An exploration into Lybra Finance, an LSD-Fi stablecoin protocol.

Lybra taps into the growing market for LSDs (Liquid Staking Derivatives) & has created a decentralised stablecoin protocol that enables stETH and ETH holders to mint an interest-bearing stablecoin called eUSD.

This increases their yield, improves asset liquidity and assists with capital efficiency, all while maintaining the value of eUSD. eUSD holders can use their tokens and obtain ~8% APY.

eUSD Minting — How does eUSD generate yield?

Users can choose to deposit ETH or stETH as collateral to mint eUSD, which requires a collateralisation rate of at least 150%. All ETH contributed to the protocol will be converted 1:1 to stETH, which will continue to provide yield over time (~5% on Lido). These inflows will be transferred back in the form of eUSD based on ETH’s price at the time. $LBR and eUSD holders will then share the revenue proportionally, with the latter’s APY at ~8%.

Figure 1: eUSD Minting Process, Source: Greythorn Research Team, Data: Lybra Protocol

Price Stability Mechanisms

The stability of eUSD is upheld through a combination of strategies including over-collateralisation, liquidation mechanisms, and arbitrage opportunities.

1. Regid Redemptions

Rigid redemptions refer to exchanging eUSD for ETH at face value. In other words, for x eUSD, you receive x dollars worth of ETH in return.

Two parties are involved in this process, namely, the redeemer and the redemption provider. The provider will receive 0.50% of the redeemed ETH as a fee from the redeemer, as governed by the Lybra DAO.

Figure 2: Rigid Redemption Process, Source: Greythorn Research Team, Data: Lybra Protocol

2. Liquidations

Borrowers (minters) whose collateralisation rates fall below 150% will be liquidated to maintain the eUSD peg. The liquidation process closes once the borrower’s reduced debt is paid off, and the value of the remaining collateral equals 110% of the reduced debt.

Three parties are involved in this process, namely liquidators, borrowers & keepers.

• Liquidators are incentivised by using their eUSD to settle the debts of any borrowers. When a borrower is liquidated, up to 50% of their collateral is burned from the liquidator’s balance to settle the debt. As compensation, the liquidator receives the collateral asset worth 109% of the value of the repaid eUSD. Additionally, a minimum of 0.50% of the collateralised asset is allocated to the Keeper.
• The responsibility of Keepers is to execute and monitor the state of the other two parties during liquidation and earn 1% of the liquidated assets.

3. Arbitrage Opportunities

• eUSD < 1 USD: Buy eUSD for $1 worth of ETH/stETH until parity.
• eUSD > 1 USD: Mint eUSD by depositing ETH/stETH and sell until parity.

Figure 3: Lybra Finance Stats, Source: Greythorn Research Team, Data: CoinGecko

How can a user earn yield on Lybra?

1. Deposit ETH and mint eUSD to earn staking rewards in eUSD and rewards in $LBR.
2. Provide liquidity to eUSD/ETH to earn trading fees in $LBR.
3. Hold $LBR to gain a share of the protocol’s revenue.
4. Become a Liquidator or Keeper to earn ETH from liquidations.

Value Capture

1. Token Holders:

• eUSD holders can obtain a stable reward yield of ~8%.
• 1.50% from the 5% of $stETH APY will be distributed to $esLBR holders, as governed by the Lybra DAO.
• The entire LSD distribution service fee is distributed to $esLBR holders.

1. Redemption Providers:

• 0.50% rigid redemption fee in ETH paid by the initiator.
• $LBR reward yields are increased by 20% for redemption providers.

1. Liquidators & Keepers:

• 10% liquidation reward.
• Liquidators receive the collateral asset worth 109% of the repaid eUSD.
• 0.50% — 1% of liquidated asset to Keepers.

1. Protocol:

• Service fee: 1.50% of eUSD circulation.

Tokenomics (Initial)

Dual Token Model: $LBR & $esLBR

• $LBR

1. Max Supply: 100,000,000 $LBR

Figure 4: $LBR Tokenomics, Source: Greythorn Research Team, Data: Lybra Finance

3. Use Cases

• Governance
• Staking
• Liquidator Rewards
• $esLBR

1. Converts to $LBR through 30 days of linear vesting
2. Use Cases:

• Governance
• Hold $esLBR to boost yields

Figure 5: LSD-Fi Comparables, Source: Greythorn Research Team, Data: Dune Analytics

Bullish Fundamentals

1. Increases capital efficiency: eUSD offers reliable rewards without sacrificing liquidity. Its 0% borrow rate enables costless leveraged long exposure on ETH.
2. Early to market: Across the main avenues of LSD-Fi,.most projects increase their staking yields through various, innovative ways of increasing leverage, yet Lybra utilises over-collateralisation. As Lybra drives its core offering through a stablecoin, it serves the market need for stable returns whilst holding a unique edge across other LSD-Fi protocols.

Bearish Fundamentals

1. Relatively high service fee of 1.50%.
2. $LBR is relatively inflationary and only set to be fully vested after two years.
3. When eUSD < $1 USD, it is important to note that the incentivisation for users to arbitrage requires them to stake ETH/stETH for eUSD, which may be toilsome during sharp market downturns.

Closing Remarks

As a pioneer of an interest-bearing LSD-Fi stablecoin, Lybra has a unique design, where multiple mechanisms have been introduced to ensure sufficient collateral for eUSD. However, its relatively high token inflation, as well as the reliability of the eUSD peg incentives may bring concerns regarding the robustness of the protocol.

While it may still be early for Lybra Finance, it is clear that they have introduced a product that the market wants to utilise.

References

• CoinGecko. 2023. Cryptocurrency Prices, Charts, and Crypto Market Cap | CoinGecko. [online] Available at: <https://www.coingecko.com/> [Accessed 9 June 2023].
• CoinMarketCap. 2023. Cryptocurrency Prices, Charts And Market Capitalizations | CoinMarketCap. [online] Available at: <https://coinmarketcap.com/> [Accessed 9 June 2023].
• DefiLlama. 2023. DefiLlama. [online] Available at: <https://defillama.com/> [Accessed 9 June 2023].
• Lybra | Unleash the Power of LSD, Stable Interest Bearing Stablecoin (no date) lybra.finance. Available at: https://lybra.finance/ (Accessed: 8 June 2023).

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