DUCA: Design

Programmatic Money & Reflexivity Protocol

DESIGN

This chapter covers a high-level overview of the design, which describes the overarching socio-economic principles that make DUCA a breakthrough innovation. The more technical details of the design, with more thorough explanations of the below-mentioned mechanisms, can be found here.

The Algorithmic Float section explains the origin of the value of DUCA and how this translates into its market value and stability. The token economy describes how the protocol substantiates this value and avoids the downfalls of previous algorithmic economies. From there, we cover each token’s value proposition, its value, and supply characteristics necessary for the protocol's functionality. We conclude with an overview of the protocol’s structure and governance.

ALGORITHMIC FLOAT

The DUCA Algorithmic Exchange Value is a fully dynamic, algorithmically self-adjusting exchange rate derived using two types of data sources: the foreign exchange (FOREX) data of the most traded currencies in the world and the official inflation data of corresponding countries. Combining the two allows for the calculation of the real exchange values between all currencies, which offers a better way to analyse each individual currency. There are two key objectives here: one, to discover the value and effective method to offset exchange value depreciation and, two, to establish a benchmark for global inflation. The monthly revisions of the underlying FOREX and inflation data influence the index’s composition, creating a fully responsive floating exchange value that maintains purchasing power.

The result is a new paradigm within currency exchange rate regimes we call Algorithmic Float. Where the current systems include pegging and managed float, the market value of Programmatic Money stems from its design and algorithms dynamically rebalancing the supply. Algorithmic Float is the key value reference of the protocol. It is an unmanaged, floating exchange rate independent of individual currencies or predetermined baskets of currencies, designed to minimise exchange value depreciation and maintain purchasing power.

The Algorithmic Exchange Value is expressed as a growth percentage based on the Special Drawing Rights currency of the IMF (SDR). Data analysis shows that the SDR has the lowest level of volatility when compared to all other currencies, offering the most stable available reference value to convey the DUCA Exchange Value.

STABILITY

DUCA is self-referential and manifests a real-world value through Algorithmic Float to achieve a fully free-floating stable exchange rate that does not depend on pegging to any fiat currency or baskets of currencies. Stability is not achieved by upholding a predetermined fiat price point for DUCA or any other native token of the protocol as is commonplace with stablecoin arrangements.

DUCA’s Algorithmic Exchange Value serves only as an internal reference value used across the protocol and its pools to adjust DUCA’s elastic supply and allow the markets to find the optimal price for DUCA. It is the market that determines the real value of DUCA and its volatility, which are beyond the protocol's direct control. When in equilibrium, the market value of DUCA equals its internal reference value. The protocol continuously aligns towards that objective through rebalancing the supply of DUCA and its other native tokens.

Achieving stability through money supply adjustment using reflexivity rather than a set value point is a dynamic process that comes with a natural latency. It offers a more sustainable protocol and value stability long-term. Reflexivity enables the power of the open markets to determine the real value of DUCA and become inextricably interwoven with its stability. It allows the protocol to embody and manifest the power of the open market in a manner truly befitting the essence of both capitalism and the blockchain.

REFLEXIVITY

The DUCA Reflexivity Protocol design provides no intrinsic value derived from anything outside the protocol, such as exogenous collateral. All value that the free open market ascribes to the DUCA Reflexivity Protocol and/or its native tokens is based on perception, which the protocol translates into value through supply, and the market affirms or denies through demand, resulting in the market value through price. This reflexivity, a continuous interplay between the market’s demand and the protocol supply, is inherently and perpetually out of balance, creating constant volatility in the capital flow by design.

The product of the Reflexivity Protocol is DUCA, Programmatic Money, which thrives on open market dynamics and is governed by transparent and credibly neutral rules and mechanisms, free from centralised influence and manipulation.

TOKEN ECONOMY

DUCA introduces a holistic approach to the token economy, enabling autonomy and integrity and ensuring the protocol's stability and functionality in perpetuity. Stability, in the context of the protocol and its native tokens, refers to maintaining a continuous capital flow throughout the system, ensuring liquidity under all market conditions.

It is a fundamental economic principle that when demand disappears, so does value. This is particularly problematic for self-referential algorithmic tokens, such as DUCA. Most experimental solutions to date include a dual-token design, failing to recognise or acknowledge the implications of the symbiotic relationship between these tokens, which sooner or later causes an inevitable collapse.

