Introducing the WENWEN Protocol V2

8 min readAug 23, 2021

Decentralized Finance is referred to as DeFi, which is a financial application ecosystem developed with blockchain technology. The beauty of DeFi is that it does not rely on any centralized entity to provide credit intermediation or endorsement. There are no restrictions on access, anyone with access to the Internet can participate, and no third party can block or reverse any transaction. DeFi aims to provide a transparent, open-source, permissionless, and decentralized financial environment for everybody worldwide, and to achieve that goal, here enters stablecoins.

Stablecoins have started to enter DeFi as a major primitive in the past few years and are widely used. It is designed to peg its value to another asset with monetary attributes that allow users to cheaply and rapidly transfer assets around the globe in a decentralized manner. Cryptocurrencies such as Ether (ETH) and Bitcoin (BTC) tend to suffer from high volatility and risk in their valuation. However, stablecoins overcome this drawback while retaining the technical advantages of the blockchain crypto asset, the benefits of security, and privacy during asset conversion. At present, the most common three types of stablecoin in the market are: fiat collateralized stablecoin, crypto collateralized stablecoin, and non-collateralized algorithm stablecoin. Although the mechanism of fiat collateralized stablecoin is simple, the disadvantage of this stablecoin is that it is highly centralized and lacks transparency. While crypto collateralized stablecoins are more decentralized than fiat collateralized stablecoins, over-collateralization reduces capital efficiency and is prone to liquidation risks when collateral asset prices fall rapidly. While many uncollateralized algorithmic stablecoins offer highly trustless and scalable models, the problem with algorithm design is that their mechanisms are often too complex to guarantee the stability of price and withstand the test of the market.

Only truly decentralized, fair, highly liquid, and scalable, firmly pegged stablecoins can achieve the goal of DeFi. Therefore, we are excited to introduce the WENWEN Protocol V2, a decentralized algorithmic stablecoin inspired by the central bank model, and aim to provide a highly scalable, decentralized algorithmic currency without collateral.

The WENWEN Protocol V2

WENWEN Protocol takes inspiration from the central bank model in the real financial world. It attempts to design a protocol that stabilizes the stablecoin’s peg rate through open market operations (market-making) via a simple and effective “algorithm-central bank mode. The WENWEN Protocol V2 introduces new functions, including the ability for users to accumulate their rewards and claim them within one click. Also, users need to stake their SHAREN to participate in the additional issuance mechanism to receive rewards. In addition, combined with innovations including the dual token system and multi-stablecoin pairs to provide a highly scalable, decentralized algorithmic stablecoin that does not require collateral

Stabilization Mechanism

The protocol proposes an algorithmic central bank model to stabilize the price. However, utilizing the central bank model does not imply centralization. Instead, the protocol’s smart contracts control all funds raised in the vault during the genesis period, including the initial tokens issued. The Protocol Controlled Value (PCV) is only used to add liquidity and stabilize the price, which cannot be taken out of the vault. The vault acts as the central bank in the protocol, stabilizing the price through repurchase and additional issuance.

The information of the vault:

Repurchase

The protocol provides liquidity through the Uniswap Bonding Curve, and users can purchase WENWEN through trading pairs (such as WBTC-USDN) on Uniswap. If the price of the WENWEN has deviated from its peg, the system vault will act as the central bank to stabilize prices through repurchase.

Using USDN as an example:

If the USDN price is higher than $1, the vault will use its own USDN to buy back the WBTC, increasing the USDN supply in the liquidity pool and bring the price back to the peg.
If the USDN price falls below $1, the vault will use the WBTC owned by the vault to buy back the USDN to decrease the USDN supply in the liquidity pool and bring the price back to the peg.

The protocol will also allow other users to arbitrage the profit from the price dislocation in order to bring the price back to the peg and earn a profit in return.

Using USDN as an example:

If the USDN price is higher than $1, users can sell their USDN at a higher price
If the USDN price is less than $1, users can purchase the USDN at a lower price.

The repurchase mechanism is the simplest and quickest way to adjust the short-term stablecoin price fluctuation.

