In practice, how will ZBTC behave? Here we analyse 3 scenarios of BTC price action and the resultant ZBTC redemption rate in detail. We compare appreciation benefits as well as de-pegging risks to existing stablecoins where relevant.
BTC decline 2021/22 — Scenario 1
A deppegging event can occur when a sufficiently large & sudden market correction happens in Bitcoin price, and there is insufficient liquidity for a large stablecoin provider to liquidate their bitcoin assets in time to realise their full dollar value. ZBTC protects against depegging events using dynamic collaterlisation, while at the same time capturing long-term value appreciation.
Scenario 1:
Let us consider a hypothetical repeat of the 2021–2022 BTC price crash, but this time with dollar-pegged stablecoins represent a 3 billion dollar market cap. At a collateral ratio of 150%, They have $4.5 billion dollars of Bitcoin backing these 3 billion dollars of stablecoins.
A. Existing stablecoin Depeg
Now, in March — April 2022, bitcoin declines by over 60% — due to cascading liquidation, the last 35% drop occurs in just a few days. ZUSD is also trapped as it attempts to liquidate ~$4.5 Billion of Bitcoin on-chain, far exceeding the liquidity on offer on most DEXes. In practice, it is only able to realise maybe $ 1 Billion of value, and it continues to hold the remaining BTC to sell OTC — as the remaining collateral declines in value by 60% ( 0.8 Billion Dollars).
Now we have $ 3 Billion of stablecoins backed by only around ~$1.8 Billion dollars of collateral. A depegging event has occurred, and these tokens have lost 40% of their value.
B. ZBTC stays pegged
At the end of this scenario, As visible from the graph, as BTC declines from 60k to 20k, the redemption rate of ZBTC continues to rise, increasing about 12.5% (blue).
As demonstrated earlier in the dynamic over-collaterlisation section, ZBTC is able to actually enforce this rising redemption rate, due to the very high collateral ratios that it imposed during bull runs. Thus ZBTC will often have 300%-500% overcollaterlisation before market corrections, better preparing it to retain peg. See the article on Dynamic Overcollaterlisation for more info: https://evidao.medium.com/dynamic-overcollaterlization-a-new-model-for-stablecoins-backed-by-volatile-collateral-3bedb25f3d0c
BTC appreciation — Scenario 2
Scenario 2: Appreciation. Bitcoin price rises to $50k in late 2022, stays there till late 2023, then drops suddenly back to $20k. (Similar to how BTC was around $10k through 2019 but briefly dropped to $5k in March 2020).
As visible in the graph, ZBTC redemption rate has risen to $35,000 over 2023. If ZBTC was minted at an average accounting price of ZBTC = $20,000, ZBTC is now worth 60% more!
In this scenario, a sudden 60% dip could expose regular stablecoins to deppeging, similar to Scenario 1. However, in this case, ZBTC will not only retain peg, it will significantly apprecuate, even as the other assets potentially depeg.
ZBTC Robustness to downturns — Scenario 3
Scenario 3 : Bitcoin price in August 2022 drops to $10k, and stays there for the next 2 years.
This is a very immediate scenario thought possible by some speculators — and is apt for demonstrating resilience of the SMA4 measure for dynamic overcollaterlisation.
As evident, in the scenario of an additional 50% Dip in BTC price tomorrow, ZBTC remains completely steady, and does not drop in purchasing power at all, even after 2 years. This shows that it is a reliable and robust stablecoin, showing at least as much stability against downturns, as exhibited by dollar-pegged stablecoins.