We propose a token economy based on three pillars to safeguard the workings of the protocol under all circumstances. First, a triple-token economy designed to break the aforementioned symbiotic relationship. Second, a holistic and sustainable approach to the incentive structure, with a pre-programmed rebase mechanism, which eliminates dependency on the market participants to stabilise the protocol. Last, a lender of last resort that allows the protocol to autonomously recalibrate within any market dynamic, free from external dependencies.

The DUCA economy relies on three native tokens (DUCA, DCM, and LPD), fulfilling independent yet necessary functions within the protocol. A rebase mechanism connects the tokens and their functions into an interconnected incentive structure. It enables the protocol to support itself and maintain stability regardless of market conditions and independently of actions outside the protocol.

The lender of the last resort is the protocol's stability token DCM. It ensures the integrity and continuation of the economy by recalibrating its supply whenever the supply of the native tokens is stretched beyond what the market can hold. DCM is designed to work in full support of DUCA, meaning that in critical situations, all demand is transferred from DCM to DUCA as a designated survivor because demand for DUCA sustains the protocol and drives demand for other tokens. If the market demand were to disappear for all native assets, the available value within the protocol would dissipate as well.

DUCA VALUE PROPOSITION

The value originating from Algorithmic Float is manifested through DUCA. DUCA’s exchange value is engineered to maintain real-world purchasing power and generate yield for DUCA holders through nothing more than token ownership. These attributes make DUCA a superior store of value accessible to all without the need for financial literacy, a cornerstone of financial inclusion and equality. Additionally, DUCA’s autonomous design means it can’t be confiscated, frozen, or rendered useless to its owner in any other way.

DUCA YIELD

DUCA generates added value for its owners, which is distributed as surplus DUCA. This yield is not a fixed or guaranteed amount but a variable percentage that relies on market conditions and dynamics. It is fully programmatic, meaning its distribution is predetermined, transparent, automatic, and credibly neutral. The yield is not produced through inflation of the supply but created using DCM in the Treasury Fund derived from the protocol's incentive structure to ensure stability.

The DUCA Yield is a product of the interplay between market dynamics and the protocol. It is designed to dynamically reflect how the market perceives the value of DUCA. As the demand for DUCA continues, yield decreases, eventually leading to a lower demand for DUCA, prompting a reduction in its supply, which, in turn, increases the yield again.

ELASTIC SUPPLY

DUCA does not have a fixed exchange value. Instead, it minimises volatility through elastic supply, which responds directly to changes in demand. Therefore, DUCA is stabilised through changes in supply and explicitly NOT based on changes in its market value. The market value of DUCA relies on reflexivity, meaning it is under the sole influence and authority of the open market. Since DUCA’s market value is not ‘pegged’ to the internal exchange value, it can significantly deviate from its reference as part of the design, enabling a truly free-floating exchange value.

The Algorithmic Exchange Value of DUCA serves as an internal reference for the protocol to adjust supply, making the value of DUCA independent of market demand fluctuations. Changes in demand lead to changes in supply, making the DUCA supply fully elastic and responsive to the market. The DUCA protocol always aligns the DUCA supply towards the internal reference value as the primary price-adjusting mechanism.

DCM VALUE PROPOSITION

The deflationary nature of DCM is one of the key aspects influencing its fundamental value. Demand for DCM is generated throughout the protocol, whilst supply is limited and only increases under predetermined conditions of growth. Every native token within the protocol requires DCM to be created directly or indirectly, next to additional demands for DCM following their creation. Minting DUCA requires an equivalent value in DCM, and after creating DUCA, the Stability Pool further requires an amount of DCM equal to the market value of the DUCA supply. The result is that for every DUCA, two DUCA worth of DCM is demanded by the protocol.

This highly deflationary nature of DCM, in combination with a supply that only expands through growth in market value, makes DCM token highly valuable, which balances out the risks and consequences that comes with its function as the stability token of the protocol.

STABILITY TOKEN

DCM is a utility token that ensures the stability of the protocol and, as such, can also be called a stability token. DCM is a rebase token, meaning the value for its owner is assessed not only through the market price but also via a potential supply change within the DCM-owner wallets. The two most dominant forces that govern this are the Stability Fee and the Treasury Fee, which are part of the incentive structure supporting the continuation of the protocol. DCM is also the protocol’s lender of last resort, upholding the minimum thresholds and driving demand for DUCA through DCM supply contraction when all other stabilising mechanisms are no longer able to produce the desired outcome.

The most extreme scenario is when all demand disappears from the protocol. In that situation, DCM, as the lender of last resort, must fully contract, effectively instigating a protocol reset. It does so by gradually reducing the total circulating supply of DCM on the open market to a predetermined minimum whilst simultaneously maximising yield to increase demand for DUCA. The outcome of this scenario changes the risk-reward profiles of each native token, creating a renewed starting point.

