"DAI" on Bitcoin? A brief review of the first Bitcoin native stablecoin YU

As the first Bitcoin native stablecoin YU, @yalaorg announced a round of $8M Seed round of financing led by @polychaincap and @etherealvc last night, officially announcing its grand vision of leveraging the BTCFi liquidity yield market through stablecoins. What do you think of what Yala is doing? It is a bit like Ethereum's "DAI moment". Yala intends to bring a "YU moment" to the BTCFi ecosystem. Next, let me briefly talk about my understanding:

1) If I remember correctly, the last time these two companies led the investment was Eigenlayer’s seed round. Yala’s investors this time also include Galaxy, Anagram, Amber Group, etc., which is considered a more serious financing - most of the money was from first-tier American institutions.

2) The narrative tide of BTCFi has been surging. Yala tried to use "stablecoins" with high liquidity and stability as a starting point to meet the possibility that users can obtain some liquidity to participate in the DeFi ecosystem without selling native BTC.

Its positioning can be simply understood as MakerDAO, which ignited the spark for Ethereum DeFi by building "DAI". Yala's stablecoin YU is very similar to DAI in design concept.

Yala uses native BTC as collateral, generates the tradable stablecoin YU through over-collateralization, and controls the supply of YU through dynamic pledge rate adjustment and arbitrage space around the liquidation mechanism, ultimately stabilizing its price at around $1, thus becoming a unified liquidity target across BTC chains, EVM chains, and other multi-chain environments;

3) How to do it specifically? Based on the white paper, I summarize the general logic as follows:

1. Yala uses a data indexing mechanism based on the Bitcoin mainnet. When users send transactions on the Bitcoin mainnet, they can directly include the target chain and receiving address information in OP_RETURN;

2. Users deposit native BTC assets directly to a specific address. Yala's Bridge system monitors these transactions and directly casts the corresponding yBTC (1:1) on the target chain. To avoid data fraud, there is a default waiting time of 6 blocks;

3. The generated yBTC can be pledged to the Yala protocol, and the over-pledge will generate the stablecoin YU. The pledge rate will be dynamically adjusted like DAI;

4. If the user wants to withdraw BTC, he only needs to create a Burn transaction on the corresponding chain. The destruction of yBTC triggered by the smart contract will be responded to in the Bitcoin mainnet pledge library. For safety reasons, the mainnet waits for 12 blocks, and BTC will eventually be returned to the Bitcoin address specified by the user.

It is not difficult to see that Yala uses the decentralized and tamper-proof data on Bitcoin as a basis, and uses it as a basis for cross-chain bridges to manage the mint token behavior of smart contracts on other target chains. Yala defines it as MetaMint. This method takes advantage of the native characteristics of the Bitcoin mainnet. Unlike Ordinals, which directly issues assets on the Bitcoin mainnet, this method is more about scheduling the operations of other integrated chains based on the data index generated by Bitcoin.

4) Due to the inherent limitations of the Bitcoin scripting language, this native BTC stablecoin asset minting behavior will reserve the necessary security block confirmation time to maximize security. YU faces the liquidation risks of high volatility, the execution requirements of the system in terms of dynamic pledge rates for liquidation, and the requirements for users to make timely adjustments to their positions.

In response to this, in addition to over-collateralization as a buffer against market fluctuations, Yala also stabilizes prices through stabilization rate adjustments, liquidation systems, and a series of market incentive operations.

For example, users need to pay a stability fee to generate YU. When the price of YU is lower than $1, appropriately increasing the stability fee can suppress the generation of YU, and vice versa. Another example is launching a series of incentive operations related to market making, arbitrage, and auctions to use the market's own energy to resolve the uncertainty caused by fluctuations. We will be able to find out more when Yala's test network goes online next week.

In general, the BTCFi track tells the story of "earning interest", from the secure consensus output of @babylonlabs_io, to the construction of the ZK general protocol framework of @GOATRollup, to the unified liquidity abstraction layer promoted by @SolvProtocol, including Yala's attempt to prosper the underlying logic of DeFi infrastructure through stablecoins. The entire BTCFi market is becoming more and more mature, and it is worth looking forward to more in the subsequent market.

Yala is collateralized with native BTC and overcollateralized to generate the liquid stablecoin YU, which may be a sign of stability!