Learn about the Liquity fork project Gravita: LSD interest-free lending stablecoin agreement

This article sorts out the differences between Gravita and Liquity in terms of collateral types, fee rates, liquidation and redemption mechanisms, and helps everyone evaluate protocol risks and make rational investment decisions.

Original Title: "LSD Interest-free Loan Stablecoin Protocol Gravita——The Birth of Xinshen Stablecoin GRAI"

Written by: darkforest

For investors in the currency circle who are optimistic about Ethereum for a long time, it is a good choice to hold some kind of Ethereum liquid pledge token LST (liquid staking token), which includes the well-known wstETH of LIDO, rETH of rocketpool, and cbETH of the centralized exchange , bETH et al. However, although the benefits of holding LST are considerable, after all, people still have to eat, and we still cannot do without that green ticket.

The innovation of Gravita Protocol is to provide an on-chain solution for interest-free lending and lending stablecoins for the Ethereum Liquidity Staking Derivative Project (LSD), giving you a new option to enjoy life while earning staking income.

Gravita is a fork project of Liquity, and the protocol's stablecoin mechanism design has passed the market test in the past two years. In my opinion, Gravita solves a major pain point of Liquity after the Ethereum Shanghai upgrade, which is the opportunity cost of depositing ETH. Because, if your ETH can earn 4-6% APR pledge income every year, then you will lose this income in disguise if you deposit native Ethereum on Liquity to borrow $LUSD. Out of the recognition of the top decentralized stablecoin project Liquity, users entering Gravita will lower the threshold of trust, but what I want to say is that these are two different projects after all, from different teams, so DYOR.

In this article, I have sorted out the differences between Gravita and Liquity in terms of collateral type, fee rate, liquidation and redemption mechanism, so as to help everyone evaluate the risk of the protocol and make rational investment decisions.

1. Mortgage items

Compared with Liquity, Gravita Protocol expands the types of collateral, including native Ethereum (WETH) and liquid pledged tokens (LST), including LIDO's wstETH, rocketpool's rETH, and Liquity's closely related Project - ChickenBonds' accelerated income stablecoin blusd, students who are not familiar with Liquity and chickenBonds can refer to my previous article for more information.

In this article, I mentioned Liquity's limitations in protocol expansion and chickenBonds' lack of external usage scenarios for the protocol. These two problems seem to have been solved in the Gravita Protocol. It can effectively undertake the current very large Ethereum Liquidity Staking Derivatives Market (LSD), and it also increases the use of chickenBonds' blusd, which can be described as killing two birds with one stone.

Gravita sets up independent lending pools (vessels, equivalent to MakerDao's CDP and liquidity's trove) for each type of collateral, thus isolating the risks between different types of collateral. Each type of collateral has a different liquidation line, such as when ETH When the price is 2000 knives, you can lend up to 2000*0.9=1800GRAI (the system will always set 1GRAI=1$), and you will be liquidated if the price of Ethereum is lower than 2000.

The risk of LST itself will be higher than that of native ETH, so Gravita sets a lower LTV (Loan-to-Value Ratio) for LST. For example, if you deposit 2000 knives in wstETH, you can lend up to 2000\ *0.85=1700GRAI, if the collateral value falls below $2000, your vessel will be liquidated.

This mechanism is more similar to makerDao, after all, it is a stable coin (MAI) generated by multi-collateral rather than single-collateral (SAI).

Another interesting collateral for Gravita is ChickenBonds’ accelerated yield stablecoin blusd. To put it simply, blusd is a stable currency with a higher APR than you simply hold lusd and put it in the liquidity pool to mine (LQTY. It has a lower limit of value, namely the floor price, which is determined by the protocol mechanism and\ )lusd value co-guaranteed.

The current market price of blusd is 1.19, the floor price is 1.144, and the blusd deposited in Gravita as collateral is regarded as 1.00(, so the LTV of the blusd pool can reach 99% and there will be no liquidation risk in the agreement, because The mechanics of the ChickenBonds protocol guarantee that the price of blusd cannot fall below 1.00).