Additional Issuance Rewards

When the demand for the stablecoin is in a long-term expansion or contraction phase, the protocol will adjust the price by the additional issuance reward mechanism to stabilize the price. The WENWEN Protocol uses the quantity theory of money to stabilize the price through monetary expansion and contraction policies. In addition to the stablecoins, WENWEN has also introduced a governance token, SHAREN, the non-stable token in the protocol. The WENWEN stablecoins have similar characteristics to convertible bonds, while SHAREN has similar characteristics to convertible shares. Holders of the tokens can claim pro-rata rewards. WENWEN stablecoins and SHAREN play an essential role in the additional issuance mechanism. When the stablecoin price fluctuates, instead of simply burning stablecoins to shrink the supply, WENWEN encourages users to buy and hold stablecoins by minting the same value of SHAREN to distribute as dividend rewards. If the stablecoin price is deviated by more than 1%, the vault will stabilize the price by expanding or tightening the money supply. Currently, users have to stake SHAREN or stablecoins to participate in the additional issuance to receive rewards.

Take the USDN as an example:

If the USDN price is higher than $1, holders of SHAREN will receive USDN dividends, the supply of USDN will increase.
If the USDN price is less than $1, holders of USDN will receive SHAREN dividends. Users can use SHAREN to purchase USDN, which increases the demand for USDN.

Since the total amount of tokens issued at the genesis is fixed, the additional issuance mechanism is an essential means to expand the supply of stablecoins. In addition, this mechanism will also create arbitrage opportunities, where users can choose which tokens to trade and hold based on the price deviation. Thereby this mechanism also promotes the stability of the stablecoin’s price.

Dual Token system

WENWEN Protocol has introduced a dual token system to improve the WENWEN Protocol ecosystem. The protocol has introduced the non-stable governance token SHAREN. Since users find it valuable to hold stablecoins due to its stability, it is also beneficial to hold SHAREN, as holding SHAREN is equivalent to holding WENWEN convertible shares, and it has two main functions:

To participate in the community governance vote.
To receive stablecoin dividend rewards.

To some extent, the price of SHAREN and the price of USDN are pegged to each other, but the vault does not actively intervene in the price of SHAREN, nor will it issue SHAREN at will, this causes the price fluctuations of SHAREN to be much higher than that of USDN. Meanwhile, SHAREN is also used to stabilize the stablecoin price. As the number of SHAREN grows, holders of SHAREN will not only receive dividend rewards continuously but also earn profits through arbitrage opportunities.

The allocation ratio of SHAREN after genesis:

Variety of Stablecoins

WENWEN Protocol will issue WENWEN stablecoins pegged to different fiat currencies for users’ convenience. Currently, the protocol has issued three stablecoins, namely the USDN, JPYN, and EURN, which are pegged to the US dollar, Yen, and Euro, respectively. Over time, more currency pairs will be issued depending on the community demand, including stablecoins pegged to GBP, AUD, CHF, and KRW in phase II and RUB, CAD in phase III. Variety stablecoin pairs help form the foundation to achieve DeFi’s vision of global interoperable financial access.

The price and total supply of each stablecoins are shown in the table below, the prices show that WENWEN stablecoins can maintain within the peg for most of the time:

Liquidity Mining

The protocol initiated the liquidity mining project to encourage users to participate in developing WENWEN’s ecosystem and improve the liquidity of stablecoins. After genesis, 70% of the SHAREN in the protocol will be distributed to liquidity providers as mining rewards. To earn mining rewards in return, users only need to add liquidity to the WENWEN stablecoin trading pairs on Uniswap and stake LP tokens in the protocol.

The current APR for liquidity mining is impressive, which encourage users to join early for a higher return:

WENWEN Protocol V2 and the vision of future

The WENWEN Protocol V2 utilizes the idea of the quantity theory of money in traditional economics and integrates with the algorithmic central bank model to stabilize the currency price and combined with the innovation of the dual token system to support the protocol. At the same time, it also introduces a variety of stablecoins to maximize the attribution of monetary currency. In practice, WENWEN Protocol expects to expand gradually, guided by the actual demand for stablecoins, and provide more stablecoin pairs and application scenarios to meet the users’ needs. After genesis, WENWEN stablecoins has shown strong stability with impressive liquidity mining APR that allows users to obtain the stable value of the stablecoins meanwhile generate a high return by liquidity mining. The ultimate goal of the WENWEN Protocol is to provide a collateral-free, highly scalable, decentralized algorithmic stablecoin.

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