May 5, 2022

7 min read

Unifi Protocol Proposes a Major “UPgrade”: UP v2 Litepaper

A whole new incentive system to supercharge UP’s redeem value and take Unifi Protocol TVL to new heights

This article was last updated on May 31, 2022.

Click here to vote now in the UP v2 Core Referendum!

Introduction

We love UP. We truly do. But UP has stagnated a bit. We need to take actions that will kick the Unifi ecosystem into high gear. An UPgrade, you might say.

UP v2 is ready — and with it, a whole new incentive system to supercharge UP’s redeem value and take our total value locked (TVL) to new heights.

If approved in a UNFI DAO referendum, UP v2 will have SIX ways for redeem value to go UP! In our existing system, there is only one way for UP redeem value to increase. That’s quite the improvement!

(If you are unfamiliar with UP’s redeem value, watch this video.)

Learn all about UP, the Unifi Protocol liquidity rewards token with a 100% backed redeem value.

UP v2 may need to be rolled out in phases and on different blockchains at different times. Not every feature or phase will be available on all blockchains. All phases, numbers, percentages, and other figures presented in this litepaper are approximations and subject to change without notice at any time.

Phase 1

UP Token Migration

The current UP smart contract does not have any of the new features that will be outlined in this litepaper. The implementation of a new and improved UP v2 system begins with migrating the existing UP token smart contract to the UP v2 token smart contract. Even before any new features are introduced, this is Step 1.

The public redeem function of UP will remain incorporated within the UP v2 token contract. The UNFI referendum on this UPgrade will be, in part, to approve changing this function to the “inactive” state in order to be able to take advantage of the improvements to UP outlined in this litepaper. (See Phase 2 below.)

UP holders will deposit their UP tokens into a smart contract and receive the same balance of UP v2 tokens back. This exchange of UP v1 tokens for UP v2 tokens will be facilitated on the uTrade platform.

Notable considerations: This exchange transaction will require gas fees to be paid by the UP token holder on whichever blockchain their UP tokens are on.

Phase 2

Currently, native tokens enter the UP smart contract through trading fees on uTrade, (1) with a portion of those fees used to increase redeem value. This feature (mint rate) is not changing.

Until now, the native tokens backing UP just sit in the UP contract, doing nothing but looking pretty and available for redemption. With the advent of more staking products and ways to earn a return on these idle assets, the new UP v2 system will put those tokens to work!

90% of the assets backing UP on each chain will be used to earn a passive return, when possible. These returns may be via native token staking, when available. On chains where staking options are limited or better options are available, verified third-party sites may be used to earn a return. (2) Those staking returns will be distributed into the UP ecosystem, increasing the redeem value. UP holders will now reap the rewards of auto-compounded staking, just by simply holding UP.

Anybody can join into this system with ease. We will be opening the minting of UP to the public. A user can send an amount of native tokens to the UP contract, and receive UP tokens, backed by 95% of the native tokens. (3) The other 5%, well that’s the mint rate which goes towards increasing the redeem value!

Native Tokens Backing UP will Fund a Liquidity Pool

As those native tokens will be busy working, UP will no longer be publicly redeemable. Instead, the UP liquidity pool on each chain will be funded by 5% of the native tokens backing UP, with an equivalent value of UP tokens for the other side of the pair. Therefore, that pair will consistently have liquidity equalling at least 10% of UP’s TVL. The liquidity provided will be maintained by the system to ensure UP holders can liquidate UP tokens if they so choose. This ensures a path for UP holders to retrieve native tokens by selling their UP on uTrade.

(4) The UP earned from this liquidity (as LP rewards) will be burned — without redeeming — or otherwise utilized to increase the redeem value for all UP holders. This is in addition to the percent of trading fees that already goes to increasing UP redeem!

Phase 3

Arbitrage Trades will Increase Redeem Value

That UP pool though — the market value will surely move away from the redeem value as people buy and sell UP, right?

