LP Finance

Updated 457 days ago

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Vision

LP Finance. Engineering the standard of synthetics on Solana.

Description

LP Finance is a synthetic asset protocol on Solana

Users can mint synthetics (lpUSD & lpSOL) interest-free while earning interest on collateral.

Our team aims to solve the Stablecoin Trilemma and Capital Efficiency through the following mechanisms.

1. Peg Stability

Collateral-backed stablecoins often struggle to maintain peg as they are often used for leveraging positions, meaning they would be sold on market.

LP Finance developed Dynamic Stability Fee (DSF) model to ensure peg at any conditions. Stability fees are dynamically calculated regarding to the depeg ratio, which in case of a large depeg, users can repay at a discount and help retain peg.

However, this mechanism has the potential to harm users' vaults and would not be a safe investment.

Therefore, Delayed DSF Activation exists. Here are the steps.

Bot monitors depeg ratio (Any users can set up a bot)
If depeg ratio is over 1%, Recovery Mode is announced. (12 hours given until stability fee is applied)
After 12 hours, there would be three scenarios:

- Depeg over 1%: Activation Mode announced. Stability fee starts applying

- Depeg between 0.5% and 1%: Recovery Mode restarts. Another 12 hours is given.

- Depeg below 0.5%: Recovery Mode is terminated.

Through this, arbitragers have higher confidence to buy stablecoins to seek profit. Additionally, as there is recovery mode, users' vaults would not be harmed.

2. Scalability

Scalability is the key for stablecoin/synth's growth. Most stablecoins fail to scale due to low liquidity which discourages users to mint higher amount.
LP Finance offers Incentivized Liquidity Provider vaults to boost the growth of stablecoins without scaling concerns.
Following are the incentives provided to certain LPs.

lpUSD-USDC & lpSOL-SOL LPs
  -15% Deposit Fee Shares
  -8% Liquidation Fee Shares
  -1% LP Finance Governance Token Inflated Shares

Liquidity mining brings negative impact for LP Finance token holders, however this could be considered as protocol improvement bribe and would be adjusted as LP Finance scales by the DAO.

3. Decentralization

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Decentralization of stablecoin is easy to achieve. If collaterals are composed of decentralized assets, the stablecoin generated would be decentralized.
However, this often draws down the scalability of stablecoins.
Following is the collateral structure of DAI generated by MakerDAO.

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Over 40% of collateral are composed of third-party centralized stablecoins. This allowed DAI to scale rapidly, however there are drawbacks existing in multiple aspects.

1. Decentralization Usage of centralized tokens has a big risk. As centralized tokens are not issued via transparent smart contract and can be frozen, the stablecoin backed by those collaterals carry a high risk.

2. Third-party Reliance Stablecoins should not highly rely on third-party stablecoins. If it does, the issued stablecoin could be reflected as a derivative of a pool of other stablecoins, which would harm the potential of taking a dominant position.

For example, if exUSD (example stablecoin) has 50% of collateral in USDT, there is a low chance for exUSD to take dominance over USDT.

4. Capital Efficiency

Decentralized stablecoins/synthetics often require high collateral ratio, which lowers capital efficiency. To solve this, LP Finance implements Overflow Collateral Model.

Whenever user deposits collateral and mints stablecoins, LP Finance transfers portion of collateral, which are unnecessary to back minted tokens to lending protocols. Here are the steps.

User deposits collateral (Max LTV = 85%, Liquidation Threshold = 94%)
10% of collateral are deposited to lending protocol providing highest APY.
Bot monitors lending protocol's utilization ratio. (Prevent withdrawal block)
Bot monitors user's LTV
If LTV rises above 88%, assets lent are redeemed.
If LTV drops back to 80%, assets are deposited back to lending protocol.

If initial LTV is too high, deposit fee could be higher than interest, resulting in loss. Therefore, users have two options to manage their funds with their preference.