Author: Yuuki, LD Capital
introduction:
Lybra currently has a TVL of 328 million, which exceeds the total of mainstream LSDFi protocols such as crvUSD, Pendle, Raft, and Gravita, and has become the largest LSDFi protocol. At present, Lybra V2 is being upgraded. The following mainly analyzes what existing problems Lybra V2 solves and what protocol expansions it has made.
Lybra's market share in the LSDFi market exceeds 50%
Source: Dune@defimochi, LD Captial
text:
Lybra V2 has been audited by Cod4rena and Consensys, and the final audit by Halborn is about to end; it is confirmed that it will be launched at the end of August. The main functional updates include the launch of peUSD to support non-rebase LST, the launch of Abitrum, the introduction of LBR War to control token emission through governance (similar to Curve War), the introduction of early unlocking penalties and dLP penalties, and the introduction of LBR burning and eUSD price stabilization funds.
Comparison of Lybra V2 and V1 functions
Source: Lybra, LD Captical
In Lybra V1, the protocol attracted market attention with its innovative interest-bearing stablecoin mechanism design and accumulated a large amount of TVL, but it also exposed the following four problems:
1. The risk-benefit imbalance of eUSD minting: LybraV1 collects 1.5% of the interest generated by the minter's collateral and returns it to the protocol income. The remaining part is converted into eUSD and distributed to eUSD holders to realize the function of interest-bearing stable currency. This results in the loss of 1.5% interest income for eUSD minters and the assumption of contractual risks. In order to incentivize minting, esLBR subsidies are required, which will cause serious inflation of LBR circulation; from the beginning of May to now (August 23), LBR circulation has increased from 4.33m to 12.87m, with an inflation of 297%, and LBR+esLBR has increased from 5.42m to 16.9m, with an inflation of 312%.
LBR inflation is serious
Source: Dune@defimochi, LD Captial
2. eUSD holders can earn interest, which makes minters more willing to hold the currency (giving up holding the currency means giving up all collateral income), and the market is willing to buy (compared with non-interest-bearing stablecoins such as USDT, holding eUSD can earn an annualized rate of return of 7%-10%). The continuous purchase of eUSD by the protocol for interest distribution makes eUSD have a long-term positive premium;
eUSD long-term positive premium
Source: Coingecko, LD Capital
3. The interest on stETH collateral is collected by the protocol and converted into eUSD, which is distributed to eUSD holders. In order to maximize their profits, minters usually choose the highest leverage ratio, which makes the CR of the entire protocol too low and easily triggers liquidation. Recently, on August 2 and August 17, ETH experienced a large drop in a single day, and eUSD experienced large liquidations, which caused losses to minters while also increasing the bad debt risk of the protocol.
eUSD high leverage ratio easily triggers liquidation
Source: Dune@defimochi, LD Captial
4. eUSD collects interest on the underlying collateral and converts it into eUSD before distributing it to eUSD holders. This interest-bearing mechanism makes Lybra unable to support non-rebased LSTs such as rETH and WBETH, limiting the expansion of the protocol’s collateral.
In response to the above issues, Lybra V2 has introduced the following adjustments:
1. The high subsidies, high leverage and difficulty in expanding the application scenarios of stablecoins are essentially caused by the interest-bearing mechanism of eUSD; the launch of peUSD in LybraV2 has solved the above problems to a certain extent. peUSD is not an interest-bearing stablecoin. Its product form is similar to other CDP collateralized stablecoins. It can specifically solve the problem that the collateral side cannot expand non-rebaseLST and eUSD is difficult to integrate with other Defi applications. At the same time, there is no high leverage tendency and positive premium of eUSD. peUSD is designed according to OFT standards to support multi-chain integration and launch flash loans to improve product functions.
At the beginning of the launch, peUSD's collateral supports rETH, WBETH and eUSD, requiring the collateral ratio of LST to be greater than 130%, and eUSD and peUSD to be anchored 1:1. The combination of eUSD and peUSD allows eUSD holders to retain eUSD interest while releasing liquidity, but this may trigger circular loan arbitrage, and the market is expected to balance through the premium of eUSD and the discount of peUSD. In general, peUSD has expanded the development of the protocol in another dimension, but it will also face competition from other relatively homogeneous products such as crvUSD and Raft. How to reduce the liquidity cost of peUSD is another challenge facing the V2 version of the protocol.
peUSD minting flow chart
Source: Lybra, LD Captical
2. The protocol introduces early unlocking penalties and dLP penalties to burn LBR and maintain the stability of eUSD prices. In LybraV2, it takes 90 days for esLBR to be unlocked as LBR tokens that can be traded in the secondary market, but users can choose to pay 25%-95% of the total unlocking share as a penalty to speed up the unlocking; the protocol allows the market to purchase this part of the penalty with LBR or eUSD at a 50% discount. The penalty design of dLP is similar to the above. In V2, minters are required to hold LBR/ETH LPs that are more than 5% of the value of the minting position to enjoy the esLBR reward. If the total value of LP held by the minter does not meet the requirements, the reward part will also be used as a penalty to allow the market to purchase it with LBR or eUSD at a 50% discount.
The above two parts of the penalty auction can enable the protocol to obtain part of the LBR and eUSD income. The LBR income part will be destroyed by the protocol to reduce the LBR supply, and the eUSD part will be used as the strategic reserve of the protocol to maintain the secondary market price anchor of eUSD.
The design of dLP can bind LBR/ETH LP to eUSD minters, reducing the number of participants required to maintain the healthy operation of the protocol. It may also help reduce LP incentives and thus reduce the inflation rate of LBR. The disadvantage is that it raises the participation threshold for minters.
3. The premium suppression mechanism for eUSD added in V2 is mainly divided into two parts: First, when the accumulated platform fee exceeds 1000eUSD, if eUSD/USDC is greater than 1.005, the protocol will convert the excess eUSD into USDC and send it to the protocol reward pool (at this time, the income of eUSD holders is distributed in the form of USDC); when eUSD/USDC is not higher than 1.005, the excess eUSD will be converted into peUSD and sent to the protocol reward pool. In general, the interest distribution of eUSD holders is changed to USDC and peUSD, thereby reducing the potential secondary market buying pressure brought by the interest distribution of the protocol. (Currently, the eUSD required for the income distribution of eUSD holders is the exchange of collateral income with protocol income, but in the long run, the protocol income is not enough to pay the interest of eUSD holders, and the protocol needs to purchase eUSD from the secondary market for distribution; V2 changes the interest distribution of eUSD holders to USDC and peUSD, which increases the selling of eUSD from the protocol in the short term and reduces the buying of eUSD from the protocol in the long term)
Secondly, the eUSD accumulated in the early unlocking penalty and dLP penalty modules will also be used as protocol reserves to stabilize the price of eUSD. When eUSD is at a premium, the protocol can choose to sell this part of eUSD to regulate the secondary market price.
It is also worth noting that since LybraV2 can support multiple collaterals, the emission share of esLBR in different collateral pools has become a governable module. Due to Lybra's current leading position in the LSDFi protocol, it may be possible to attract asset issuers (LSD protocol) to accumulate esLBR to participate in Lybra protocol governance in order to expand the application scenarios of its LST, or increase income for esLBR holders through the bribery market.