Under this mechanism, blusd holders have a way of borrowing and lending stablecoins with extremely high capital utilization efficiency and no liquidation risk. In my opinion, this will greatly improve the usage scenarios of blusd and promote ChickenBonds to re-enter the positive cycle. From the market price of blusd, we can also see the recent steady increase in prices. From the perspective of market demand, whenever Gravita opens a new mint cap for each collateral category, the blusd pool is always the first one to be filled, which shows the strong market demand.

At the end of this article, I will analyze the investment opportunities related to ChickenBonds.

2. Rate Mechanism

When it comes to the same mortgage of LST to borrow stablecoins, why should I choose Gravita instead of MakerDao? The reason is two points:

(1) The liquidation line is lower and the capital utilization rate is higher. Gravita's LTV is 85%, converted to coll. ratio is only 116%, which is much lower than MakerDao's liquidation line of at least 160%. For example, if you mortgage $1,600 of stETH on makerdao, you can only lend up to $1,000 in dai, but if ETH drops a little, you will be liquidated. In Gravita, you can also borrow GRAI of $1,000, and you can afford the value of the mortgaged stETH to drop to $1,160.

There is a huge difference in capital efficiency between the two agreements.

(2) Interest-free loans and interest-bearing loans Borrowing stablecoins through Gravita only needs to pay a one-time Borrowing Fee of 0.5% at most, while makerdao has annual fees ranging from year to year, and the collateral for borrowing at the lowest rate is rETH, coll. The ratio must remain greater than 170%, and the annual fee is 0.75% per year. The other two are loans against stETH as collateral.

Unified into one table can more clearly see the difference in capital utilization efficiency and cost between the two agreements.

It needs to be elaborated that using the Gravita protocol can enjoy interest-free borrowing, and for positions over 6 months, the one-time maximum fee is only 0.5%. For users who repay their debts before six months (approximately 182 days) are due, a fixed borrowing fee of 0.5% will be refunded proportionally to the time used, subject to at least one week's interest.

To some extent, Gravita's fee mechanism for short-term loans is better than that of liquidity. For those users who only need a few days for capital turnover, it greatly reduces the cost of borrowing and improves Gravita's short-term borrowing costs compared to liquidity. competitiveness.

3. Liquidation and redemption

Gravita has roughly the same liquidation and redemption mechanism as compared to liquidity, the difference is that although there is a common stable pool on the Gravita protocol, each collateral type has an independent system state. Thus, specific collateral types can be in recovery mode while others remain in normal state.

Recovery mode (honey for you, arsenic for you):

The recovery mode is the most effective mechanism for guaranteeing the value of its stablecoins in the liquidity protocol. This happened only during the two-day extreme market on May 19 during the two years of liquidity operation. The effectiveness of the mechanism was also obtained at that time. After verification, the global CR of the system quickly recovered by more than 150%, and LUSD quickly returned to anchor. As the top decentralized stablecoin, LUSD became famous in the first battle, and has confirmed its status as the king in the subsequent stablecoin storms (LUNA, USDC) incidents.

As a fork project of Liquidity, Gravita naturally inherits this excellent mechanism. But for mortgage borrowers, this must be an event that must be handled carefully. It is like the snap of Thanos's fingers, which cleans up the troubled world. It is really white and clean, but I am talking about yours position.

Of course, if you can make the LTV of your position less than 71.4% during the recovery mode, then you can survive. However, it is quite difficult to achieve this in extreme market conditions, and you need to do very good risk management at ordinary times.

LTV 71.4% is equivalent to Coll.Ratio 140%. This value is triggered when the global CR drops to 150% in liquidity. In this indicator, Gravita Protocol is more aggressive than liquidity, and a lower CR will trigger global liquidation.

Although the recovery mode makes mortgage borrowers very scared, for those who are prepared, such as GRAI holders who deposit in the stability pool, it is really an opportunity to pick up big bargains.

Liquidation Profit (Your Honey)

When the WETH Vessel is liquidated, users can expect to get WETH at a discount of about 10% below the market price. For LST Vessels that allow users to borrow GRAI at 85% TVL, stablecoin providers can expect to receive this LST at a market discount of approximately 15% upon liquidation.

