Sovryn <> Frax - Proposal

Hello – I’d like to gauge interest in a liquidity partnership. This is a preliminary post to see if a longer form one is justified.

TL;DR Sovryn is seeking dollar/stablecoin liquidity to the platform and is willing to compensate with a combo of yield (estimated 50%+ please see detailed analysis and historical data in link below) and option for a convertible note on the Sovryn token (at a 20% discount). All liquidity provided would be held self-custodially and be immediately liquid. No rehypothecation and no fractional reserve.

Here’s the detail:

Sovryn builds DeFi apps on the Bitcoin sidechain RSK. The flagship product is a fork of Liquity from Ethereum, called Zero (0% interest over-collateralized BTC backed CDP: Zero: Protocol for Zero-Interest Loans | SOVRYN). This allows Bitcoiner’s to borrow bitcoin-backed stablecoins against their Bitcoin at 0% interest (plus a small origination fee usually around 3%). Despite RSK traditionally being a ghost town, there is a lot of interest and demand for this product, even from the maximalist crowd. More than can currently be handled. The problem is until the bitcoin-backed stablecoin itself becomes more useful (for example when it is issued on Taro/RGB/BRC-20), people who borrow against their BTC immediately want to swap the newly minted bitcoin-backed stablecoins (called ‘ZUSD’) for Tether/USDC/DAI/FRAX. Since supply of Tether/USDC/DAI/FRAX liquidity has almost run dry it means the protocol has to effectively shut down Zero as a bitcoin-backed borrowing product, leaving a lot of money to be made on the table.

The protocol is seeking stablecoin treasuries, such as FRAX, that will bring liquidity into the platform so it can be bridged out into the much deeper Ethereum ecosystem.

As an example, FRAX treasury would bridge FRAX into Sovryn on RSK chain. Those stablecoins would be converted to ZUSD and held self-custodially in what is called the ‘Stability Pool’. This is a pool of dollars within the Zero protocol that is responsible for liquidating at risk bitcoin-backed loans. For example, if someone borrowers $100K ZUSD against $150K BTC collateral then the price drops, at $110K BTC (approx. 90% LTV) price they would be liquidated. In this scenario $100K ZUSD is burned from the Stability Pool but the liquidity providers in the pool receive $110K BTC as compensation. Effectively, Stability Pool liquidity providers get the right to buy BTC at 10% discount during liquidations. Further, if they re-sell the BTC back for ZUSD and go back into the Stability Pool to gain more liquidations they can acquire more BTC at another 10% discount. During times of volatility this can be very, very lucrative (upwards of 100% Stability Pool APY Explained: Earn at Least 5% and More | Sovryn). Aside from performing liquidations, the funds in the Stability Pool do absolutely nothing else. They literally sit 100% in the pool, no re-hypothecation & no fractional reserve.

Because the Stability Pool returns are volatile, the protocol is also paying 5% APY paid in $SOV token on any funds in the Stability Pool. I’m happy to discuss the mechanics of the $SOV token if that’s of interest. For now, all that matters is those 5% APY tokens are immediately liquid, paid out every 30s block and can be held or immediately sold into the market if FRAX treasury doesn’t want to hold any altcoin.

A few other nuggets:

  • Sovryn’s team is the furthest along with any Bitcoin and stablecoin project and feels the CDP structure offered is superior to all other proposals: https:// bitcoinmagazine. com/technical/world-needs-bitcoin-backed-stablecoins
  • Sovryn is leading many of the conversations around bleeding edge Bitcoin scaling solutions like ZK Rollups. One of the contributors is John Light: https:// bitcoinrollups. org
  • While the team hopes to push forward and move to more advanced Bitcoin L2 scaling solutions, none of what was described above requires a high through-put L2. Scaling this specific protocol on RSK is not an issue based on conversations with our developers and bridging the stablecoin to some combo of RGB/Taro/Hyper-core/BRC-20 is viable.
  • Sovryn is getting ready to release a SDK which would allow other services to white-label and build on it’s DeFi back-end. That will further expand the reach of Bitcoin related financial products.
  • The protocol is live and in production, not vapor-ware. The primary risk with our setup is smart contract risk. However, the flagship product is a fork Liquity (and other popular DeFi protocols) which has been operating in Ethereum world for 2+ years. It has performed successful liquidations on crypto-backed loans and maintained it’s $1 peg very well through the 80% drops and volatility of last year.
  • Any funds bridged ETH <> RSK would happen over the MultiChain bridge: https: //multichain. xyz/

The ultimate ask would be a revolving line of credit which can be drawn on when stablecoins are needed, thus alleviating the medium-term issue of bridging out ZUSD into deeper stablecoin liquidity eco-system. These stablecoins would be held self-custodially by you (or your partners) exclusively in the Stability Pool where they would earn a base-line risk minimized yield with the upside potential on liquidations. Additionally, at the end of the loan term you will have the option to convert funds in the protocol token for a discount.

The primary benefit is significant yield for FRAX holders. Driving fees to FRAX CRV pools from previously untapped Bitcoin market. Acquiring material upside on the asymmetric bet of Bitcoin DeFi. Providing a path for FRAX to indirectly be used on high through-put stablecoin payment applications such as RGB/Taro on Lightning Network.

What would the communities interest be in a structure like this?

Normal disclaimers, not financial advice. Consider this a a modest informational post.