Interpreting Lybra Business Model, Token Design, and V2 Advantages and Disadvantages
Lybra Business Model, Token Design, V2 Advantages and Disadvantages
Author: ETHAN, E2M Research
1. Lybra’s Business Design
1.1 Business Model
Lybra’s main business is the interest-bearing stablecoin eUSD. Users can collateralize ETH (automatically converted to stETH through the protocol) and stETH to mint eUSD in excess. The eUSD obtained from collateralization forfeits the interest income of LSD assets. At the same time, the project will use the interest income from stETH to purchase eUSD in the market and distribute it according to the user’s eUSD holdings. The protocol charges a 1.5% annual management fee for minted eUSD as business income.
LSD (Liquid Staking Derivatives) is one of the industry solutions derived from the pain points of the minimum 32 ETH staking requirement and the high operational threshold for validators after the transition to ETH’s Proof-of-Stake mechanism. It specifically refers to the 1:1 staking certificate obtained by collateralizing a small amount of ETH on-chain through joint staking.
The stETH mentioned in this article is the staking certificate for ETH issued by Lido, a leading project in joint staking. Lido accounts for 32% of the total staking share. Its business model is to select qualified node operators and allow users to stake small amounts of ETH into its protocol to obtain stETH, charging users a 10% fee on staking rewards.
1.2 Rigid Redemption
The value of eUSD fluctuates due to market trading. When the price of eUSD is low and below 0.995, the protocol provides rigid redemption service with a 0.5% deduction. In other words, users can choose to redeem eUSD rigidly at a 1:0.995 ratio to exchange it back for ETH, preventing the price of eUSD from further deviating from its peg.
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The liquidity for this part of the redemption comes from the collateral assets of users who choose the rigid conversion function within the protocol. When rigid redemption occurs, users providing liquidity for redemption receive a 0.5% redemption fee and an additional 20% APY in LBR rewards.
1.3 Liquidation Mechanism
The healthy collateralization ratio of the protocol is above 160%, and the liquidation threshold is 150%. When a user is liquidated, up to 50% of the collateral will be liquidated from the liquidator’s balance to repay the debt. In return, the liquidator receives collateral assets worth 109% of the repaid eUSD value, and 0.5% of the collateral assets belong to the Keeper (a third-party monitoring project). If liquidation is proposed by the Keeper, the Keeper can earn 1% profit. When the global collateralization ratio is below 150%, users with collateralization below 125% will be fully liquidated.
1.4 Design Innovations
The mechanism of eUSD refers to the codebase of the Liquity protocol and introduces some design innovations based on Liquity’s liquidity pool.
1. Liquity charges a one-time minting fee but no other fees afterwards. Initially, this allowed Liquity to generate a significant amount of protocol revenue, but later on, growth may become stagnant. On the other hand, eUSD does not charge a minting fee but instead collects a 1.5% management fee in eUSD. This allows eUSD to have more sustainable protocol revenue compared to Liquity.
2. Liquity incentivizes users to provide redemption funds to the liquidity pool while continuously rewarding LQTY tokens. Lybra, on the other hand, removes the liquidity pool function and relies on liquidators for liquidation. In addition, Lybra adds an additional 20% LBR annual reward.
3. Liquity’s collateral is singular and only consists of ETH. This is the reason for the current decrease in growth. However, Lybra supports stETH as collateral in addition to ETH, and after v2, it will also support more LSD assets, expanding the range of assets and obtaining more growth.
1.5 Potential Issues with the Current Protocol:
1. The price of eUSD has consistently been at a premium. This is due to the fact that eUSD’s interest-bearing nature is viewed by users as a long-term investment, reducing potential selling pressure and making it difficult to decouple. The business logic also converts stETH earnings into eUSD, creating a cyclical buying pressure.
2. The eternal problem for all stablecoins is the lack of application scenarios. Currently, apart from the two trading pairs on Curve and Uni, eUSD does not have any other application scenarios, severely limiting its long-term development as a stablecoin.
II. LBR Token Economic Model
The current protocol’s token distribution mechanism for LBR is shown in the table below. The IDO portion sells 5M LBR at a price of 0.3U, with a value of 1.5M.
