Coffin Finance (COFFIN) is a start-up blockchain project that tries to make stablecoins stable.
To explain, many stablecoins are volatile. Stablecoins are volatile because no stablecoin is an actual store of value. Instead, they store stablecoins’ value elsewhere in an account or an index or algorithm.
Notably, the TerraUSD (UST) stablecoin collapsed in May 2022 because of its fragile design. UST’s price fell from $1 on 7 May 2022 to 1₵ on 7 June 2022, Gemini estimates. TerraUSD fell to 3₵ on 24 August 2022, the last day for which I could find a TerraUSD price.
The collapse began after traders realized UST was unstable. The collapse broke TerraUSD’s peg. To elaborate, that meant TerraUSD was no longer worth $1. Hence, Terra collapsed because its only value was the implied ability to offer a stablecoin worth $1.
Why Stablecoins are Unstable
They built Coffin Finance to prevent catastrophes such as the TerraUSD collapse.
Stablecoins use digital mechanisms they call smart contracts to make payment in a fiat currency or gold. They store the fiat currency or gold in an account or in a digital payments platform. For example, Tether (USDT) stores US Dollars in accounts. Hence, when you buy a Tether, you are buying a contract to get payment in US dollars.
Some other stablecoins, including DAI and sUSD, make US dollar payments financed by cryptocurrency holdings. Hence, you buy sUSD. What you buy is a contract to sell cryptocurrency to buy dollars with. There are also algorithm-based stablecoins that contain a contract to buy fiat currency in the future.
Can Coffin Finance Fight Stablecoin Volatility?
Coffin Finance is an effort to create a less-volatile stablecoin that is less vulnerable to bank runs and market panic. The Coffin team hopes to reduce volatility with several mechanisms, including Price Oracles, deflationary mechanisms, diversified collateral, arbitrage, and incentives to maintain the peg price.
These mechanisms keep the price of the CoUSD stablecoin pegged to the US dollar. If the CoUSD Coin Price falls below $1, Coffin uses arbitrage to buy dollars to increase the price. If the price is over $1 USD, Coffin sells dollars to bring CoUSD’s price down to $1 USD.
For example, Coffin takes price feeds from several price oracles, including Band Protocol, UniSwap V2 and the SpookySwap Router Oracle. These oracles help the DAO calculate the prices of Coffin (COFFIN) and the CoUSD stablecoin in US Dollars.
Band Protocol provides Fantom (FTM) to US Dollar and Fantom (FTM) to USD Coin (USDC) prices. Meanwhile, SpookySwap Oracle sets FTM to coUSD, FTM to COFFIN, CoUSD to COFFIN, CoUSD to USDC, and CoUSD to DAI prices.
At its launch, Coffin Finance used a time-weighted average price (TWAP) to calculate token prices. The hope is TWAP could calculate accurate prices for tokens. Coffin will temporarily also use a UniSwap V2 swap mechanism to create stable token pairs. UniWap V2 use is temporary because that mechanism is not capital efficient.
Additionally, Coffin Finance uses two types of collateral ratios to promote stability. They base an Effective Collateral Ratio on the actual collateral ratio to create an honest peg. Conversely, they base a Target Collateral Racial on historical CoUSD prices to encourage stability.
Coffin uses the Target ratio to create new CoUSD tokens from Fantom (FTM) and COFFIN. In this process, they burn the COFFIN tokens and use the FTM as collateral. The system updates the Target Collateral Ratio every 60 minutes. During the update, the system compares the current CoUSD price to the US Dollar’s price (USD). If the CoUSD value is over $1 dollar, they decrease it to match the $1.
They hope to use the Effective Collateral Ratio for collateral redemption in the future. Coffin could redeem CoUSD at a $1 dollar rate. However, they suspended redemption in June.
Coffin Finance has little Value
However, despite its big claims. CoinMarketCap gives Coffin Finance (COFFIN) almost no Coin Price value. For example, CoinMarketCap gave Coffin a $0.001403 on 22 September 2022. Coffin was CoinMarketCap’s 8,121th largest cryptocurrency on 22 September 2022.
CoinMarketCap gave Coffin a $4,202 Fully Diluted Market Cap and a 24-Hour Market Volume of $1 on 22 September 2022. Thus, I consider Coffin a worthless cryptocurrency investors need to avoid until they create stablecoins.