USDC or USDT at a 1:1 ratio.

Operators: Operators are institutions capable of executing large-scale yield generation strategies, including banks, high-frequency trading (HFT) companies, private equity firms, real-world asset (RWA) protocols, decentralized finance (DeFi) protocols, and liquidity funds, etc.

Restakers ): Restakers is a capital pool that locks funds and protects stablecoin users by providing security for the operator’s activities, and thus obtains the right to use its re-staked ETH.

(The original image is from Decentralized Finance Dave, compiled by Deep Tide TechFlow)

The working principle of CAP

CAP’s smart contract clearly defines the operating rules for all participants, including fixed requirements, punishment mechanisms, and reward mechanisms.

Stablecoin users can deposit USDC or USDT to mint cUSD at a 1:1 ratio. Users can choose to stake cUSD to earn yield or use it directly as a USD-pegged stablecoin. cUSD can always be fully redeemed.

An institution (such as a high-frequency trading company with a 40% threshold yield) chooses to join the operator pool of CAP and plans to obtain loans through CAP for its revenue strategy.

To become an operator, the institution needs to pass the CAP whitelist review and convince depositors to entrust their funds to them. The total amount of entrusted funds determines the capital limit that the operator can obtain. Once the institution obtains enough “coverage” through delegation, it can withdraw USDC from the collateral pool to execute its exclusive strategy.

At the end of the loan period, institutions distribute profits to stablecoin users based on the benchmark yield of CAP, while paying a premium to re-stakers. For example, if the benchmark yield is 13% and the premium is 2%, the institution can retain the remaining profit (in this case, 25%).

Users who collateralize cUSD will accumulate interest through the operator’s activities, and this interest can be withdrawn at any time.

The motivation of each participant

To understand the operation of CAP, it is not enough to only understand the behavior of the participants, it is more important to understand the motivation behind their participation.

Stablecoin holders

Stable income, no need to switch frequently: The market-set interest rate of CAP allows users to avoid frequent protocol switching, so even if market conditions change or the protocol becomes outdated, they can continue to earn income.

Security: Compared to CeFi and Decentralized Finance applications that promise high returns but lead to user fund losses, CAP provides higher security. Users’ principal is protected by the immutability of smart contracts and sufficient collateral, rather than relying on trust.

Operator

Zero-cost access to additional capital: The capital provided by CAP does not require a cost basis, allowing market makers in the yield market to achieve higher returns compared to the traditional LP model, while increasing the total locked-in value (TVL) of Decentralized Finance protocols by (, the assets under management (AUM) of private credit funds by ), and creating more possibilities for cross-domain arbitrageurs.

Re-staker

Provide a new use for locked ETH: Since ETH is usually locked on L1 with limited use cases. By re-staking ETH, users can delegate it to operators to participate in active verification services AVS(.

Yield on blue-chip asset payment: CAP allows re-stakers to independently determine the premium to compensate for the risks they take. These premiums are paid in blue-chip assets such as ETH or USD, rather than inflationary governance tokens or off-chain point systems. Therefore, the earnings of re-stakers are not limited by project market value and have unlimited growth potential.

Risks exist

Any new opportunity comes with risks, so it is especially important to understand the potential risks of CAP:

Risk of shared security market: CAP is based on EigenLayer and other shared security markets, so it may be affected by the risks of these platforms.

Fluctuation of underlying asset prices: If USDC or USDT becomes unanchored, users will face the risk of price fluctuations. However, this risk exists even without a CAP.

Risk of third-party cross-chain bridges: When users use cUSD on other chains via cross-chain bridges, they may face the risk of third-party bridging. However, CAP itself is not directly exposed to such risks.

Smart contract risk: CAP does not rely on custodians or human supervision, but protects users through the rules of smart contracts. However, users need to bear the risk of potential smart contract logic, even if the code has been audited.

Conclusion

Every participant in CAP (minters, operators, and re-stakers) has unlocked new income opportunities by contributing value: depositors receive guaranteed stable income, operators obtain capital at zero cost, and re-stakers earn high-quality asset income through delegation.

In order to achieve the large-scale application of income-oriented stablecoins, we need to rely on the power of efficient markets rather than centralized teams. Just like markets in other industries, the competitive mechanism brings the best results for all participants.