How Lybra V2 Will Deliver A More Robust Mechanism For Upholding The eUSD Peg & Support The Long-Term Value Of LBR Tokens

TL:DR

• Lybra V2 will be introducing a number of new mechanisms for upholding the eUSD peg
• This will include a new eUSD/3CRV Pool, a Premium Suppression Mechanism, and a dLP (Dynamic Liquidity Provisioning) Mechanism
• It will also have several mechanisms designed to support the value of LBR tokens by decreasing sell pressure and increasing demand
• This will include a 90-day vesting period of esLBR, boosts for those who decide to lock up, and a penalty for those who exit vesting early.

In previous articles we’ve discussed some of the headline strategic upgrades that Lybra V2 will deliver, such as expanding the range of LSTs that can be used as collateral, unlocking omnichain functionality for eUSD, and increasing fund security. However, in addition to these step-changes in functionality, there will also be a range of additional technical upgrades designed to answer specific needs raised by V1 users.

In this article, we’re going to take a look at some of these technical upgrades and explain how they will benefit Lybra users. Specifically, we’ll be focusing on V2’s updated mechanism for ensuring eUSD maintains its peg, as well as new features designed to support the long-term value of LBR tokens. Let’s start by looking at one feature of V2 that we are really excited about, namely the new eUSD peg mechanisms that we’ll be introducing…

Introducing Lybra V2 New eUSD Peg Mechanisms

As the world’s first interest-bearing stablecoin, offering typical yields of approximately 8%, eUSD faces novel challenges for ensuring it maintains a stable 1:1 ratio with USD. Because eUSD is constantly generating yields for its holders, each eUSD could reasonably be valued at higher than 1 USD if one takes into account the potential yields. However, it is important to the utility of eUSD as a stablecoin that it remains equal in value to USD. So, based on learnings from V1, Lybra V2 will be introducing two important new features to keep eUSD on peg:

1. Creating An eUSD/3CRV Pool

Lybra V2 will be introducing an eUSD/3CRV Pool. Unlike the present eUSD/USDC pool, it will be a stableswap pool on Curve, which is specializing in pegged assets. This will further help eUSD stay on peg.

2. Premium Suppression Mechanism

V2 will also introduce a dedicated feature designed to suppress the price of eUSD if it is trading at a premium. The Premium Suppression Mechanism will work as follows:

a) Currently, esLBR holders receive a revenue share based on platform fees generated by the protocol. On V2, if accumulated platform fees exceed 1,000 eUSD, this will automatically trigger the protocol to gauge the current exchange rate between eUSD to USDC.

b) If eUSD is trading with USDC at a premium of more than 0.5%, the protocol will then start to swap the eUSD for USDC until it is back to 0.5%.

c) The USDC acquired from this transaction will then be transferred into the reward pool for esLBR holders, so they will receive their rewards in terms of USDC.

d) If, on the other hand, eUSD is trading with USDC at a premium of 0.5% or below, then the eUSD will be swapped for peUSD, which is the new omnichain version of eUSD. The peUSD will then be distributed to the protocol revenue pool.

e) To accommodate this new functionality, peUSD and USDC will be treated as equals for distribution in the protocol reward pool. This means that the protocol can provide rewards to users in either peUSD or USDC, depending on the availability at any given time. The protocol will always prioritize distribution in peUSD but if there are insufficient quantities of peUSD in the reward pool, then it will automatically distribute the rewards in USDC instead.

3. Stability Fund

Lybra incorporates an innovative feature known as the Bounty mechanism. This feature allows users to acquire dLP and advanced vested esLBR using either LBR or eUSD.

In scenarios where eUSD is employed for these purchases, the used eUSD portion is strategically reserved as a part of the protocol’s Fund Stability. This reserved Fund Stability serves a critical function in ensuring the stability of the protocol by helping to maintain the peg of eUSD, especially in instances where eUSD is trading above its peg. Thus, this mechanism not only offers enhanced flexibility for users but also contributes to the overall stability and robustness of the Lybra protocol.

Taken together, the new eUSD/3CRV pool, the introduction of the Premium Suppression Mechanism, and the Stability Fund will serve as powerful tools for ensuring that the value of 1 eUSD always remains close to 1 USD, and stays on peg.

