Pool Shares

Directly contribute risk capital to the JuiceDollar system to get JuiceDollar Pool Shares (JUICE) in return.

Reserve Pool Shares

JuiceDollar Pool Shares (JUICE) are shares in the equity reserve pool of the JuiceDollar system. Being a JUICE holder is similar to being a shareholder of a bank. As the JuiceDollar system makes profits through fees or liquidations, the price of the pool shares is automatically adjusted upwards. Likewise, when risks materialize and the reserve pool incurs a loss, the value declines. They can be minted at any time and redeemed immediately (with only a one-block delay to prevent flash loan attacks). Over time, reserve pool shares that are not moved accumulate votes. Shareholders with at least 2% of the votes gain veto power.

Economics

Anyone can create additional pool shares by depositing reserve capital at any time, or redeem them immediately (with only a one-block delay to prevent flash loan attacks). Therefore, an important design consideration is the pricing mechanism for pool shares. As having a price implies having a valuation, this boils down to evaluating the JuiceDollar system.

Proportional Capital Valuation

In an approach inspired by the research paper "The Continuous Capital Corporation (opens new window)", the JuiceDollar system evaluates itself at a constant multiple of its capital. This multiple is set to ten (VALUATION_FACTOR = 10). So if there is 1 million JUSD in equity capital K, anyone can subscribe to new pool shares at a valuation of 10 million JUSD, or also redeem old shares at that valuation.

Equilibrium

Consider again the example with 30 million JUSD in outstanding mints and an interest of 5%, leading to a reserve inflow of 1.5 million per year. Under these circumstances, rational market participants will value the entire pool at 30 million JUSD and therefore buy additional pool shares until the valuation hits 30 million JUSD. With VALUATION_FACTOR = 10, this valuation is reached at a reserve pool size of 3 million JUSD, leaving 27 million JUSD in circulation that can be used for other purposes.

This is essentially fractional reserve banking with a target reserve ratio of about 10%. In contrast, the tier 1 equity capital of modern banks is usually less than that, so the JuiceDollar system has comparable or higher reserves. However, unlike in the traditional banking system, this reserve requirement is not strictly enforced by a regulator, but more like a carrot that attracts the equilibrium towards the reserve target.

If the effective interest at which new positions can be opened is at 5% and the reserve is below the target of about 10% of the outstanding balance, then it is possible to do interest arbitrage by minting additional JUSD at an interest of 5% per year and using those to buy pool shares that yield maybe 6% per year. The opposite is the case if the reserve is higher than the target. In that case, minters should think about selling pool shares to repay their debt (if they are able to).

This leads to the following rule of thumb: if the JUICE market cap is higher than the market cap of JuiceDollar, then that means that the market participants are betting on the system to grow. If the JUICE market cap is lower than the JuiceDollar market cap, then the market is signaling that it expects the JuiceDollar system to shrink.

Limits to Capital Efficiency

What if someone creates a clone of the JuiceDollar system with a higher valuation factor (e.g., 20x, targeting 5% reserve)? Would they be able to offer a better deal thanks to better capital efficiency? Here, one needs to be aware that there is a trade-off. It is certainly more attractive for those who mint some JUSD to buy pool shares and dump the rest of the coins onto the market. However, one needs to be aware that this implies that there is a buyer for the other portion of the JUSD to keep the system in equilibrium. These buyers are typically users that hold JUSD for transactional purposes. And to them, stability is key. But stability suffers if one aims for an overly ambitious level of capital efficiency, making the clone less attractive for transactional purposes. It is hard to tell where exactly the right equilibrium is, but this is not a race to the bottom where the system with the lowest capital requirements automatically wins. JuiceDollar's choice of VALUATION_FACTOR = 10 (targeting ~10% reserve) represents a balanced approach that provides adequate stability while still allowing for seignorage gains.