Explaining Lybra’s Comprehensive Plan For Maintaining Fund Safety As It Expands The Range Of LSTs It Accepts As Collateral
TL;DR
- As Lybra V2 expands the range of LSTs it accepts as collateral, it has introduced measures at every stage of onboarding, minting and liquidation to maximize fund safety.
- The onboarding process for every new asset includes a two-stage due diligence procedure, including risk evaluation by both the core team and the DAO.
- Each LST asset is then held in a separate, isolated pool to contain the risk of contagion during a hypothetical “black swan event.”
- Finally, additional steps have been added to the liquidation process to improve fund safety.
Fund Security Sits At The Heart Of Lybra’s Forthcoming V2 Upgrade
With the competitive audit for Lybra V2 now complete, momentum is building towards the release of the much anticipated protocol upgrade. One of the most exciting features of Lybra V2 will be the functionality that allows users to put up a wide range of different LSTs as collateral to mint eUSD. eUSD is the world’s first interest-bearing stablecoin, offering yields of approximately 8%. To ensure this new functionality launches smoothly, it is vital that the Lybra protocol maintains the highest level of fund safety even as the range of different assets on the protocol expands. It is also important that there are robust plans in place to deal with any potential “black swan events” that might arise for any one of the assets.
This article breaks down the many steps we’ve taken to ensure fund security at every stage from onboarding new LSTs, to minting eUSD with them, and finally, the liquidation process. To start with, let’s have a look at how Lybra starts its risk management process even before a new LST asset is onboarded onto the protocol…
Lybra’s Multi-Level Due Diligence Process For Onboarding New LST Assets
Onboarding a new LST asset as an option to use as collateral on Lybra V2 inherently carries some level of risk if it is not effectively managed. It doesn’t matter how robust the minting and liquidation processes are; if the asset itself has inherent vulnerabilities or incompatibilities with the protocol, then problems will inevitably arise. This is why Lybra takes a two-pronged approach to due diligence during the onboarding process. This process draws on the expertise of the core Lybra technical team members, whilst also harnessing the inherent layer of transparency and accountability offered by the Lybra DAO. The onboarding process can be summarized in 2 key phases:
- Due Diligence By Lybra Core Team Members: Before any LST provider is considered for onboarding onto the Lybra protocol, Lybra core team members will conduct a detailed due diligence process. This will look at every aspect of the asset from its rewards mechanisms and security procedures, to its safety track-record and technical specifications. The process is designed to ensure the asset is both secure and compatible with the way the Lybra protocol functions at every level.
- DAO Voting Process: To ensure a fully accountable, transparent and democratic process, the final decision on whether to onboard the asset will then be passed on to Lybra DAO. The only exception to this will be very high profile LSTs such as Binance’s WBETH and Rocket Pool’s rETH, which only need to go through phase 1 due diligence, given that they have already heavily market-tested. Other emerging LST providers will be asked to submit a detailed proposal to the DAO and then the DAO will vote to decide:
a) Whether to accept the proposed asset for onboarding,
b) The eUSD mint limit for the new LST pool.
By placing mint limits, the DAO can manage the associated risk attached to any single asset. Once the DAO has voted to accept an LST asset and determined the mint limit, the Lybra Contract Admin will initiate a new LST asset pool.
However, the onboarding risk management process does not end there, as there are further fail-safes in place in the post-launch phase for each asset. Once a new LST asset pool is live, the DAO can still vote to:
- Adjust the mint limit on an ongoing basis
- Deactivate or remove the asset if risks have been identified.
This ensures that the risk management process is always dynamically responding to new information and that the DAO is always in control.
The due diligence process for onboarding is just one part of Lybra’s process for ensuring fund safety though. Next up, comes the procedures that have been put in place during the minting process…
Using Isolated Vaults & Pools To Minimize Risk During The Minting Process
Once a new LST asset has been onboarded onto the Lybra protocol, users will be able to use it as collateral to start minting either eUSD or peUSD (Pegged eUSD). peUSD is the omnichain version of eUSD, which will bridge eUSD from the Ethereum mainnet to Layer 2s, allowing users to deploy it on the full range of supported chains.
