Introducing Inertia Finance

What is Inertia (TIA)?

TIA token is a partially collateralized token, soft pegged to the U.S. Dollar. TIA is available on both the Polygon (MATIC) network and on the BinanceSmartChain (BSC).

The protocol aims to maintain TIA token’s price stability by storing sufficient collateral in the time-locked smart contracts. This collateral is used for redemptions, helping to maintain price stability. The collateral consists of two tokens. On the Polygon network, USDC and VCTY, while on the BinanceSmartChain it uses BUSD and VCTY token. The USDC or BUSD token is deposited into the protocol when a user mints TIA token, while the VCTY is used for minting is burned. When the user redeems TIA tokens, the protocol pays back USDC or BUSD tokens and mints the required amount of VCTY tokens.

The ratio of USDC or BUSD and VCTY token used by the minting and redeeming function is determined by the Target Collateral Ratio and by the Current Collateral Ratio respectively.

Traditional & Algorithmic Stable Coin

In this section we will look at what other protocols have done in order to maintain market stability, and how efficiently they maintain their capital. We will also discuss fractionalized stablecoins like TIA and how we aim to revolutionize this traditional approach.

Over Collateralized Stablecoins

Most stablecoins require a certain amount of capital to collateralize their assets and keep them close to the desired $1 peg. For example, DAI is an over-collateralized stablecoin that requires an issuer to post 150% collateral. In other words, if a user wanted to mint 100 DAI, they would have to send $150 in Ethereum to the CDP contract. If the value of the collateral were to fall below a certain threshold, this position could be liquidated. The value of this collateral is what maintains the value of DAI pegged.

In the case of USDC — a centralized fiat-collateralized stablecoin — Coinbase holds $1 in a vault for every USDC issued. USDC is always mintable and redeemable for $1 worth of USD. In this example, USDC is more capital efficient than DAI because it only requires $1 of collateral to mint 1 USDC. A similar procedure applied for other centralized stablecoins such as BUSD (Binance), USDT (Bitfinex/Tether) and others.

Algorithmic (non-collateralized) stablecoins don’t use any capital reserve. In general, they purely rely on an algorithm or mechanism that will burn tokens when supply is too high (to increase the price) or mint new tokens when supply is too low (to dCCRease the price). Non-collateralized stablecoins require continual growth to be successful. In the event of a price crash, there is no collateral to liquidate the coin back into, and the holder’s money would be lost, as seen with many past projects trying to utilize such design. Examples of this are Empty Set Dollar, and bDollar Protocol.

For fractionalized or partial-collateralized stablecoins, the capital required to mint is only partially denominated in other stable assets. The remaining portion is denominated in a volatile asset, which is required as collateral. This requirement creates both a natural demand for the volatile asset, as well as a value capture. In the case of TIA, this volatile asset is VCTY. The nature of this value capture means that there is a direct relationship between the value of VCTY and the circulating supply of TIA. Additionally, the collateralization ratio for TIA is a floating number — meaning that if the peg performs well, it is a more effective value capture for TIA.

Whereas some stablecoins only goal is to maintain the peg, TIA does so while producing yield for governance token holders. It accomplishes this by investing idle collateral into a yield-producing vault that feeds the Treasury contract. The Treasury then pays out the yield to stakers via a profit-sharing function.

Conclusion

TIA is progressing the stablecoin landscape by maximizing capital efficiency. By implementing a floating collateralization ratio, TIA not only maintains peg in the most efficient manner possible, but it also captures value for VCTY holders and produces yield for its community of holders across the whole decentralized finances ecosystem.