How does USDaf generate yield?

How can I earn with USDaf?

• Stability Pool deposits (Earn): Earn protocol revenue by depositing USDaf into the various Stability Pools.

• sUSDaf: The autocompounded, auto harvested, tokenized, yield-bearing version of USDaf built in partnership with Yearn is the best one-click way to get yield on your USDaf.

• Protocol Incentivized Liquidity (PIL): Supply liquidity for USDaf onto the incentivized external DEXes.

• Lock ASF: Receive protocol revenue generated from USDaf borrowing fees, subject to governance vote.

Yield is generated from:

• Interest payments: Each borrow-market automatically funnels 75% of the of its revenue to its Stability Pool depositors (Earners). This is paid out in USDaf.

• Liquidation gains: USDaf will be used to liquidate under-collaterized loans, effectively buying their collateral with a ~5% discount. This is paid out in the respective collateral type for each Stability Pool.

Users may also use USDaf in incentivized liquidity pools across leading DEX’s, allowing both liquidity providers (LPs), Stability Pool depositors, and sUSDaf holders to benefit from enhanced yield options under the two-token model.

USDaf is built with a dual-token model: USDaf for transactions and sUSDaf (staked USDaf) for earning yield. USDaf alone does not generate yield, but is used for transacting or providing liquidity.

Users can stake USDaf into respective Stability Pools for each collateral type, or elect to stake their USDaf for sUSDaf, a tokenized yield-bearing ERC-4626 version of USDaf built in partnership with Yearn Finance that automatically allocates USDaf across each of the 8 Stability Pools in an optimized manner.

All the yield is fully sustainable, scalable and “real”, with no governance token emissions and lockups.

The Dual-Token Model

The Dual-Token model pioneered by teams like Frax, Ethena, Maker, and others, has proved to be incredibly beneficial for users. There is a yield trade-off, leading to higher rewards for both sUSDaf stakers/earners and liquidity providers:

Users have two options with sUSDaf: To choose between staking their USDaf in the stability pool or providing liquidity in pools. 1 USDaf cannot be used in both at the same time, but users can split their USDaf stack across either, should they wish.

• If a user stakes USDaf for sUSDaf, they forgo the liquidity pool rewards, leaving those rewards for the remaining liquidity providers. This creates a higher yield for LPs because fewer participants are sharing the pool rewards.

• If a user provides liquidity, they sacrifice the opportunity to earn yield from the stability pool. As fewer users stake in the stability pool, the share of interest payments and liquidation collateral is spread across fewer sUSDaf holders, leading to higher individual yields.

What is the estimated yield on Earn?

The yield is a representation of the rates borrowers are paying. Since 75% of the borrowers’ interest payments go to Earn, the effective yield can exceed the average interest rate paid in a borrow market if less than 75% of the USDaf supply is deposited to the respective Stability Pool. This yield amplification sets Liquity V2 apart from competitors and money markets where lending rates cannot be higher than borrow rates.

This two-token model offers flexibility, but also creates a healthy tension between staking and liquidity provision, ensuring that both pools remain attractive by rewarding users based on their choices and the overall participation in each pool.

Why are there multiple Stability Pools?

The goals are to:

Establish separate borrow markets for different collateral assets with their own market driven interest rates, using the Stability Pool backing to dynamically split redemptions across the available collaterals (link to “Redemption”).

Compartmentalize the risks as much as possible when depositing to the respective Stability Pools (Earn) by giving the depositors control over which collateral assets they want exposure to in case of liquidations.

How do risks differ for the different Stability Pools?

Users can deposit their stablecoins into the Stability Pool of their choice, aligning with their risk preference and the types of collateral they're comfortable being exposed to. By selecting pools associated with specific BTC variants or Stables, participants can tailor their risk exposure and potential reward profile.

By offering separate pools for different collateral types, the system allows users to choose their exposure based on the perceived risk and potential returns of each BTC or Stable. This compartmentalization helps manage systemic risk, ensuring that impacts from liquidations in one asset class don't disproportionately affect the entire ecosystem.

It is important to note that all USDaf holders including depositors still remain dependent on USDaf to keep its peg.