RAI is an ETH backed stablecoin with a managed float regime. The RAIUSD exchange rate is determined by supply and demand while the protocol that issues RAI tries to stabilize its price by constantly de or revaluing it.
How does RAI work?
The long term price trajectory of RAI is determined by the demand for ETH leverage. RAI tends to appreciate if SAFE users deleverage and/or RAI users long and it depreciates in case SAFE users leverage and/or RAI users short.
To better understand how RAI behaves, we need to analyze its monetary policy which is made out of four elements:
- Redemption price: this is the price that the protocol wants RAI to have on the secondary market (e.g on Uniswap). The redemption price is used by SAFE users to mint RAI against ETH and it is also used during Global Settlement in order to allow both SAFE and RAI users to redeem collateral from the system. The redemption price almost always floats and it does not target any specific peg
- Market price: this is the price that RAI is traded at on the secondary market (on exchanges)
- Redemption rate: this is the rate at which RAI is being devalued or revalued. The process of devaluing/revaluing RAI consists in the redemption rate changing the redemption price
- Global Settlement: settlement consists in shutting down the protocol and allowing both SAFE and RAI users to redeem collateral from the system. Settlement uses the redemption (and not the market) price to calculate how much collateral can be redeemed by each user
Unique Money Markets
- If Alice pays 5% per year to borrow RAI from a money market and the RAI redemption rate is -10% per year, she is effectively earning 5% year. This is because of the expectation that RAI's market price will go down by 10% in one year. On the other hand, Bob might be lending RAI at 4% per year, but if the redemption rate is -10%, his net rate is -6%
Stacked Funding Rates
- If an exchange or protocol decides to offer RAI perpetuals, they will essentially allow traders to stack funding rates on top of each other.
- The redemption rate is similar but not identical to a funding rate. The net funding rate on a RAI perpetual is a combination of the funding rate on the platform/exchange that lists the perpetual and the redemption rate.
- RAI is the first asset ever created that allows this.
- A developer can build an options protocol which takes into account changes in the redemption rate in order to determine the price of puts/calls. This is because the redemption rate can be thought of as an intrinsic interest rate for RAI.
Pegged Coins/Synthetic Assets
- Projects building pegged coins can use RAI as a more stable alternative to ETH. In case of a severe ETH market crash, RAI can offer its holders more time to unwind their positions before they get liquidated.
- Protocols that deploy capital in order to get the best yield for their users (e.g Yearn) can leverage RAI (and its intrinsic redemption rate) to boost returns.
- Arbitrageurs (or otherwise traders in general) can look at the redemption price behavior and combine this datapoint with others (e.g market sentiment) in order to find the ideal time when they should execute a trade.
Portfolio Management Strategies
- Anyone can create Set Protocol sets or Balancer pools that offer diversified exposure to RAI's redemption rate as well as other yield bearing assets (e.g cTokens, aTokens).