Baki agent safety: An introduction to our mechanics that secure your liquidity
Following our announcement of Baki, an infinite liquidity FX exchange for African currencies. I wanted to take some time to delve deeper into the benefits that Baki provides regarding safety mechanics and processes for new users, as well as the broader economies it is targeted to directly impact.
Infinite Liquidity at the Central Bank Rates
The key benefit Baki provides, and central to its architecture, is the ability to offer infinite liquidity at the official conversion rate. This is a significant pain point for any business trying to operate an intra-African trade network. The key challenge found in Nigeria, and other economies on the continent, is that limited access to official central bank rates has caused a fragmentation of liquidity and the growth of parallel rate markets that trade at a significant premiums to the central bank rate. Businesses that require to enter or exit local currency positions can be significantly constrained in terms of the liquidity they are trying to source and might be subject to additional spreads to settle a larger transaction. As of now, the Nigerian government has aimed to quash this liquidity disparity by merging the central bank rate with the parallel street rate, however the public is yet to be presented with evidence that future disparities between rates are an impossibility.
By creating a synthetic asset that can be traded in and out of at the central bank rate, the access to the exclusive exchanges is democratized and made entirely permissionless. Moreover, the architecture of Baki allows for infinite liquidity, meaning that if a unit of zUSD exists it can always be converted for the equivalent value in any of the supported currencies. This directly addresses the issues that arise from the fragmented liquidity in the available models currently. Our Baki agents can be rest assured that through this mint and burn mechanic, that there will always be liquidity to trade between currencies, especially at times of extreme volatility.
Denomination of assets on-chain in local currencies
A second key benefit for our agents who utilize Baki, is that it provides the ability to natively quote assets in local currencies on chain. This opens the opportunity for exchanges to price assets natively in local currencies, forgoing the requirement of either fiat-priced on-ramps or dollar denominated assets.
Moreover, this addresses one of the key critiques of crypto, that it results in the dollarization of currencies taking monetary power away from domestic central banks. This is especially important when one considers that most commodities are priced in USD. Therefore any local purchaser of commodities is exposed to the combination of both the commodity price movements and the movement of the dollar. Therefore, even if a commodity does not experience any price movement, but the USD to local currency rate fluctuates, a trader will be impacted by these changes. Baki re-instills the power of local pricing entirely on-chain in a fair and permissionless manner for our baki agents. This will serve as the cornerstone allowing for the development of more advanced structured products that can be denominated in local currency such as currency options or forwards.
Scalable
Additionally, another key benefit of being a Baki agent is that Baki is infinitely scalable. Infinite liquidity can be provided using nothing but a reference price to convert from one currency to another. This can be expanded to commodities, or even more advanced products such as currency strength indices (think a tracker that follows the strength of the US dollar against a basket of African currencies). Baki can theoretically include any type of currency or asset should the reference price be provided.
Single access point
The key issue associated with any multi-currency stable coin system is the requirement that each currency requires liquidity to be seeded individually. This fragments the liquidity, which in turn requires additional capital to be deployed to provide the depth across all currencies. Since any zToken currency can be converted for the equivalent value in another zToken, means that only a single zToken needs to be available on exchanges (decentralized or otherwise). Baki only requires external liquidity on the zUSD token. This simplifies the pegging mechanism as 1 zUSD only needs to equal 1 USDT, USDC, or cUSD on any exchange for the peg mechanisms to work correctly.
Robust pegging mechanism
Lastly, the most important part of Baki is that it ensures the peg of 1 zUSD = 1 USD. This is done through a robust mechanism that has been battle tested by industry protocols such as Maker DAO, Liquity and Abracadabra. Fundamentally we need to understand that there are two markets for zUSD, the primary market and secondary market.
The primary market is the minting and redemption mechanisms available to minters. This mechanism will always assume that 1 zUSD = 1 USD. Therefore, whenever users mint or redeem their zTokens, the protocol will treat them as equivalent to 1 USD. The secondary market refers to any other market zUSD is available on such as DEXs, CEXs or lending protocols. These depend on the supply and demand for zUSD. The inter-dependence of the two markets will form the core mechanism to ensure Bakis peg.
For example, should the zUSD trade above the peg (i.e. zUSD > 1 USD) on a secondary market, since the protocol implicitly assumes that 1 zUSD always equals 1 USD, minters have the incentive to mint additional tokens and sell them into the market to earn the additional profit. Alternatively, should zUSD be trading below the peg, minters are incentivized to buy back zUSD at a discount and redeem it to reduce their debt position for less than the implicit value. The zUSD availability will expand and contract dependent on the secondary market price and the primary market will always offer the par value when being interacted with.
Conclusion
Baki is a significant step in the DeFi space as it finally offers a robust, scalable and targeted solution to some of the biggest challenges that African businesses face. By building a product specifically focused on solving real world problems, we are proving that on-chain solutions have a role to play to help provide 21st century solutions to 21st century problems.
Our agents can be rest assured that Baki has been designed to save income by minimizing transaction costs, as well as saving agents significant time delays that would otherwise be experienced through traditional processes.
Welcome to Baki. We are thrilled to have you on board. Please check out our testnet platform available at: https://baki.exchange to see how Baki could improve your processes with working capital.
