Lybra Finance - the first interest-bearing omnichain stablecoin backed by LSDs 1:1.
Thanks to the Ethereum Shanghai upgrade, you can now earn over 8% base APY on your eUSD holding.
Pretty nuts, right? Yeah, I know. Infact, I couldn’t believe my eyes at first.
Plus, the few people who know about it swear it’s something they’ve never seen before.
But do not take my word for it - you need to try it out yourself.
As you already know, stablecoins in the cryptocurrency space are presently categorized into three : fiat-collateralized (USDT, USDC, BUSD etc.), cryptocurrency-collateralized (DAI, BitUSD etc.) and algorithmic stablecoins (Frax etc.).
Each of these categories of stablecoins are distinct based on the nature of their underlying assets, collateral ratios, issuance and price stability methods.
But there’s something missing amongst these stablecoins - they do not generate interest for their holders. This problem stems from their distinct underlying assets and issuance mechanism.
Well, that’s in the past now because right now you can enjoy over 8% base APY by simply holding eUSD.
Now, you’re probably wondering how this works. I’ll tell you all about it in a moment.
But first, what’s eUSD?
eUSD is the first interest-bearing overcollateralized stablecoin backed by LSD (liquid staking derivative).
If you do not know what LSD means, these are tokens that represent staked assets in a DeFi protocol. For instance, stETH represents your ETH position staked on Lido Finance which can be used in other DeFi protocols like Lybra.
Thanks to the Ethereum Shanghai upgrade, smart contracts can now take advantage of the revenue flywheel generated by LSDs (in this case, stETH) to provide a secure, price-stable, interest-bearing stablecoin.
eUSD is issued by Lybra Protocol. It is overcollateralized by ETH and stETH (receipt of staked ETH on Lido Finance). It is hard-pegged 1:1 to USD, and comes at zero cost mint/loan fee.
Here’s how this works…
When you deposit ETH on Lybra protocol, the ETH is automatically converted to stETH which can be redeemed for ETH 1:1. stETH eventually increases overtime.
This increased income is converted to eUSD based on the USD value of ETH at the time.
A certain percentage is then shared amongst $LBR holders, and the rest shared amongst eUSD holders with a base APY of approximately 8%.
This offers the secure, stable store of value you enjoy on your traditional stablecoins while earning a stable interest rate of 8% base APY by simply holding.
eUSD maintains its peg to 1 USD by overcollateralization, arbitrage opportunities and liquidation mechanisms.
Lybra protocol maintains a minimum collateral ratio of 170% i.e. $1 worth of eUSD is backed by $1.7 worth of stETH as the underlying collateral.This overcollateralization method ensures the safety and security of users.
Arbitrage opportunities : Lybra helps to maintain price stability by allowing you to deposit ETH as collateral and mint new eUSD which you can sell on DEXs when eUSD is trading above 1 USD. This increases the circulating supply, and ultimately forces eUSD to fall back to 1 USD. You can decide to buy back lower or use it to repay your loan.
And when eUSD is trading below 1 USD, you can buy eUSD at lower prices from the market and redeem it for ETH/stETH on Lybra. As more users keep doing this, it leads to an increased demand for undervalued eUSD which drives the price back up to 1USD. You can then decide to hold your ETH/stETH, or sell and enjoy your profits.
Liquidation mechanism : Under-collateralization is not encouraged on Lybra protocol.
So, when a user’s assets fall below the collateral threshold, the protocol allows a liquidator to buy a portion of the debt (liquidated collateralized stETH) with a matching eUSD value. This puts appreciation pressure on eUSD and helps to maintain stability.
$LBR is the governance token of the Lybra protocol with a maximum supply of 100 million.
Holders of $LBR can participate in governance while also earning real yield from the protocol in the form of eUSD.
It can only be obtained by earning rewards through minting eUSD, or becoming an eUSD/ETH liquidity provider.
$LBR can also be locked to obtain esLBR (escrowed LBR) which is neither tradable nor transferable. It can be redeemed for $LBR 1:1 via a vesting process which allows a linear conversion to $LBR over a period of 30 days.
Holders of esLBR can participate in voting. Your voting power increases with the amount of $LBR locked in the contract.
Holders of esLBR also receive 100% of the 1.5% annual LSD distribution service fee.
Users of Lybra finance have the roles they play in the protocol. These roles include:
Minters : Users can mint eUSD on Lybra Protocol by simply depositing ETH as collateral with zero borrowing/ interest costs. It gets even better because you earn a steady income on your eUSD by simply holding. This even makes it a lot easier to repay the debt whenever you can (since there’s no fixed duration for repayment).
Borrowing eUSD requires that your collateral stays above the safe collateral which is 170% as at the time of writing. This is to help ensure safety of users in the protocol.
Rigid redemption: This involves the process of redeeming eUSD for ETH at face value. For instance, users can redeem their eUSD for the corresponding dollar value in ETH at any point in time. However, keep in mind that a 0.5% rigid redemption fee is charged on this service which is paid to the redemption provider.
How do you become a redemption provider, and what are the upsides?
You become a rigid redemption provider by opting to become one. For example, if a user decides to redeem their $5000 eUSD for ETH at face value, this requires a redemption provider to provide the ETH equivalent to ensure the success of the transaction .
However, the provider gets paid 0.5% redemption fee when someone redeems their eUSD against their ETH collateral. You also enjoy other benefits like token airdrops, service fees etc. from the protocol.
But here’s something else to keep in mind - during the course of the rigid redemption, a portion of your ETH position (collateral) will be deducted. But do not worry, because part of your eUSD debt will be repaid when this happens to create a balance. Look at this from this angle : someone pays off your eUSD debt and redeems a corresponding dollar value in ETH (your collateral). Plus, you could charge them a 0.5% redemption fee.
This process could either take the form of partial redemption where the debt isn’t completely repaid, or full redemption where your debt is completely reduced to zero. This process keeps your position safe and healthier.
Ultimately, there’s the LBR rewards increment of up to 20% for redemption providers on Lybra.
Liquidators : When a minter’s collateral rate falls below the MCR (minimum collateral rate) which is 170%, liquidators pay off the minter/borrower’s debt and receive the collateral asset (of the borrower) in exchange for the service. This process is termed liquidation, and it ensures stability of the eUSD. The liquidator uses their eUSD to settle the borrower’s debt.
During the course of liquidation, 50% of the borrower’s debt is burned from the liquidator’s balance to repay the debt. The liquidator eventually inherits 109% of the collateral asset while 1% goes to the Keeper.
You become a liquidator by simply activating the liquidator feature which can be turned off anytime you wish.
However, you can delegate the liquidation process to the keeper who eventually liquidates the borrower with your supplied eUSDC. The good thing is you still get to keep 9% of the liquidation rewards while the keeper gets 1%.
Personal thoughts : With V2 coming, other LSDs introduced as collateral and plans to make eUSD an omnichain stablecoin that can be used on L2s in the near future, the future is bright for Lybra.
These are my thoughts and should not be misconstrued as financial advice. DYOR!
You can learn more about Lybra by going here…
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