To maximize fund safety during the minting process, Lybra V2 will create isolated pools for each LST asset on the protocol. You can read a detailed account of how the different pool mechanisms will work here. However, it can be summarized as follows:
Firstly, the two different classes of LST asset — namely Rebase and Non-Rebase LSTs — will each be held within isolated vaults. Then, within each vault there are separate pools for each specific LST asset. Part 2 (for Rebase LSTs) and Part 3 (for Non-Rebase LSTs) of our LSD Summer School delve into the details on the respective processes for minting eUSD and peUSD. However, the key workflows are summarized in this graphic:
The important thing to understand from a fund safety perspective is that every single individual LST asset is held within its own separate pool. This means that even in the worst case scenario where a black swan event hits one asset, there is an extra layer of protection in place to ensure there is no contagion to other assets. In this way, the new minting process not only provides a smooth and intuitive user journey but also contributes to maximizing fund safety as more LST assets are onboarded.
Of course however, even with robust processes for minimizing risk embedded into the onboarding and minting phases, perhaps the most important part of all is designing a liquidation process that maximizes fund safety. Here are the extra steps that have been put in place to ensure this…
Additional Measures For Ensuring Fund Safety During Liquidation On Lybra V2
There will be two types of stablecoin on Lybra V2. eUSD will be joined by peUSD, which is the omnichain version that bridges eUSD to any supported Layer 2 to expand its utility in DeFi applications. To account for this, one additional step has been added to the liquidation process on V2 for eUSD to maximize fund safety. Furthermore, a very small tweak has been made to create a similar liquidation process for peUSD. Here’s how the liquidation process will work for each and how the additional step helps to keep funds secure:
- Liquidation Process For eUSD
The additional step that has been added to boost fund safety on Lybra V2 during the eUSD liquidation process works as follows. Whenever eUSD is converted to peUSD, the eUSD is locked in the mainnet contract. This locked eUSD plays an important role in ensuring the safety of the funds. This is because the locked eUSD can be used to make flash loans that facilitate liquidation. To explain how these flash loans work, let’s take an example:
1. Bob borrows 10,000 eUSD from the “locked” eUSD pool and repays Alice’s 9,000 eUSD debt.
2. Bob receives $10,000 stETH (the extra $1,000 stETH is a liquidation reward).
3. Bob is required to repay 10,500 eUSD, as per the flash loan terms.
4. Bob’s earnings from the “Flash Loan + Liquidation” action incentivize more liquidators to conduct liquidations. This is because you now don’t need to hold eUSD to be a liquidator. In this way, borrowing eUSD from the flash loan pool and repaying a slightly higher amount helps both in executing the liquidation process and in generating a profit.
- peUSD Liquidation
Meanwhile, the liquidation process for peUSD on Lybra V2 remains broadly similar to the eUSD liquidation process in V1. The only exception is that the global liquidation process that was in place on V1 has been removed for peUSD. This global liquidation process, referred to as “Overall Liquidation” in the docs meant that when the overall Lybra protocol Collateral Rate fell below 150%, any user with a collateral rate below 125% could be fully liquidated. This will not apply to the liquidation process for peUSD on V2, thereby increasing the security of funds. The only other detail to take note of is that the source of the peUSD does not impact the liquidation process. Whether it was converted from eUSD or minted directly from Non-Rebase LSTs, the liquidation process remains the same.
Conclusion
There are a lot of exciting new features coming in Lybra V2, ranging from the expanded selection of LSTs you can use as collateral, to the introduction of peUSD with its omnichain functionality. This will unlock a proliferation of new strategic options for users. It will also help Lybra cement its place as the leading solution in the LSDfi space, whilst expanding the utility of its interest-bearing stablecoin. However, users can rest assured that as the protocol’s functionality expands, new measures are being put in place to ensure that funds remain secure and risk is minimized. At every stage from asset onboarding to minting and liquidation, Lybra V2 has integrated unique features to maximize fund safety so that users can rest easy as they start exploring the new functionality on offer. We can’t wait to start sharing all this new functionality with you, but in the meantime make sure you stay in touch with us for all the latest updates on:
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