Philosophy
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UNIT is designed to be a BTC-backed Collateralised Debt Position (CDP), programmed to be soft-pegged to the USD at 1.01-1.04 UNIT/USD before transaction costs to finance responsible leveraging across BTC-Fi.
At its core, UNIT offers conservative on-chain leverage to borrowers with a targeted collateralization ratio of 135-160% at all times. Initially, these UNIT-tokenised "loans" will be made with 0% interest, a 1% Redemption Fee, and a variable Liquidation Fee. DUCAT token holders will control these parameters, and create new ones, via the DUCAT governance process.
The Ducat Protocol expects to open itself to other BTC-native collateral tokens with at least one full cycle of price history. However, in the near term, BTC's liquidity and volatility profile (as a crypto-native store of value) is unmatched relative to other non-fiat crypto assets.
We chose a 135-160% collateralisation ratio for UNIT to balance BTC's historical 10-minute volatility (roughly the time of a Bitcoin block) with capital efficiency. Exogenous collateralization is the only market-credible stablecoin risk structure. Every stablecoin and stablecoin-like derivatives whose risk models have held up under high stress is either exogenously overcollateralized (their collateral comes from a token with a much larger market cap that the stablecoin protocol has no/minimal influence over) or, in a few CDP cases, very heavily endogenously overcollateralized, with very tight controls on debt origination.
Our stability mechanism relies on the Liquidation Auctions (to recapitalise distressed vaults). Ideally, this process will be as decentralised as possible, with liquidators taking advantage of rich returns on invested capital. Our priority is ensuring that all UNIT is at least 135% collateralised by BTC at all times. If we ensure that UNIT is always collateralised at well above 100%, even during periods of extreme market stress, market forces will take care of the peg; borrowers will have very strong incentives to repay their UNIT debts if and when UNIT trades at a discount to $1.