REFLEXIVE SUPPLY

The reflexive supply of DCM should be viewed from two angles. First is its limited circulating supply, which cannot be inflated. It expands gradually into a maximum circulating supply solely through the price increase following real demand. This price increase opens up an arbitrage opportunity that incentivises buyers to purchase DCM via the DCM distribution, increasing the circulating supply. The second is how the circulating supply can be divided between the DCM on the open market and the DCM that is present within the protocol and, therefore, not part of the circulating supply of the open market.

When the DCM market value goes below the Par Value, the DCM circulating supply is reduced through deflation. When the market value exceeds the All-Time High, the circulating supply increases until the maximum supply is reached; this ensures that the current circulating supply is limited and in alignment with market demand. The distance between the DCM value brackets is defined through the Fibonacci retracement levels, and the borders are adjusted via the Par Value calibration and DCM distributions.

The protocol uses these retracement levels to determine the amount of DCM that needs to move from the open market to the Stability Pool to reduce the circulating supply. The lower the DCM market value, the bigger the demand for DCM in the Stability Pool. Managing the capital flow within the protocol in this way ensures that the supply of DCM on the open market is in line and highly responsive to the actual demand, making it reflexive.

LPD VALUE PROPOSITION

LPD is the pool token of the Stability Pool, which holds DCM and DUCA. The Stability Pool ensures the over-collateralisation of DUCA with the liquidity provided by the LPD owners. The liquidity in the Stability Pool is part of DUCA’s stabilising mechanisms and incentive structure. This means it is subject to dynamic incentives and fees that prompt the market to increase and decrease liquidity. The LPD value and yields can be volatile and dynamic. Demand for LPD is algorithmically established based on the DCM market value to ensure the alignment of the protocol with market dynamics.

DYNAMIC TARGET SUPPLY

The default target pool size of the Stability Pool is 100% of the DUCA market cap in DCM, whereas DCM is valued against its market value. Consequently, the over-collateralisation in the Stability Pool is initially set at a standard 100%. The internal demand for DCM within the Stability Pool results in a dynamic target supply for LPD. The changes in either DUCA supply or DCM market value change the target supply of LPD. The additional criterion influencing the LPD supply is Clean Float.

The Clean Float is a fully automated, transparent, and credibly neutral mechanism that manages the capital flow between DCM and LPD by setting the target Stability Pool size through inversely correlated LPD and DCM incentives. The purpose of Clean Float is to align the circulating supply of DCM on the open market with market dynamics by adjusting the target size of the Stability Pool and, thus, the target supply of LPD. LPD ensures an always present demand and, therefore, an exit market for DCM.

Whenever DCM market value decreases, Clean Float creates the protocol demand for DCM, simultaneously safeguarding the over-collateralisation. The lower the market value of DCM, the better incentives and higher demand for LPD, which, in turn, decreases the supply of DCM on the market. The higher the market value for DCM, the lower the demand for LPD and DCM in the Stability Pool, increasing the DCM supply on the open market. An additional guardrail safeguards an absolute minimum pool size in case of sudden value depreciation or total market failure. The Stability Pool, therefore, is designed to never be emptied, so an under-collateralisation of DUCA is not possible.

DUCA-BACKED ASSETS

As a superior store of value that maintains its purchasing power and provides yields solely through ownership, DUCA is perfectly positioned to serve as collateral for a broad range of assets. DUCA can serve as a high-quality composable building block to substantiate the value of anything DUCA-backed across a variety of use cases and applications.

DUS VALUE PROPOSITION

DUS is a DUCA-backed native asset with an internal exchange value equal to 1 USD. It is backed by an asset designed to maintain purchasing power and outperform the USD. No dollars or dollar-based securities are used to substantiate its value, and as such, it could serve as a synthetic dollar. The supply of DUS is elastic and works in the same way as DUCA to stabilise value, where the protocol automatically adjusts the supply based on changes in the liquidity pools.

USD HEDGE

DUS has an internal value of 1 USD, which means it benefits from any exchange rate appreciation between the USD and other fiat currencies. However, when the USD value is under pressure, DUCA outperforming the USD generates additional yield for DUS owners. In this way, owners of DUS are provided with (partial) protection against the loss of value of the USD.

