Proposal to Implement leverage function for liquid staking tokens and their original tokens

[SeiyaChida]

Title:

Implement Leverage Function for Liquid Staking Tokens and Their Original Tokens

Author:

@SeiyaChida (SCI)

Summary

This proposal aims to introduce a leverage function for liquid staking tokens and their original tokens within the Starlay platform. It seeks to capture the leverage demand for Liquid Staking, providing users with potentially higher yields while also considering the associated risks and technical implementations.

Motivation:

The motivation behind this proposal is to enhance the utility and financial optimization of the Starlay platform by enabling users to leverage their staked assets. With the increasing popularity and TVL in Aave v3, and the utilization of its emode, there is a clear demand for leveraged strategies in the DeFi space. This proposal aims to cater to that demand within the Starlay ecosystem, particularly focusing on upcoming liquid staking assets like lDOT.

Specification:

DOT<>lDOT case

The implementation involves creating a mechanism that allows users to:

1. Convert their DOT holdings to lDOT tokens.
2. Use lDOT tokens as collateral to borrow DOT at a specified LTV.
3. Convert borrowed DOT back to lDOT.
4. Repeat the process to a specified limit, achieving geometrically increasing leverage.

The leverage and APR will be calculated based on specified LTV, interest rates, and borrow rates, with considerations for different tokens.

or more simple way for lDOT in case the following conditions as an example:
User holding=10DOT, LDOT LTV=50%, Deposit=111LDOT(≒15DOT), LDOT=0.13667DOT, Leverage=1.538461538

User profit rate

lDOT
Due to leveraging, the yield obtained from lDOT is multiplied by the leverage. However, interest is charged on borrowing DOT, so ultimately, a yield of **Leverage × (lDOT yield - DOT borrowing interest on Starlay) can be obtained, which can be quite substantial in the current scenario of nAstar: Leverage ratio × (22.2%-2%) = APR, which is considerably high. (as of 27th Dec)

LTV	Leverage	APR(%)
30%	1.428571429	28.57142857
35%	1.538461538	30.76923077
40%	1.666666667	33.33333333
45%	1.818181818	36.36363636
50%	2	40
55%	2.222222222	44.44444444
60%	2.5	50
65%	2.857142857	57.14285714
70%	3.333333333	66.66666667
75%	4	80
80%	5	100
85%	6.666666667	133.3333333
90%	10	200
95%	20	400
97%	33.33333333	666.6666667

※ Rate is on 27th Dec 2023
※ Formula for Leverage ratio = 1/(1−LTV)
※ Actual APR may be lower than the indicated number

Benefits:

• Users can potentially achieve higher yields through leveraging.
• Enhances the utility and financial strategies available within Starlay.
• Can attract more TVL and user activity to the platform by catering to the demand for leveraged staking.

Costs:

• The followings will be covered by SCI budget
  • Development and implementation of the leverage mechanism and possibly a flashloan function.
  • Potential need for implementing rebase compatibility for certain tokens.

Time:

The implementation time is not specified and would require a detailed technical analysis to determine.

Risk Management:

Potential risks

• User losses due to depegging between original and liquid staking tokens.
• Technical risks associated with the development and implementation of new functions.
• Market risks related to interest and borrow rate fluctuations.

Risk migration

• Mitigations may include thorough audits, however given that the changes are minimal and, compared to Aave’s emode, do not alter existing LTVs but rather utilize them in the implementation of flashloans and incentives around liquid staking tokens, the risk to the shared pool is low. Therefore, the necessity for additional smart contract audits is diminished in this instance.

Next Action

• We will put the proposal to a vote via Snapshot in 3 days
• Consult with Algem, Acala and Bifrost team regarding potential collaborations and technical considerations and integrate this function with each LSTs once this vote has been passed.

Voting Schedule

Snapshot Voting: Jan 5th, 09:00 UTC - Jan 8th, 09:00 UTC.

Voting Option

YES - Approve the proposal
NO - Reject the proposal - Finalizing token listing evaluations and integration.

[Patrick87]

Very much a fan of this. I do things like this all the time, but it helps if you can do everything within the same platform, especially if you want to unwind the construction.

[Beck]

Is the difference between this proposal and Makai that processing across other platforms can be done with 1click?
I think Makai is a leveraging function that can be completed within Starlay.

[SeiyaChida]

Thanks for a great question!

The primary distinction between this proposal function and Makai lies in the streamlined process and the types of rewards available.

The Makai function allows users to leverage a single token with a one-click process, focusing purely within the Starlay ecosystem. With Makai, users can earn profits from LAY rewards alone.

On the other hand, the leverage staking function expands this concept by enabling one-click leveraging of both LST and the original token. This not only simplifies the process but also broadens the reward structure. Users of the Leverage function can earn from both LST yield and LAY rewards, offering a more diverse income stream. This means that even without a substantial amount of LAY, users can still earn significant yields.

Here’s a breakdown of the reward formulas for clarity:

• Makai reward: Leverage × (Deposit APR + LAY [Deposit reward] + LAY [Borrow reward] - Borrow APR)
• Leverage staking reward: Leverage × (LST Yield - the original token borrowing Interest on Starlay) + LAY Reward (Both deposit and borrow APR)

[Beck]

Thank you for your explanation.
I understand.