The online platform economy has enabled small startups to scale to large tech giants, based on one counterintuitive dynamic: they do not own any of the inventory that makes up their networks. The most classic examples are Uber, which does not own any of the vehicles in its fleet, and Airbnb, which does not own any of the rooms that dot the platform. Using the power of the market, these companies are able to match those offerings with those in need of a service, whether it be a ride downtown or a place to crash. Unlike traditional organizations burdened with logistics such as maintenance, licensing, and unforeseen circumstances, they can instead focus on improving their technology, user experience, and efficiency for their users, which ultimately makes them infinitely more scalable.

The world onchain has a similar dynamic, those looking for yield and those delivering it, and the latter is full of actors and protocols that tout promising APYs through their own strategies. Yet single yield strategies on their own, whether leverage from CDP, interest from T-Bills, or yield through market strategies such as the basis trade, all run into the problem of delivering at scale.

A Tale of Two (Limited) Designs

Legacy projects with endogenous designs rely on the demand for usage on platforms. For lending markets and perps, this is the willingness of users to leverage. For token flywheels, this is having new investors buy governance tokens. If there is no demand for these platforms, whether its for leverage or tokens, then the supply liquidity will cease to earn yield. It is not difficult to see that this design resembles an Ouroboros, the mythical snake that consumes itself, as these projects cannot self-perpetuate beyond themselves.

For newer exogenous strategies, protocols have continually asked the wrong question: what strategy will scale the most? The reality is that no strategy can infinitely scale forever. As alpha dries up, all strategies eventually become obsolete and our brightest minds end up going back to the drawing board.

So what questions should stablecoins be asking instead? As a nexus of capital formation, stablecoins should instead ask how to allocate capital and how to guarantee user protection. For stablecoins to be successful, crypto needs a stablecoin with flexible and secured strategies.

Enter CAP

CAP is the first stablecoin protocol to outsource yield generation in a programmatically and fully covered manner.

Key Stakeholders in CAP

At the core of the CAP system are three separate actors: minters, operators, and restakers.

• Minters are the stablecoin holders who hold cUSD, which are always redeemable at 1:1 with the underlying collateral of USDC/USDT.
• Operators are agents who have a competitive advantage in performing scalable yield-generating strategies. Operators come in all different shapes and sizes, such as banks, HFT firms, private equity shops, RWA protocols, DeFi protocols, and liquid funds.
• Restakers are pools of locked capital that gain use of their restaked ETH by providing shared security to operator activity, thereby protecting stablecoin holders.

CAP Mechanics

CAP’s smart contracts detail the rules under which all actors can participate in the protocol, which include immutable requirements, penalties, and rewards.

1. Stablecoin holders deposit USDC/USDT to mint CAP’s stablecoin cUSD 1:1, which they can either stake to earn yield or use as dollar-pegged stabelcoins. cUSD is always fully redeemable.
2. A known institution, such as an HFT firm with a hurdle rate of 40%, chooses to enter into CAP’s pool of operators. They intend to draw a loan from CAP and use it as part of their strategies.
3. In order to become an operator, the institution must first be whitelisted into CAP and then convince restakers to delegate to them. The value of the delegation limits how much capital operators are able to access. Once the institution is “covered” by delegations, they can withdraw USDC from the collateral pool to execute their proprietary strategy.
4. By the end of the loan, the institution distributes yield to stablecoin holders according to CAP’s benchmark yield. They also pay the restakers by the premium they are charged. If the benchmark yield is 13%, and the premium is 2%, the institution gets to keep the delta, which would be 25% in this example.
5. The stablecoin holder that staked cUSD now accumulates interest from the operator’s activities, which can be realized at any time.

Incentive Alignment

It is not sufficient to know only what an actor does but why they are incentivized to participate in CAP.

Stablecoin holders

• Earn yield regardless of market condition at any size: Given CAP’s market-set rates, users no longer have to constantly shift between protocols as they become obsolete.
• Safety: we are tired of dangerous CeFi and DeFi applications that promise yield but always result in losing all user funds. Their principal is protected not by trust but by the immutability of smart contracts and collateral.

Operators

• Additional capital with no cost basis: This dynamic increases the cut of yield market makers receive compared to their current LP model, grows TVL for DeFi protocols, adds AUM for private credit funds, and increases the scope of possibilities for cross-domain arbitrageurs.

Restakers

• Lack of use case for locked ETH: Restakers have extremely limited use for their ETH because it is locked on the L1. They restake this ETH in order to delegate to operators that allow them them to participate in AVSs like CAP.
• Proactive fee in blue chip assets: CAP gives full autonomy to restakers to charge the premiums they assess to sufficiently compensate for the risks they take. The premium is paid out in blue chip assets like ETH and USD, rather than inflationary governance tokens or offchain points programs. As such, the yield for restakers grows infinitely, unbounded by project market caps.

Risks

Novel opportunities do not come without risk, which is why it is important to understand the risks inherent to CAP.

• CAP is built on shared security marketplaces like EigenLayer. As such, it is exposed to their platform risk.
• The price of underlying assets: If USDC or USDT depeg, then users are exposed to these changes of price. Note that they are already exposed to this risk without CAP.
• Third-party bridge risk: if users wish to interact with cUSD from any chain, they will be exposed to the risk of third-party bridges that transfer cUSD from Ethereum. CAP is not exposed to third-party risks.
• Smart contract risk: CAP does not rely on custodians, regulations, or other human systems to protect users. Code protects cUSD holders in its unbiased adherence to CAP’s rules. As a result, users are exposed to the risk of this audited smart contract logic.

Conclusion

When each actor, minter, operator, or restaker, contributes value to CAP, they unlock value that would otherwise not be accessible to them. Depositors earn covered yield, operators access capital at zero cost basis, and restakers earn yield from delegations.

To achieve scalability for yield-bearing stablecoins, we must harness the power of efficient markets instead of relying on centralized teams. Like with markets in other industries, this results in the best outcomes for parties due to competition.

If you have any questions or want to follow our journey, you can join our community Discord here: https://discord.gg/XAYrRY6hfB