How Ceres Works
In summary, the cryptocurrency market's demand for decentralized stablecoins with an ideal level of stability, scalability, and capital efficiency is exactly the motivation for the creation of Ceres protocol. The Ceres protocol are designed especially in accordance with the paradigm of decentralized stablecoins.
In our opinion, it is doubtful that any decentralized stablecoin, relying solely on the increase or decrease in quantity and price controlled by the code, can maintain a stable price at the initial stage without the support of actual collateral. For example, it is impossible for the sovereign credit currency to keep stable if there is no tangible or intangible assets owned by the country to support its value. In addition, we can also fully understand the disadvantages of non-collateralized mechanism by observing the actual conditions of AmpleForth, BasisCash, UST and other non-collateralized decentralized stablecoins.
At the outset, to ensure the stability and convenience of participants as much as possible, the USDC would be used as the major collateral of Ceres protocol. In other words, the stablecoins ASC will be supported partially by collateral, with the proportion of collateral called "Collateral Rate".
In addition, Ceres protocol will use a series of mechanisms to continuously reduce the collateral rate (until it is 0) so as to maximize the capital efficiency. In the future, the protocol will involve more native crypto assets as collateral, to make the collateral diversified and completely decentralized.
The value locked in Ceres protocol is controlled by its smart contract. It regulates the issuance of stablecoins based on the information of market demand transmitted by the external oracle (e.g. Chainlink). When market demand increases, the protocol increases the issuance of stablecoins, and when market demand decreases, it stops or reduces the issuance of stablecoins.
PCV is expected to optimize the use of the locked value in it, respond to environmental changes in a timely manner, and regulate the issuance of stablecoins. At the same time, PCV can also alleviate some irrational fluctuations caused by human emotions as encountered by many decentralized stablecoins, such as the typical death spiral caused by fear. PCV is extremely helpful for improving the stability and scalability.
The central bank of Ceres protocol is a series of smart-contract-based assets pools. It functions similarly to the central bank of sovereign countries in the real world, storing assets and regulating currency issuance. Ceres' central bank accommodates the collateral and other media needed for the issuance of ASC, and the protocol regulate the issuance by controlling the collateral and media.
The central bank works with PCV to improve the stability of the protocol. At the same time, the central bank is also an easy gateway for users to invest funds, which will necessarily improve the scalability of the protocol.
The success of any cryptocurrency project depends not only on the innovation of the project itself, but also on the benefits that the users and funds can get from it, which essentially comes from the value capture of the development dividend of the project. The Ceres protocol designs a comprehensive and feasible value capture mechanism, which works to obtain and distribute the benefits from the project’s development to the users and funds. Such a value capture mechanism accelerates the construction of Ceres protocol’s ecosystem, building a positive cycle between project development and benefits.