However, peg stability is just one of the challenges that V2 will provide solutions to. It will also be introducing a new feature designed to support the price of LBR tokens by managing sell pressure and increasing demand. This is achieved through V2’s new dLP (Dynamic Liquidity Provisioning) mechanism. So, let’s take a look at how that will work.

How V2’s New dLP (Dynamic Liquidity Provisioning) Mechanism Will Help Support The Value Of LBR Tokens

Maintaining a healthy value for LBR tokens is an important part of incentivising participation in the Lybra ecosystem and ensuring its long-term sustainability. To help with this, V2 will be introducing several mechanisms designed to help support the LBR’s value. The first of these is the new dLP (Dynamic Liquidity Provisioning) mechanism.

The dLP mechanism will work as follows:

1. To receive esLBR emissions from the eUSD loan pool, users will be required to maintain a minimum 2.5% threshold in locked Dynamic Liquidity relative to the total value of their loan. For example, if a user were to mint 1,000 eUSD they would need to provide a minimum of $25 worth of LBR/ETH dLP tokens to be eligible for esLBR emissions.
2. At any point, if this user drops below the minimum 2.5% threshold, they will become ineligible for all unclaimed esLBR emissions.
3. Simultaneously, a bounty equal to the amount of emissions that the user has earned while ineligible will be offered. This bounty can be purchased by any user at a 40% discount in LBR or eUSD.
4. In scenarios where eUSD is employed for these purchases, the used eUSD portion is strategically reserved as a part of the protocol’s Stability Fund. This Stability Fund serves a critical function in ensuring the stability of the protocol by helping to maintain the peg of eUSD, especially in instances where eUSD is trading above its peg.
5. At any point, if the user’s dLP rises above the 2.5% threshold again, they will resume receiving their esLBR emissions.

By tightening the requirements for receiving esLBR and requiring recipients to lock a threshold amount of Dynamic Liquidity, V2’s new dLP feature will help to reduce sell pressure. Meanwhile, the introduction of bounties that incentivize other users to buy the forfeited emissions at a discount will increase demand for LBR. Taken together therefore, these measures will help support the value of LBR, thereby incentivizing participation in the Lybra ecosystem. They will also ensure that, as a governance token, LBR is held by stakeholders aligned with the long-term health of the protocol. Furthermore, the Stability Fund contributes further to peg stability

However, the dLP is not the only feature of V2 that will help with supporting the value of LBR tokens. It will be working hand in hand with a new set of vesting mechanism for esLBR, which are designed to align token holders with the long-term health of the Lybra ecosystem. Here’s how they will work:

How The New esLBR Vesting Mechanisms Will Align Incentives With The Long-Term Health Of The Lybra Ecosystem To Further Support LBR Prices

Three changes will be made in V2 to help align the esLBR vesting process with the long-term health of the Lybra protocol:

1. Extending The Vesting Period From 30 Days To 90 Days

In Lybra V1, the vesting period for converting esLBR into LBR was 30 days. This relatively short vesting period worked well for incentivizing initial participation in the Lybra ecosystem during its infancy. However, as Lybra has matured into the market leader in the LSDfi space, it is now at a stage where it can prioritize attracting users who are aligned with the long-term health of the protocol. Therefore, in Lybra V2, the vesting period for converting esLBR into LBR will increase to 90 days. This is designed to avoid reliance on mercenary capital and develop a stable base of holders who are rewarded for long-term participation. It also ensures that the people making governance decisions are making those decisions with the long-term health of the Lybra ecosystem.

2. Introducing The Boost Mechanism

As well as the new extended vesting period, Lybra V2 will further incentivize long-term participation via its new Boost Mechanism. The Vesting Lock Period Boost Mechanism is designed to reward users who choose to lock up their LBR or esLBR tokens. It will mean that the longer users lock-up their LBR or esLBR tokens for, the higher the esLBR yield they will earn through all mining pools.

