Alpha Report: Lybra Finance 2

Governance, LayerZero, new mechanisms, and collaterals.

Lybra's V2 brings a lot of novelties, let's explore them together.

Lybra is a borrowing service that aims to provide yield-bearing, secure, and decentralized stablecoins.

There are some aspects I will not cover in this report, so I invite you to check out the one about Lybra V1 if you are not familiar.

Lybra introduces a new stablecoin, peUSD. It is a stablecoin derived from eUSD, following the OFT standard of LayerZero, and it brings along with it use cases in DeFi.

peUSD can be minted using eUSD (1:1) or borrowed with non-rebase LSTs such as rETH or wstETH.

Unlike eUSD, which follows a rebase mechanism, simply holding peUSD does not entitle you to any yield. The collaterals used to mint or borrow it will continue to accumulate rewards.

If you use non-rebase LSTs to borrow peUSD, your LSTs will continue to accumulate value over time. You can benefit from this when you retrieve them upon closing your position. You will be charged a fee of 1.5% on the borrowed amount during repayment.

If you use eUSD to obtain peUSD, the yield from eUSD will be accumulated in your "position." When you reverse the process and convert your peUSD back to eUSD, you will receive your initial eUSD + the accumulated yield.

Now, there are many possibilities for you:

Feel free to comment on your best strategies!

Lybra maintains its primary goal of providing yield-bearing stablecoins. The expansion of the collateral range is focused on ETH-based LSTs.

The LSTs are categorized into two types:

Each category of LST has its own vault, and each asset within a category has an isolated pool within the vault. The Minimum Collateral Ratio is maintained at 150%, but that of non-rebase LSTs can be adjusted to 130%.

The addition of new collaterals will follow a two-step process:

After the launch, adjusting the mint cap or removing a collateral will be subject to a DAO vote.

It is worth noting that some LSTs considered as top-notch (e.g., WBETH) will only need to pass the first step to be integrated.

The first two new collaterals will be rETH and WBETH. A third one, swETH, will be the first to undergo a DAO vote for onboarding.

There will be many more collaterals added subsequently, whether they are Rebase LSTs for minting eUSD or Non-Rebase LSTs for minting peUSD.

The different peg mechanisms are similar to those in V1.

However, there are, of course, some new ones.

When eUSD is used to mint peUSD, it is locked in a contract on the mainnet. These locked eUSD can be used during flash loans, allowing liquidators not to necessarily hold eUSD.

The protocol generates revenue through service fees. When the fee accumulation exceeds 1000 eUSD, the protocol evaluates the eUSD exchange rate relative to USDC.

If eUSD is 0.5% greater than USDC, the protocol will exchange eUSD for USDC to reduce the price. As a result, esLBR holders will receive rewards in USDC.

If the price of eUSD is not 0.5% higher than that of USDC, the eUSD will be exchanged for peUSD. esLBR holders will receive rewards in peUSD.

This fund is fueled by the eUSD obtained through the Bounty Program, which we will discuss later. The fund helps maintain the peg of eUSD, especially when it is above the peg.

In the first thread of V1, I mentioned that full liquidations can occur if the CR < 125%. I was mistaken.

Full liquidation can occur when the protocol's CR is < 150% and the individual CR is < 125%.

This still applies to eUSD borrowings.

However, for peUSD loans, even if the protocol's CR is > 150%, as soon as a position has a CR < 125%, it can be fully liquidated. (Actually, I was half wrong; I was ahead of my time haha)

$LBR is integrated into the LayerZero OFT standard.

esLBR holders see their income sources expand with repayment fees in peUSD and the arrival of bribes.

As mentioned before, each LST has its own pool. Each of these pools will be eligible to receive incentives. The governance power lies with the esLBR holders, who can vote on the direction of these incentives.

In summary, esLBR holders have the power to accept an LST as collateral, choose the mint cap, and decide if a pool will receive incentives. Lybra has implemented a bribing mechanism that allows protocols to incentivize governance power holders to vote on the direction of esLBR emissions.

You also have the option to lock your esLBR for a period ranging from 1 to 12 months.

This will boost your governance power (and therefore your rewards) (to be confirmed) as well as the rewards you receive on different incentivized pools.

The vesting period to convert esLBR into LBR has been extended from 30 to 90 days. You can bypass this duration (exit early) in exchange for a penalty ranging from 95 to 25%.

All penalties (in the form of esLBR) will be allocated to the Bounty Program.

From now on, to benefit from incentives in the mint pool (esLBR), you will need to maintain a dLP (Dynamic Liquidity Provisioning) of at least 5% in value compared to the size of your loan.

This means that you must hold a LBR/ETH LP staking position with a value equal to or greater than 5% of the size of your loan to benefit from the emissions in the mint pool.

If the value of your dLP position falls below this 5% threshold, emissions would then become available for purchase in the Bounty Program, until you return to the minimum dLP threshold.

This mechanism allows anyone to purchase esLBR with a 50% discount.

These esLBR tokens come from premature vesting exits and dLP, as mentioned earlier. Purchases can be made using eUSD (which goes into the stability fund) or LBR (which are burned).

The advantage of eUSD lies in the concentration of the yield of $300 million worth of stETH distributed to 170 million of eUSD, allowing eUSD to benefit from a very attractive yield (~7%).

Additionally, when you mint and hold eUSD, you receive esLBR tokens from the incentives in the mint pool.

In V1, esLBR tokens took only 30 days to be fully converted into LBR, and there were no restrictions on rewards (V2 ⇒ dLP ≥ 5%).

This strategy was therefore very easy to implement, lucrative, and not very restrictive. (Isn't that right, Sifu?)

Undoubtedly, this contributed to the strong growth of eUSD.

With V2, this strategy becomes less profitable. Incentives will be shared among different pools, the vesting period will be 90 days, and incentives will only be obtainable with a dLP position ≥ 5% of the value of the loan.

To achieve equivalent returns, one will certainly need to perform loops with peUSD.

As you will agree, this changes the meta a bit.

It is clear that the selling pressure for LBR is reduced with V2, and holding LBR becomes potentially more interesting. But what about the use and growth of peUSD/eUSD?

The peUSD obtained through non-rebase LSTs is not unique in its kind.

Several borrowing services integrate LSTs and LayerZero. It will be interesting to see who will capture the largest market share in this stablecoin sub-niche.

Certainly, we will see emerging strategies. Perhaps it will be the eUSD/peUSD synergy that will make the difference. What do you think?

Lybra is not done with its V2 and has many more things to build.

Article posted @August 3, 2023