STAKE ESCROW RESERVE

The DUS Supply is backed by 102% of its value in DUCA. However, the fiat exchange value of DUCA may vary. The Stability Pool guarantees a 102% collateral in DUCA through a Stake Escrow Reserve (seDUS). Whenever the value of DUCA in the DUS Reserve decreases, the extra DUCA from the Stability Pool is added to the seDUS Reserve as a loan. Whenever the value increases, the seDUS Reserve is reduced, with excess DUCA sent into the Stability Pool. The Stability Pool and, by extension, the LPD owners act as the guarantor for the collateralisation of DUS, ensuring that it is not possible for DUS to get under-collateralised. Hence, only a very low percentage of over-collateralisation is required.

PROTOCOL STRUCTURE

The protocol consists of 3 subsystems: the DMM, AMO, and the Core Protocol.

The DUCA Market Maker (DMM) with integrated liquidity pools represents the only touchpoint between the protocol and the market participants. It alone allows entry and exit into the DUCA ecosystem and access to all its native tokens. The deep liquidity offered in the DMM is protocol-owned, ensuring safety and its continued functioning under all market conditions. By shielding the Core Protocol using the DMM, we achieve additional security and protection against market manipulation.

The Automated Market Operator (AMO) ensures the continuation and correct functioning of the protocol by managing the liquidity in the DMM. The AMO rebalances native token supplies between the DMM and the Core Protocol in accordance with the pre-programmed transparent rules and objectives of the protocol.

The core and heart of the protocol consists of the Stability Pool, the Reserve, and the Treasury. The Stability Pool, together with the Reserve, handles the minting and burning of DUCA and storage of DCM as endogenous collateral whilst the Stability Pool ensures structural and dynamic over-collateralisation of DUCA. Additionally, the Stability Pool lies at the intersection of other processes that manage fees and incentive structures to ensure the continuity of the protocol.

The Treasury includes the Treasury Fund, the DMM Fund, the Operating Fund and the Community Fund. It contains the protocol-owned tokens used for maintenance and to ensure the sustainable growth of the DUCA ecosystem. The Treasury Fund contains the DCM for DUCA Yield, obtained by extracting value from the protocol through the Treasury Fee, Seigniorage, and the Par Value Calibration. The DMM Fund contains the protocol-owned liquidity for the DMM provided through the DCM distribution and enables the business model of the protocol. The Operating Fund collects all yield and transaction fees from the DMM and handles the on-chain costs that the protocol requires to run, safeguarded by the Stability Pool through the Operating Fee. Any excess funds flow into the Community Fund, which supports the ecosystem growth through grants, incentives, rewards, airdrops, and bounties for the community, as well as marketing expenses and remuneration for members providing paid services.

SCALABILITY AND EXPANSION

The DUCA Reflexivity Protocol is a decentralised application built on Ethereum Mainnet rather than an independent blockchain or a secondary layer. In order to be future-proof in terms of scalability, DUCA is envisioned as a multichain solution, able to expand to unlimited chains and layers and become a native solution to each base layer over time. DUCA is designed to function independently on each chain and operate fully in accordance with the market dynamics of each individual chain.

This approach is a scalable solution to scalability. It avoids self-imposed limitations and ensures all options are open for future development, including multiple independent DUCA native layer 2 solutions, all the way to a native DUCA blockchain. The two aspects that remain fully chain-agnostic are the DCM maximum supply of 3.75B tokens and the DUCA exchange value based on Algorithmic Float.

GOVERNANCE

DUCA must establish a necessary level of integrity and autonomy to fulfil its function and produce the market trust required for continuous existence. It does this by establishing a censorship-resistant, fully automated, and transparent protocol, with all its mechanisms and functions clearly explained and verifiable by the participants. This level of operation based on complete automation and freedom from any third-party influence or manual operations is what we consider 'operational decentralisation'.

QUALITY

To enable maintenance processes and quality control, DUCATA becomes the protocol's Maintainer and initially holds centralised access to the codebase. DUCATA can make changes to the protocol upon the admins' agreement through a multi-sig. DUCATA, as the protocol’s Maintainer, brings knowledge and credibility to the process to safeguard the original vision, design principles, integrity, and overall quality of the protocol for the greater benefit of all.

The last step to achieve ‘full decentralisation' is introducing a community governance structure to decentralise the update-and-upgrade processes. The objective is to move towards an immutable codebase with increasingly fewer alterations as time passes as opposed to a continuous development process perpetually extending the protocol. The protocol functions ‘as is,’ and any changes only occur through a unanimous decision with the community as the final authority on every proposed alteration. This fully eliminates any centralised influence within the governance structure and allows DUCA to achieve complete decentralisation.