Yeti on the Move
Yeti Finance has now been live on Mainnet for over four months. The protocol has seen impressive growth and stability with a peak of over $850,000,000 total value locked.
Highlighted are some of the major accomplishments and partnerships that Yeti Finance has achieved since launch:
- Over $1B in collateral integrations with Aave v3, sJOE, sAVAX, qiTokens, etc.
- Integration of YUSD in the greater Avalanche ecosystem: Platypus Finance, Kyberswap, BENQI, Vector Finance, Echidna, Arable Finance, and Frozen Walrus Finance, Talecraf
- Release of in-depth protocol and portfolio analytics: YUSD backing breakdown, trove data and history, veYETI boosting calculator, dynamic asset reward data
- Redemption UX improvements: fees go directly to users along with introduction of redemption page and trove ordering list
The Terra collapse marked the beginning of an unprecedented crypto downturn in combination with growing macroeconomic headwinds. In this dark time, the Yetiprotocol displayed extreme resilience. As UST collapsed to 0 and USDT depegged down to 95 cents, YUSD traded between $0.99 and $1.01 due to hard peg mechanisms that allowed anyone to instantly redeem their YUSD for backing collateral at $1 to $1 basis minus redemption fees. Liquidations also operated flawlessly with the system liquidating over $50,000,000 in one day during the UST collapse.
Yeti Finance’s unique value proposition is giving users a way to borrow against assets not typically avaliable in regular lending markets. We plan to continue focusing on that and move forward on our mission of giving users a way to have more power with their assets.
However, a key roadblock in releasing them is the limit of how much YUSD that can be in circulation without redemptions. The way forward can be reduced to two key features to unlock greater protocol borrowing capacity and sustainability: the introduction of a peg stability module, and the addition of interest rates.
This article will dive further into these solutions we have developed together as a community and detail a path forward:
Key Area of Improvement #1: Redemptions
The ability to redeem YUSD for $1 in underlying collateral in the lowest collateral ratio trove has been a key reason why YUSD has been able to maintain peg throughout volatile periods like the UST collapse. The redemption mechanism, however, introduces uncertainty to active borrowers as their deposited collateral can be redeemed for YUSD.
Solution: Yeti Finance Peg Stability Module (PSM)
To fix redemptions, the community has decided it’s in the protocol’s best interest to offer a new way to swap YUSD for USDC without affecting borrowers. The solution: the Yeti Finance Peg Stability Module (PSM), which is a two way swap system similar to MakerDAO’s system.
YUSD holders would be able to utilize the PSM and trade 1 USDC for 1 newly minted YUSD or trade 1 YUSD for 1 USDC from the PSM. This would replace redemptions as the first line of defense for the YUSD peg. The USDC in the PSM could also be deposited in Aave to generate protocol revenue.
Creating the PSM is a two step process: (1) bring YUSD back to peg and overpeg with increased YUSD incentives on the stability pool (2) accumulate USDC in the PSM
Step 1: Bring YUSD Over Peg:
The first step is to direct additional incentives to the stability pool or another YUSD sink, with a target of creating roughly $7.4m in YUSD sink. This would bring the YUSD price over peg by imbalancing the liquidity pools in the other direction toward a lack of YUSD.
Step 2: Accumulating USDC in the PSM:
After YUSD is overpeg, the protocol can start accumulating USDC in the PSM on a 1:1 basis. If YUSD is trading at say $1.01, new buyers of YUSD would prefer to “buy” new minted YUSD from the PSM at the price of 1 USDC than to pay the market price of $1.01. And in this way, we will accumulate USDC in the PSM.
In the future, if the YUSD price trades below $1, users will be able to utilize the PSM to trade 1 YUSD for 1 USDC from the protocols stored USDC, minus a few basis point swap fee.
While creating the PSM, it would potentially be in the best interest of the protocol to shut off new YUSD borrowing to prioritize pushing the peg up and accumulating USDC in the PSM.
Key Area of Improvement #2: Scalability
The other key unlock for the Yeti protocol is increased sustainability. The current protocol revenue model of one time fees borrowing fees doesn’t allow Yeti to indefinitely support new minted YUSD without the use of external incentives or token emissions.
To scale the protocol beyond its current size, we have to move past reliance on token emissions and create a stream of sustained protocol revenue.
Solution: A New Borrowing Model
After observing the dynamics of Yeti over the last 4 months, community members believe the best borrowing model going forward is switching to a traditional interest rate model and significantly reducing one-time fees.
This is a transition away from Yeti’s unique fee model, but the community believes it will ultimately provide a better experience for borrowers and enable scalability and sustainability for the protocol.
With higher recurring revenue from interest, the new model would allow Yeti Finance to scale YUSD liquidity, the stability pool as new borrowing occurs and grow the PSM without relying as much on inflationary $YETI incentives. Specifically, this would mean LPs and stability pool depositors could be paid Real Yield in YUSD from interest rate revenue.
Furthermore, borrowers would be able to switch collateral assets more easily due to lower one-time fees, fixing a significant pain point for users and opening Yeti up to a whole new market of borrowers who are interested in shifting their assets around in the short-term.
Interest rates would start off very low, around 0.50% annually on YUSD minted, and could rise to closer to 1–2% over time. This model will enable the protocol to better support the $1 YUSD peg, scale borrowing infinitely without users being redeemed, and allow the release of new collateral integrations such as GLP.
The introduction of interest rates will occur no earlier than (9/26/22) or 30 days from the time of this Medium post to allow current users to adjust their borrowing positions as needed.
Update 9/20/22: The new borrowing model with recurring interest rate will not go in effect until early October.
Update 10/3/22: The audit for the new borrowing model is scheduled to start on October 10th and will be finishing around October 24th which is approximately when recurring interest rates will go in an effect.
5. New mobile web app, protocol and collateral stat pages, portfolio analytics
6. New collateral intergrations and vault token leveraging protocol
Yeti is important in the sense that it can enable borrowing against any asset, through the issuance of YUSD. This is combined with power to borrow at the highest leverage ratios with lowest liquidation thresholds due to the stability pool liquidation mechanism, and the protocol’s cross margining feature creating the ability to take out loans against a basket of assets instead of just one, makes Yeti a best in-class borrowing protocol.
The protocol will be in a unique position to take advantage of these strengths, and allow collateralization of “real yield” assets such as GMX’s GLP, vault tokens and scale borrowing capacity with these new changes.
- Currently, new borrows lead to redemptions, and YUSD is hovering slightly below $1. The amount of stablecoin liquidity is dependent on token emissions and external incentives which is not sustainable long-term. These issues can be resolved with a new PSM and the new borrowing model.
- When PSM is ready to launch, the protocol could begin partially incentivizing YUSD liquidity with rewards in YUSD itself. This will bring the YUSD price up and fill up a PSM to eliminate redemptions and bring a safer borrowing experience to everyone.
- The introduction of interest rates and reduction of one time fees will enable long term protocol sustainability. Interest rates will start out low (0.5%) and not go in effect any earlier than (9/26/22) for existing borrowers.
- The focus thereafter will be integrating high demand collateral like GLP, the BTC.B assortment, and qisAVAX and asAVAX.