Boosts in V2 will be calculated based on a formula that involves the amount of Locked Up LBR (or esLBR), the Maximum Threshold (also referred to as Maximum Lockable Threshold), and a Time Weight Factor. . The formula is as follows:

Boost = Locked Up LBR (or esLBR) / Maximum Threshold * Time Weight

The Maximum threshold Lockable Limit (esLBR Limit) for a user is determined by the ratio of the user’s total mint value to the total mint value across the entire protocol, multiplied by the total circulation of LBR and esLBR. This is illustrated as:

esLBR Lockable Threshold = your loan value in USD / overall loan value in USD * total circulation of LBR and esLBR

Users are allowed to lock up more esLBR than the maximum threshold, but the boost will be calculated based on the real Maximum esLBR maximum threshold.

The following tables provide an example of how this would work in practice:

The only other detail for users to be aware of is that once they have committed to a certain lock-up period, that period cannot be decreased. So, if they wanted to adjust their lock-up period, they would need to initiate a new lock-up cycle, which resets the count to the beginning.

The key takeaway of the Boost Mechanism is that users will be rewarded for locking up their tokens for longer periods. Combined with the longer vesting period, these two features will help ensure a committed user base in the Lybra protocol, thereby aligning incentives with the long-term health of the ecosystem. Both features will also decrease sell pressure on LBR, thereby helping to support its value.

These features are joined by one final new vesting mechanism in V2, which also helps to achieve these goals. This feature is the esLBR Advance Vesting Penalty Mechanism, and this is how it works:

3. How The esLBR Advance Vesting Penalty Helps To Reduce Sell Pressure & Increase Demand For LBR To Support Its Value

Although the vesting period for converting esLBR to LBR on Lybra V2 will be 90 days, users can still choose to vest their tokens earlier. But doing so will incur a penalty and the penalty has been designed in such a way that an early vesting event would actually lead to a net increase in buy pressure rather than sell pressure. This is because for every day earlier than the 90 day standard that a user vests, the amount of LBR they receive will decrease proportionally. For example, if they were to vest 4 days after receiving their esLBR, they would incur a 95% penalty (so only receive 5% of the regular amount of LBR). On day 5, it would be a 94% penalty, on day 6, a 93% penalty, and so on. Crucially however, the tokens forfeited by the user who vests early would be offered as a bounty, where any other user can buy them at a 40% discount, which will create demand. We can illustrate this using an example:

1. Let’s say that a user called Alice earns 1,000 esLBR through mining.
2. She vests her esLBR and decides to exit the vesting after 10 days.
3. This would incur a 90% penalty of 900 esLBR, meaning she only receives 100 LBR.
4. The 900 esLBR that she has forfeited would go into a bounty, where they can be bought buy other users at a 40% discount using either LBR or eUSD.
5. So, another user, Bob, comes in and buys the 900 esLBR at a cost of 540 LBR due to the 40% discount.
6. As with the dLP bounty, In scenarios where eUSD is employed for these purchases, the used eUSD portion is strategically reserved as a part of the protocol’s Stability Fund, thereby helping to uphold the eUSD peg.

The Advanced Vesting Penalty therefore not only incentivizes long-term participation in the Lybra ecosystem but also ensures that early vesting events actually lead to a net increase in demand for LBR, thereby supporting its value.

So, in combination, the new 90 day vesting period, the Boost Mechanism and the Advanced Vesting Penalty provide a whole suite of mechanisms for aligning user incentives towards long-term participation. In doing so, they reduce sell pressure and increasing demand to bolster the value of LBR in a variety of different vesting scenarios.

Conclusion

With an expanded range of LSTs that can be used as collateral, new omnichain functionality, and increases to fund security, Lybra V2 has a lot of eye-catching features that will dramatically increase the utility of eUSD. However, as well as these utility upgrades, V2 will also have a plethora of features designed to solve for more technical and strategic goals. These include solutions for upholding the eUSD peg, supporting the value of LBR and ensuring that, as a governance token, it is held by stakeholders aligned with the long-term health of the protocol. Taken together, they will ensure that Lybra maintains its position as the market leader in the LSDfi space, delivering an interest-bearing stablecoin solution that outstrips all other options in the market in terms of both utility and technical functionality. We can’t wait to release the upgrade soon so that you can try it for yourself. In the meantime make sure you stay in touch with us for all the latest updates on:

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