By Hover Labs
In February, Hover Labs launched Kolibri, an algorithmic stablecoin protocol on Tezos.
Since launch, we’ve seen incredible interest in the project. At current time, over 728 CDPs have been opened and over 1.4M XTZ (~9M USD) of value is locked in the protocol backing 1.2M kUSD.
We’ve also successfully tweaked economic parameters (the stability fee and debt ceiling) to bring the value of kUSD back to peg. For those curious, we publish and distribute metrics of the system.
Now that we’ve gotten relatively close to peg with the stability fee adjustments, our focus turns to utilization and price stabilization without just the stability fee. We drive that through mechanisms that drive buy-side demand for kUSD.
Today, we’d like to show off two initiatives in the space. We look forward to engaging with the community about these initiatives in our Discord.
Liquidity Mining with StakerDAO
StakerDAO is a cross chain assets factory, powering and investing in DeFi across chains such as Tezos, Cosmos, Algorand, Polkadot and Ethereum. StakerDAO recently launched STKR, a cross chain governance token. Holders of STKR can vote on proposals from the community.
Hover Labs has submitted a proposal to start liquidity farming on Tezos for kUSD, as well as wXTZ and STKR.
If the proposal passes, 250K USD of STKR tokens will be allocated to holders of kUSD who provide liquidity on Quipuswap. This temporary initiative helps us accomplish both of our goals.
Increased rewards for providing liquidity to a kUSD pair makes it more attractive for users to bring more depth to the order books. This in turn decreases slippage in trades, making kUSD a more viable and liquid asset to trade, increasing fees for LPs in the future after the incentive program ends. This also makes “liquidity providing” become a valuable use case for kUSD and a reason to buy and hold the asset.
We encourage all members of the Kolibri community to consider if they support this proposal and to vote on it. STKR holders can vote on the proposal on the STKR governance portal.
We’re also pleased to launch a Liquidity Pool for oven liquidations on our testnet and zeronet deployments today. The pool acts as a liquidity backstop that protects the collateralization of the Kolibri protocol.
The Liquidity Pool is open source, and available on testnet and zeronet today. The code is unaudited, please use with caution. With a successful reception from the community, Hover Labs anticipates launching a mainnet version of the pool shortly.
The liquidity pool provides another use case for kUSD. It also automatically trades on Quipuswap, driving trade volume, which increases fees for kUSD liquidity providers, and thereby makes providing liquidity more attractive.
How it works
The Liquidity Pool is a shared pool where users contribute funds in order to liquidate under-collateralized ovens.
Users deposit kUSD tokens in the pool and receive QLkUSD (Quipuswap Liquidating kUSD) tokens in return. The QLkUSD tokens entitle the holder to the original amount of kUSD tokens deposited, plus any additional kUSD tokens earned from liquidating ovens.
QLkUSD tokens are liquid and may be sent to other users or used in other applications. Any user who holds a QLkUSD may return the token to the pool and receive the associated kUSD at any time.
When an oven is undercollateralized, anyone may liquidate it, provided they have sufficient kUSD to repay the loan. When an oven is liquidated, the liquidator receives the collateral (XTZ) in the oven.
Any user can act as a liquidator and can initiate a transaction that will use the pooled kUSD to liquidate an oven. When an oven is liquidated, the pool receives XTZ, which should be worth more than the kUSD repaid.
The pool also pays a percentage of the received XTZ directly to the liquidator. This payment reimburses the liquidator for their transaction fees, and it rewards the liquidator for using the pool, rather than selfishly liquidating the oven themselves.
The pool then trades the remaining XTZ for kUSD on Quipuwap, a decentralized exchange on Tezos. The kUSD received in the trade are distributed ratably to all holders of the QLkUSD tokens, who will receive their portion of the new kUSD when they redeem their QLkUSD tokens.
An Illustrated Example
Let’s see how the liquidity pool works in practice!
Let’s assume the following:
- 1 XTZ is worth $5
- 1 XTZ may be exchanged for 5 kUSD on Quipuswap- Alice has contributed 5 kUSD to the liquidity pool
- Bob has contributed 5 kUSD to the liquidity pool
- The pool has 10 kUSD total (5 kUSD + kUSD)
Imagine that an oven is under collateralized, such that:
- The oven has 1 XTZ of collateral (worth $5)
- The oven has 3 kUSD of outstanding loans (worth $3)
- The oven's collateralization is thus 166%, below the required 200%
Charlie notices that the oven is undercollateralized and uses the pool to liquidate it. Then the following occurs:
- Charlie pays .008 XTZ as a transaction fee
- The pool pays 3.21 kUSD to liquidate the oven (3 kUSD in outstanding loans + a 8% liquidation fee from the protocol)
- The pool receives 1 XTZ for liquidating the oven
- The pool pays 1% of the collateral to Charlie, sending him .01 XTZ to cover the transaction fee and reward him for using the pool
- The pool swaps the remaining .99 XTZ on Quipuswap for 4.95 kUSD (.99 XTZ * 5 kUSD per XTZ).
- Charlie spent .008 XTZ and received .01 XTZ
- The pool now contains 11.74 kUSD(10 kUSD to start — 3.21 kUSD to liquidate the oven + 4.95 kUSD from the swap)
- Alice and Bob’s QLkUSD now give them rights to the new value in the pool, and they may redeem their QLkUSD for 5.87 kUSD (11.74 kUSD / 2)
Note: This example is for illustrative purposes only and does not constitute financial advice.
Users contributing kUSD receive several benefits for using the pool. First, they can work together to liquidate ovens larger than the collateral than any individual holder may have on hand.
Secondly, if users all competed to liquidate the oven individually they would be competing on who was the fastest and had the highest transaction fees. The fastest user with the highest fees would receive everything, while all other users received nothing. By aligning all users together, users are likely to receive a portion of liquidation rewards more consistently.
Users who use the pool to liquidate are able to receive a portion of liquidated rewards without having to buy or hold kUSD.
The Kolibri Protocol requires ovens to be liquidated when they go underwater in order to maintain peg. The Kolibri protocol benefits from the liquidity pool because systemic risks from ovens that are too large for any individual to liquidate are more easily liquidated.