The Lybra protocol also adopts a ve economic model. The Ve tokens in the protocol are converted back to LBR through a linear release mechanism, rather than a one-time release at maturity. The current ve token in the protocol is esLBR, which cannot be traded or transferred but has voting rights and can share protocol revenue. Mining rewards are the main source of esLBR, which is linearly converted to LBR within 30 days.
Based on the esLBR release model in May, the daily emission of esLBR will range from 54,618 to 126,277, with the following distribution: eUSD reward pool: 78%, LBR/ETH Uniswap V2 LP pool: 15%, eUSD/USDC Curve LP pool: 7%.
III. Current Protocol Data (August 25th)
3.1 Stablecoin Market Landscape
Let’s take a look at the overall landscape of the stablecoin market. According to Defilama’s data, it ranks 12th in the stablecoin rankings.
3.2 LSDFI Market Landscape
According to Defimochi’s dune data, the current size of the LSDFI track is not large, at about 660 million, and Lybra holds a 51.2% market share in the LSDFI market, making it the absolute leading project.
3.3 Calculation of Interest Rates in the Lybra Protocol
eUSD is an interest-bearing stablecoin. According to the data in the above image, the eUSD interest rate on the official website is 8.40%. The author attempted to estimate the earnings of users participating in minting: based on the current global collateralization ratio of 198%, the daily stETH interest rate is about 4%. After deducting the 1.5% protocol annual fee (deducted based on the scale of eUSD, so subtract 1.5% directly from the previous total), the earnings of users pledging according to the global collateralization ratio are about 6.42%, which differs from the data provided by the official website.
The actual on-chain distribution of eUSD earnings can be understood through the Lybra mechanism breakdown by Loki. https://mirror.xyz/gundam0079.eth/RFkeOG9UCUDC57ggdy7xMVX7jGOPt9Mt8-y0E-30vfw
3.4 Official Website Interface
The image below shows the official website interface for Lybra’s yield operations. First, let’s look at the Mint pool section for eUSD. The APR16.39% here is the annual yield subsidy for esLBR, and this additional yield is the key to the protocol’s flywheel logic.
After users participate in the minting mechanism for eUSD, although the protocol will deduct a 1.5% management fee annually, which means that users will lose approximately 0.76% of their total earnings compared to stETH (1.5%/198%), they will receive a 16.39% annual reward linearly released with esLBR. The additional yield and the expected yield of esLBR compared to holding stETH are more attractive.
In other words, although the protocol will skim off part of the income from stETH, it will provide additional subsidies for users holding eUSD in the form of linearly released esLBR, thus increasing the protocol’s future yield expectations and potential capital pressure.
There is also an optional Boost mechanism in the top left corner of the image. Users who enable the Boost mechanism will delay receiving the annual reward for esLBR (up to one year with Boost100%). For example, when a user selects a 6-month Boost, the protocol will pause the distribution of esLBR for half a year and then release esLBR with a 50% bonus, which is 1.5 times the normal distribution.
3.5 Historical Liquidation Data
In the data from Dune, the protocol experienced a large liquidation from early August to August 17, with a total liquidation size of 1.58M and a total historical liquidation size of 1.87M.
3.6 Number of eUSD Holders
The number of users holding eUSD in the entire protocol is 1068. From this data, it can be seen that the protocol is still in the early stages. The author attempted to participate in the collateralization of ETH to mint eUSD. The minting business has a minimum threshold of 1 ETH. Considering the high gas fees on the ETH chain, it is not friendly to retail investors. Retail investors with less than 1 ETH cannot participate, and users with several ETH also need to consider the gas costs. The author believes that in the future, it may only be possible to attract retail participants’ funds if Layer2 and cross-chain staking are opened to reduce the threshold.
3.7 LBR Valuation
On August 25, the author conducted a valuation. According to the data from Defilama, the token price is $1.4, circulating market cap is 19.72M, and FDV is 140M. Lybra’s fee and revenue are 2.64M (calculated by multiplying the income of the past month by 12).
In terms of decentralized stablecoins, MakerDAO is an absolute leader. Comparing it with MakerDao using TokenTerminal data, MakerDao’s current circulating market cap is 917.96M, and FDV is 1.02B. The fee and revenue data are 106M (calculated by multiplying the income of the past month by 12).