In summary, liquidation profit is inversely proportional to the LTV of the collateral type liquidated on Gravita. This means that in extreme market conditions (referring to a sharp drop in the market, rather than a thunderstorm in a certain LST in the agreement collateral), users who deposit in the Stability Pool can buy LST at a 15% discount, which can be said to be very delicious.

Stable Mechanism

As a liquidator, it is impossible to enjoy risk-free excess returns. His risk point is whether the stable currency GRAI generated by the Gravita protocol can always remain stable. In this regard, Gravita also inherits Liquity's excellent mechanism - redemption, which we can also call:

Hard peg

The protocol is able to redeem GRAI at $0.97 in exchange for collateral (i.e. 1 GRAI for $0.97 worth of collateral), which forms a price floor for the GRAI stablecoin. To clarify, 0.97 means a 3% redemption fee is paid to redeemed borrowers.

At the same time, GRAI minted with 90% LTV collateralized by WETH can create a price ceiling through arbitrage opportunities. For example, when the market price of GRAI is 1.2(, ETH holders can mortgage Ethereum and mint GRAI at 90% LTV and sell it in the market for arbitrage. The profit of an arbitrage can reach nearly 8% (0.9\*1.2). So in theory, GRAI moves around 1) in the range of -3%/+10% in the decentralized market. But that doesn't mean the coin is within these ranges all the time.

risk:

In my opinion, the emergence of GRAI cannot shake LUSD's status as the king of decentralized stablecoins, but it can greatly improve the scalability of decentralized stablecoins. The price paid for the improvement of scalability is the degree of decentralization Decline, because no matter whether the increased collateral is stETH or rETH, as an LSD project itself, it is a centralized existence, because no matter how decentralized it is in the node verification link, the private key for withdrawal is after all on the project side, and There are only a few actual controllers of the project, and the agreement can also be upgraded.

Of course, it is not necessary for every stablecoin in the market to be as decentralized as LUSD. Diversified choices are ultimately a good thing for users.

Another big risk comes from the different liquidation lines set by the vessels of different collaterals. If the market crashes rapidly, especially when a certain type of LST occurs a risk event, GRAI holders may immediately redeem (redemption ) Native Ethereum WETH, once again to redeem blusd at one level, when these two underlying assets no longer become the ballast stones that constitute the value guarantee of GRAI, the collapse of GRAI will be inevitable.

opportunity

A major innovation of Gravita compared to other LSDfi projects is the incorporation of ChickenBonds, a more stable bond asset, which together with native Ethereum has become the cornerstone of GRAI value, which is more stable than simply using one or several LSTs as collateral It is more beneficial to the ecology than many projects to increase LST leverage without thinking.

I also found some potential opportunities in it. The lusd still in ChickenBonds pending state is 3.74M, and the total supply of blusd is 10M. Among them, there are already 2M blusd in Gravita. If Gravita continues to open the mint cap of blusd, The blusd in the market will be drained quickly, and there is only one channel to create blusd, which is to obtain a slight profit by holding ChickenBonds, a very special bond for nearly 2 months (this time is dynamically adjusted), This huge difference between the supply side and the demand side may promote the further appreciation of blusd, and will also greatly shorten the profit cycle of ChickenBonds holders, and accelerate the supply of blusd to the market. For the specific operating mechanism of ChickenBonds, please refer to my previous article.

At present, the $lusd reserve in Liquity's stability pool earning a meager APR has reached 179M. These reserves are likely to participate in the creation of ChickenBonds and the generation of blusd, which means huge room for growth for both Gravita and ChickenBonds.

In my opinion, the defi composability between Liquity, Gravita and ChickenBonds completes the closed loop of product logic for the first time. ChickenBonds promotes the issuance of Liquity’s stablecoin LUSD, Gravita promotes the issuance of ChickenBonds bonds, and Liquity’s stablecoin issuance mechanism guarantees The stable operation of the Gravita protocol and the mutual benefit and win-win situation of the three protocols have created the possibility of a flywheel effect. As for whether the flywheel can turn, let us wait and see.