LexDAO Banknote $LXB – lexDAO

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Token Governance as a Service

What is a LexDAO Banknote?

A LexDAO banknote is a Dai token, that is staked in the MakerDAO DSR (as Chai), that is wrapped in a smart contract that enables the governance of the token by LexDAO LLC (a group of legal engineers (“Not your lawyer”) and Ethereum smart contract aficionados).

What is Dai?

First one must start with Dai, which is a synthetic stablecoin that is meant to be worth approximately 1 US Dollar in value and is minted from the MakerDAO system. To be able to “mint” Dai in the MakerDAO system requires an overcollateralized lending position, currently with Ether ETH, Basic Attention Token BAT, or USD-C (which is a stablecoin created by Coinbase/Circle). For a DAI to be born requires a “Dai Borrower” to lock one of the above tokens at the acceptable overcollateralization ratio. 1.5X for BAT and ETH, and 1.25X for USDC.

As an example, assume that ETH is worth $150 per token. Then the lender could lock 1 ETH and borrow a maximum of $100 Dai. If the market value of the ETH dropped below the 150% collateralization ratio, then the borrower is liquidated. The ETH is auctioned and a further liquidation penalty (13%) is assessed and the borrower gets whatever collateral is left (if any) after subtracting their liquidation penalty and the original loan. Therefore, most borrowers in the system try to maintain a 300% collateralization ratio to avoid liquidation.

How does the MakerDao system attempt to maintain the exchange value of 1USD per Dai? This is where it gets somewhat complex and has some similarities to a Central Banking system. MakerDao is governed by a governance token called Maker (MKR) that allows its holders to vote on certain changes to the Dai system, including collateral ratios, stability fees (similar to interest on the loan) assessed on borrowed Dai, and caps on overall issuance of the system. Basically, they need to match supply and demand for the stablecoin to maintain the USD parity.

When DAI value is under the peg:

If Dai demand is weak (people would rather sell Dai than buy it at 1USD per DAI), then they can raise the system interest rates. This generally, would cause some borrowers to pay back their loan, where the Dai is burned and thereby reducing the overall supply. The other lever that the system has what the MakerDAO system calls the Dai Savings Rate (the “DSR”). This is a rate of accrual (think interest) that the system pays to holders of Dai to “lock” the token into the DSR. The money for the accrual comes from the stability fee charged borrowers. Therefore it is a demand incentive for savers to lock the Dai in the DSR. Therefore if the DSR is 6%, then some investors would be willing to purchase DAI to get the higher savings rate. Check out the current DSR rate here.

When DAI value is over the peg:

If Dai demand is strong (people would rather hold Dai than sell it at 1USD per DAI), then they can lower the system interest rates. With lower system rates, borrowers would use their collateral to effectively take out lower rate loans. This is an incentive to mint Dai, which increases supply as it is generally sold into the ecosystem. Similarly, the MakerDAO system can lower the DSR, to zero and perhaps even negative, which would reduce any incentive to lock Dai in the DSR.

What is CHAI?

CHAI is a Dai that is locked in the DSR that is then wrapped or “tokenized” into an ERC-20 token that makes it fungible and transferable. So it is a synthetic dollar (a “Dai”) that is earning rewards at the “DSR”. So basically a bearer asset where the holder of the CHAI has both rights to the DAI and the DSR value (“interest”) accrued since it was wrapped in the contract. Check out https://chai.money/ to learn more or “wrap” a Dai into the Chai contract or “unwrap” the Chai into Dai. When the Chai is unwrapped, the user would get both the original Dai and the accrued reward back.

Chai is an important concept as it allows value accrual and fungibility. This concept is perhaps analogous to bearer bonds historically. Why is this useful? A simple example would be allowing funds held in escrow or a wallet to earn the DSR while they sit in purgatory. Unlike typical funds, such as cash in a wallet or USD locked in an escrow, the Chai would be accruing value 24/7. Chai captures the value from the opportunity cost of the DSR that would be lost. The risk of Chai is similar to that of Dai in that it still has the risk of the MakerDao system. If the system breaks then it would be possible that the Dai would not be valued at 1 USD. In other words, the peg could break. In such cases, the system has the ability to call for an emergency shutdown, which would freeze it and ultimately pay Dai holders out from the collateral still held in the system.

What is a LexDAO Banknote (“$LXB”)?

As we first started, $LXB is simply a Chai that is wrapped into another contract to grant certain rights to a third party such as lexDAO to manage the asset in case of mistake, dispute, or perhaps malfeasance. LexDAO is a decentralized organization for legal professionals who are seeking to provide a trusted layer between the decentralized world of blockchains and a legal settlement layer in the real world. We are trying to bridge this layer to provide a working framework for organizations to work in a trustless and trusted manner using Ethereum, blockchains, smart contracts and decentralized organizations.

Wait stop the train… In crypto it is preached “not my key not my coin”. That is true, but there are inherent trade-offs between having full custody over one’s assets via private key management, trusting third party exchanges, and contracts. Trust is generally required somewhere in the system, even if it is with yourself with all the mortal errors that entails. What if the private wallet that has the private key gets compromised by a bad actor? (Or, perhaps more likely gets lost or forgotten? I have seen people forget where they stashed their gold bullion for instance.)

So a simple way of looking at the $LXB system is that it provides some safety rails for a user to recover value if a mistake is made, if there is a token lost, or perhaps where it is in dispute. How does $LXB work?

👉 First Mint $LXB using the Openlaw form, which is free to open an account and use this will allow you to opt-in to wrap Dai into the contract and agree to the terms.

👉 Once the $LXB is wrapped you can add it to metamask and send it anywhere that an ERC-20 token can go. Remember that it is also earning the DSR while it lays around.

👉 Let’s say that you inadvertently send $LXB to the wrong Ethereum address. Normally sending a token to a foreign account would render it lost in space, a black hole for value… But, is this really the best we can do, as we pitch legacy on distributed networks for online payments? (Back to our Black Hole predicament…)

👉 Oh Drat! What to do. In the case of $LXB, there is recourse. In the case of lost tokens or disputed balances, one would simply petition lexdao.chat to begin a process of recovery from lexDAO members that control the $LXB protocol with votes weighted to their reputation. From LexDAO determinations, the Aragon Agent would act as a recovery system which would return custody of the lost, missing or disputed $LXB to petitioners.

👉 Finally, and for avoidance of doubt, any holder of $LXB can also unwrap back to Dai and remove the token from governance under the LexDAO Banknote mechanisms.

The $LXB token contract can be found here. What does that mean? The code is there for review to make sure that a user is interacting with the right smart contract: https://etherscan.io/address/0xdab9050983202fb4d9941e010df660376fa6726f#code

In the meantime, make pull requests to the source code on the LexBank repository, join the lively discussion in lexDAO chat, and build on the rapid effort to move legal assets to distributed networks like Ethereum and achieve a sound $LexDollar (to be continued…).

⚖️ Carpe Veritatem ⚔️

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