Feb 11 | 7 min read
The inception for the platform spurt after frustrations with MakerDAO’s DAI, formerly known as SAI (Single-Collateral DAI). As Maker added additional forms of collateral to support DAI’s backing, a discussion was sparked about the true nature of crypto’s infrastructure being “decentralized” if supported with collateral controlled by centralized entities. Built with the nostalgia of SAI in mind, Reflexer Finance forked MakerDAO’s DAI while locking in some fundamental changes to the protocol namely: permanently selecting Ethereum as the sole collateral, an on-chain PID controller to stabilize RAI’s target price and the use of FLX to incrementally remove all governance from the platform.
Reflexer Finance believes that building RAI around these principles will give the DeFi ecosystem a stable digital asset unpegged to any currency and will remain authentic to the principles of decentralization. Additionally, by focusing on ending governance decisions Reflexer aims to carry out their inital vision and establish a “Money God” system governed independently of humans discretion by utilizing smart contracts.
FLX is the “ungovernance” token of the Reflexer Finance protocol. The idea behind this was to completely remove governance decisions from the long-term operation of the product- in this case, RAI. The term “ungovernance” was thrown in the name as a joke but also to ensure the community would make fun of the team if they didn’t execute on their vision. This term also serves as a reminder to the community that if all goes successful RAI governance activity would be needed for only a small percentage of DAO activity. The FLX token has two main functions inside the RAI protocol:
Ungovernance: once governance minimization is finalized, FLX holders will be able to remove control from any remaining components in RAI or, if needed, continue to manage components that may be challenging to ungovern (such as oracles or any other component interacting with other protocols)
Backstop mechanism: FLX stakers are the first line of defense in case the RAI protocol goes underwater. The second line of defense is with debt auctions that mint new FLX and auction it in exchange for RAI
Reason-being that in crypto many teams have set out to build visionary decentralized products but are sidetracked in the pursuit of growth or money; consequently sacrificing the long-term success of the product. Creating this internal mechanism for FLX will help the Reflexer Protocol remain loyal to using Ethereum as its sole collateral and trust in the PID controller mechanism to keep stability instead of using governance to set incentive loan rates on each new collateral backing the stablecoin. In the upcoming year, Reflexer Finance will make progress on major governance decisions that center around external components regarding oracles. After achieving success “ungoverning” the protocol, the concentration of votes in the future will have to do with forms of spending that are not optimized by an algorithm such as funds or grants being paid for by the DAO and oracle components that change as the external landscape progresses.
FLX uses a backstop mechanism to protect RAI. This system works by users staking the FLX-ETH LP tokens in a pool and over time the protocol will give you more FLX with a buyback mechanism that is funded by fees. In a scenario where RAI is under the value of ETH and goes below the specific threshold. Anyone can confiscate the ETH and RAI debt that ETH has to be sold for. If the debt fails to get paid then the protocol has “bad debt” on its RAI, the system uses the LP tokens to buyback this difference and uphold the RAI target price. You can follow this mechanism in more detail below:
Mechanism for backstopping the RAI
Stefan Ionescu, a solidity developer originally from Romania founded Reflexer Finance. Stefan’s background in coding comes from being an android developer, he was introduced into crypto around December 2017 and drawn in by the idealism of decentralization. Experiencing the corrupt nature of government decisions in Romania, led him to notice the opportunity in organizing without government when learning about DAOs. Stefan became increasingly involved in the space joining early DeFi chats gaining exposure to experienced crypto developers and strategists which led to his next move of working with smaller fintech companies to help build out on-chains loans.
In 2019, he left in pursuit of his own venture which was sparked from a research grant focused around learning about stablecoins. During this time, he learned more about the operational mechanisms of DAI and SAI. After realizing Maker had failed to accomplish its original vision for DAI he set out to build Reflexer Finance’s RAI aiming to achieve this mission and reignite an authentic stablecoin. The team raised 50K USD in a pre-seed round from MetaCartel Ventures which was then followed by other prominent investors in the space including but not limited to Paradigm, Standard Crypto, Variant and Pantera.
The circulating supply of FLX is currently 174,492.50 FLX, out of a maximum 1,000,000 supply with a market capitalization of $32.5 million USD. FLX was initially distributed through incentivized liquidity pools. You can track all distributions of FLX here.
Reflexer Finance, stands out because of the simplicity of its product. By solidifying Ethereum as the sole collateral of RAI, it will ensure that RAI does not get tainted by assets controlled by centralized powers. It’s governance structure will ensure the product remains true to its original vision, which is unlike many teams in the space with constantly changing protocol operations.
Reflexer Finance also distinguishes itself through its use of its on-chain PID controller. This is a fancy way of saying a smart contract looks at a price source picked by governance, if below a certain target, the system will incentivize people to sell to reach target value market price.
When RAI’s market price > redemption price for a sustained period of time, the redemption rate will become negative
When RAI’s market price < redemption price for a sustained period of time, the redemption rate will become positive
When RAI’s market price = redemption price for a sustained period of time, the redemption rate will settle at a steady state (that may be non zero)
The system above allows RAI to achieve a target floating price without having being pegged to anything.
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FLX was included in the GMI index because of its simplistic approach to creating a stablecoin in the Ethereum ecosystem and its unique outlook on governance. As regulatory measures slowly creep up on the crypto industry, stablecoins will be under increased scrutiny from agencies and subject to policies of centralized banks. Without a crypto native stable asset its hard to see how the ecosystem as a whole can flourish and create “decentralized” products while dependent on the foundation of a stablecoin controlled by traditional finance. A DeFi index without exposure to an authentic stablecoin wouldn’t be complete and RAI will provide the framework for protocols to build decentralized products down the line without worry of regulatory scrutiny.
Index Coop is a decentralized autonomous organization (DAO) that powers structured decentralized finance (DeFi) products and strategy tokens using smart contracts on the blockchain. We offer a suite of sector structured products, leverage and inverse products, and yield-generating products. We aim to create products that are simple to use, accessible to everyone and secure. Our products are built on Set Protocol, a twice-audited, self-custodial DeFi tool that allows for the creation and management of Ethereum-based (or ERC-20) tokens. Among users, partner protocols, and our composable products, Index Coop maintains one of the largest partnership networks in the DeFi ecosystem.
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