To WTZ Or To Ctez, That’s The Question
In this piece, Allen Walters explores Ctez and WTZ on Tezos. He looks into their purpose, some of the differences in design, and how they both function in Tezos DeFi.
Image courtesy of the Tezos.com Illustration Library.
Ctez and WTZ
Two wrapped XTZ tokens launched lately: WTZ and Ctez. Both serve the same purpose, but the design is quite different.
Traditionally, everyone that holds XTZ can either bake or delegate their XTZ and earn staking rewards. Around 6% compound interest on your XTZ is not a bad return if you intend to hold XTZ for a longer period of time.
Since Decentralized Finance (DeFi) applications have been introduced on Tezos, other opportunities have entered the stage to earn yield.
You can earn yield in several different ways through DeFi, but buying into DeFi projects means you exchange XTZ for other tokens. This means you’ll miss out on 6% staking rewards.
But what if you could have your cake and eat it too? Enter the world of DeFi while simultaneously earn 6% staking rewards on the XTZ that you invested?
In some applications you don’t have to make a choice between 6% staking rewards on your XTZ, or other yield opportunities.
Several stablecoins like kUSD and uUSD allow you to provide XTZ as collateral and mint kUSD or uUSD.
With this type of collateral the lending applications allow you to continue to earn staking rewards on the XTZ that you have provided.
Wrapped XTZ tokens extend that idea to a broader use-case. By providing XTZ as collateral, you mint wrapped XTZ while your collateralized XTZ continues to earn staking rewards.
The wrapped XTZ can be used to step into the world of DeFi and never lose out on a single cycle.
If you sell your DeFi position again and move back into XTZ, you can burn your wrapped XTZ and redeem the XTZ that you put up as collateral including your additional staking rewards. Yes, you can have your cake and eat it too.
But it’s important to understand how both wrapped tokens work because there are important factors and risks to take into account if you want to interact with them.
WTZ is an XTZ wrapper provided by Crunchy Network. The XTZ – WTZ wrapper contract is a decentralized way to wrap your XTZ and mint WTZ on a 1:1 ratio.
The XTZ that you submit to the wrapper contract is deposited in a common XTZ pool, so this is not a personal vault/ pool and anyone that owns WTZ can burn WTZ and redeem XTZ.
There is no liquidation in the WTZ protocol. The circulating supply of WTZ is always backed for 100% by redeemable XTZ.
The XTZ in the pool is delegated. That way, staking rewards are earned and the amount of XTZ in the pool increases at about 6% per year per WTZ that is minted.
To make sure you will profit from those rewards, the value of WTZ increases at a 6% rate per year too. So the rate at which you burn WTZ and redeem XTZ after a year, is about 1:1.06.
This results in the fact that if you wrap 100 XTZ for WTZ on January 1st 2022, you’ll be able to redeem ~ 106 XTZ on January 1st 2023: your XTZ + 6%. The minting ratio always remains 1:1. (Minus a small fee for the WTZ protocol.)
Simplicity is the strength of WTZ. As a result, anyone that obtains WTZ can redeem XTZ with that WTZ. And the exchange rate is always predictable.
WTZ – XTZ value on Crunchy is always as it should be and not influenced by ask and demand. (This is different if you trade WTZ for XTZ on a DEX, where the price IS influenced by ask and demand and will likely not always be 1:1).
WTZ is mostly used on Spicyswap. Spicyswap is a DEX which does not support XTZ token pairs, which means that all trades that interact with XTZ values are made in WTZ.
Arbitrage between other DEXes sets the record straight and as a result, the WTZ value on Spicyswap resembles XTZ value almost exactly.
Ctez works differently. Ctez is used on PlentyDeFi. The Ctez protocol works with individual vaults. This means that anyone that wants to mint Ctez, needs to open a vault and deposit XTZ as collateral.
XTZ in these vaults can be delegated and earn staking rewards.
Ctez actively persues a 1:1 XTZ:WTZ value level through an algorithm, that sets a target price to drive Ctez value as close as possible to a 1:1 XTZ ratio. If the target price changes, then so does the collateral utilization ratio.
If the collateral ratio changes, it can cause vaults that have not kept enough margin in their collateral management to open up for liquidation.
To prevent liquidation, users will need to burn Ctez or add more XTZ as collateral to keep their vault’s collateral ratio on a healthy level.
The Ctez peg is maintained by an economic mechanism called ‘drift’. A full description of drift and how the Ctez peg is maintained is best explained in this Github Repo.
This way supply and demand is influenced and the value is constantly directed towards a 1:1 XTZ value ratio.
When minting Ctez, it’s extremely important to understand these factors so you can manage your collateral ratio responsibly and manage the risks that are involved with possible liquidation. When liquidated you will lose XTZ.
Pros and Cons
Both wrappers have pros and cons.
The simplicity of the WTZ design is its strength. It’s very straightforward, anyone can burn and redeem WTZ for XTZ which guarantees holders the value of WTZ as a token.
The DEX value on the market on the other hand, depends on the market. There are no additional tools to drive the value back to a 1:1 XTZ value if it moves off course.
The fact that anyone can redeem or mint WTZ, allows anyone to take advantage of arbitrage opportunities, which causes a natural peg to XTZ value in the market. WTZ value on Spicyswap has been very stable since launch.
The more complex Ctez design includes algorithmic pressure to peg Ctez value to a 1:1 XTZ value, which is a plus.
When buying Ctez on a DEX it’s important to realize that you can only burn Ctez and redeem XTZ if you have a Ctez vault and minted enough Ctez in the first place.
This means that for many users, you fully depend on the market value and liquidity levels on the DEXes that trade Ctez pairs.
That means that long-term holding can bring a certain amount of risk.
On the other hand, the fact that Ctez value is pushed towards a 1:1 XTZ ratio through its algorithm, lowers the risk of devalued/ overvalued market value of Ctez.
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