The current valuation of LBR is shown in the table below:
From the comparison of valuations, it can be seen that Lybra’s FDV valuation is significantly higher than MakerDao’s, while considering the comparison based on circulating market cap, LBR is slightly lower than MakerDao at the current time.
In Lybra’s single-coin mining project, the profit is eUSD. Here, the protocol uses 1.5% of the income to buy eUSD, which is the actual empowerment of staking LBR tokens. Considering this, the valuation of the protocol is still somewhat underestimated.
IV. V2 and Pros and Cons Analysis
4.1 Lybra V2
In the currently announced information, it is expected that the V2 version will be upgraded at the end of August and audited by Consensys and Halboun. At the same time, Lybra’s V2 migration guide has been released, and users can update LBR and eUSD to the V2 version according to the guide after the V2 update.
The update plan for V2 includes: the issuance of peUSD, collaboration with LayerZero, more trading pairs for eUSD and reducing the premium of eUSD, as well as updates to the economic model (dLP and Lybra War).
Issuance of Non-rebase stablecoin peUSD and support for more LSD assets as collateral
Issuance of peUSD anchored to Non-Rebase LSD (initially including WBETH, rETH, swETH), while allowing conversion of eUSD to Non-rebase peUSD. peUSD without interest-bearing properties is more conducive to circulation and trading.
Collateralized eUSD can be used for flash loans
eUSD collateralized by peUSD can be used for flash loans and charged a 5% fee rate. This is designed for liquidation purposes.
Collaboration with LayerZero to develop cross-chain tokens
peUSD and LBR will become cross-chain versions through LayerZero, allowing for cross-chain circulation.
Addition of stablecoin trading pairs
In terms of the application scenarios for eUSD, an eUSD/3CRV pool will be launched on Curve, adding stablecoin trading pairs.
Value equalization mechanism
In terms of reducing the premium of eUSD, Lybra has proposed a value equalization mechanism. When the premium of eUSD exceeds 5%, the protocol will convert the funds used to purchase eUSD into USDC for distribution. When the premium is below 0.05, peUSD will be issued instead.
Users holding eUSD need to pledge 5% of the total value of LBR/ETH trading pairs in order to receive rewards from the Curve pool; otherwise, rewards will be suspended. This increases the trading depth of LBR. If LP is not pledged, the release of esLBR will be suspended, and penalized LBR will be given to users at a discounted price (50%).
Extension of linear release time for esLBR
The mechanism for linear unlocking will be extended from 30 days to 90 days, prolonging the release period and increasing the complexity of internal price gaming. Users can also withdraw directly, but LBR rewards will be penalized based on the timing, and penalized LBR will also be given to users at a discounted price (50%).
With Lybra supporting more LSD assets, a bribe election gameplay will be designed, hoping to create a Lybra War similar to Curve War.
4.2 Analysis of advantages and disadvantages:
1. First mover advantage:
Lybra is currently the market leader in LSDFI in terms of market capitalization, and the number of users holding positions in the protocol is not large.
2. Positive flywheel logic:
If the value of the collateral ETH increases during an upward trend in ETH, it will bring higher collateral ratios and higher returns, demonstrating considerable development potential.
1. Reputation risk:
The protocol is developed by an anonymous team, and the team’s track record is unknown.
2. Subsidizing with dependent tokens can accumulate selling pressure on tokens:
It is essentially borrowing against collateral. Relying on the release of tokens for subsidies enables the protocol to operate in a positive feedback loop. However, there are always significant subsidy costs in the development of the protocol, which can accumulate potential selling pressure risks when the protocol grows slowly.
3. Still in the early stage with unclear moat:
The current Total Value Locked (TVL) of over 300 million and the volume of eUSD of 160 million are not significant. The FDV market value is significantly overvalued compared to Maker. In the future, if there are competitors who are major suppliers of LSD bills, such as Lido, or competitors who cooperate deeply with major trading venues like Curve or Uni, Lybra’s subsequent growth will face challenges.
4. Need to expand application scenarios:
Currently, the scenario for eUSD is limited, with only pools in Curve and Uni and low liquidity. The design of peUSD and the full-chain support of layer zero may partially solve this issue, which needs continuous attention.