Well, Unifi Protocol’s proprietary arbitrage solution will ensure that when this happens, it benefits the UP ecosystem! This is made possible by the arbitrage smart contract having exclusive rights to mint and redeem UP at the current redeem value. Therefore, whenever the market value goes too far above or below the redeem value, an arbitrage trade will be performed to correct this discrepancy. Eventually, the precise differential which triggers a correction may be determined by DAO functionality.

(5) And the profits from those trades will go into the UP contract. This is huge. As the market price and redeem value fluctuate, every arbitrage trade will increase the redeem value of UP.

For those keeping track, we are now up to 5 ways for UP redeem value to increase: trading fees, public UP minting, staking rewards, LP rewards, and arbitrage profits.

Phase 4

Bonded UP — APR Supercharged!

UP itself can be staked — also known as bonding — to earn even more rewards! This is an optional action that can be initiated by UP holders.

Bonding UP can entitle you to a percentage of the staking returns earned by the native tokens backing UP (see Phase 2). Bonded UP should earn rewards orders of magnitude higher than the rewards from simply holding UP, and as designed, higher rewards than even staking native tokens to node operators.

(6) The UP bonding process effectively burns a portion of UP, and as a result increases the backed value of all UP in circulation.

More information on the precise mechanics of the UP bonding process will be released in advance of this stage rolling out. Phase 4 will not be available as a feature of UP v2 at launch.

“Redeem Value” → Backed Value

We have now covered all 6 ways that UP can increase in redeem value! Of course at this point, if approved, it may be a good idea to start calling it Backed Value, since part of this UP v2 UPgrade means UP can no longer be redeemed. For access to the increasing amount of native tokens backing each UP token, the UP token would have to be sold. UP v2 is an algorithmic coin with a reserve of native tokens that 100% back each UP in circulation.

UP v2 is an algorithmic coin with a reserve of native tokens that 100% back each UP in circulation.

But why?

First and foremost, SUSTAINABILITY. Ecosystem rewards should not need to be propped up by inflationary subsidies, or subject to the whims of external market pressures. Unifi Protocol is proud to be a leader in this regard and UP v2 can make a significant contribution in this space.

Secondarily — UP will be in demand. If demand for UP increases, that makes LP rewards on uTrade that much better. The benefits earned by staking UP will likely exceed the returns from staking the underlying tokens to validators — and everything stays within the Unifi Protocol ecosystem. That demand for UP isn’t lost to market inefficiency — instead it goes right back into UP! By leveraging the sustainable economics of UP, we get to use the funds backing each token to benefit uStake, uTrade, and beyond. No inflationary garbage.

The system is future-proofed too. How these systems feed into one another can be updated easily. We can upload a new contract, resume the public redeem function if necessary, and have the other contracts point to the new contract. This is great for any bug fixes, and also allows us to optimize the system for more beneficial outcomes. In other words — this opens up tons of opportunities for the DAO in the future. Let’s say we are currently providing native tokens to Option A for staking rewards, and the DAO would rather us provide the native tokens to Option B. No problem. The DAO can vote for this change. Look out for future referendums on this topic.

Conclusion

The UP v2 “UPgrade” introduces 5 new ways for UP to increase in backed value and total value locked — public UP minting, staking rewards, LP rewards, arbitrage profits, Bond minting fee — with trading fees of course being the sixth method. UP v2 will address the stagnation of the current redeem value, and increase our TVL. These six ways should be a massive jolt to UP — making the Unifi Protocol ecosystem as unique and competitive as any other DeFi offering on the market now, but most importantly, far more sustainable. Up, up, and away Unifi!

About Unifi Protocol

Unifi Protocol creates innovative and straightforward solutions for Web3 applications. Since 2018 the Unifi team has been bringing groundbreaking blockchain products to market, beginning as a volunteer team with a vision for a decentralized future. This legacy of forward-thinking innovation is the foundation of Unifi Protocol, now an established company at the forefront of Web3 technology.

Stake UNFI, earn rewards and be part of the Global Unifi Protocol DAO governance. https://gov.unifiprotocol.com/my-dashboard.

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