Ebisu at $0TVL Hour: Fixed-Rate Open-Term Stablecoin Credit Markets in DeFi

Hi everybody, I'm Ethan from Ibisu. ISU is a stable coin credit market that enables fixed rate open-term loans against blue chip tokenized collateral. So it's one of the only places in DeFi you can lock in a fixed rate and then repay any time. I'm going to explain a little bit about how the mechanism works. So firstly, all debt issued by the protocol is EBUSD denominated.

It's like a CDP protocol and EBUSD is fully backed by overcolateralized debt. How is EBUSD pegged? Um, it's through a permissionless onetoone redemption function. So, EBUSD is always redeemable for $1 of collateral. This means that EBUSD is always as liquid as its underlying collateral, like irrespective of DEX liquidity.

And this is also how the PEG is maintained. So if EBUSD can ever be purchased for less than $1, redeemers can redeem it for $1 of collateral and make some profit um which pushes the peg back up. So our unique feature is our market set fixed rates. Borrowers can come to the platform and lock in a fixed rate uh that is calculated by the protocol and based on the strength of EBUSD's PEG. The strength of the PEG is a function of DEX liquidity and premium and and IBSU's monetary premium.

And I'll get more into this mechanism later. So like with all CDP protocols, protecting solvency is key. We use JIT liquidation as our primary liquidation um path. So this is like having third party dependency on um like available flash liquidity. Um if just in time liquidation fails, we have stability pools as a backup.

stability pools receive 25% of our protocols um borrower revenue and this is used to incentivize EBUSD deposits um which are burned um to absorb debt uh in the case of liquidation if JIT fails and lastly uh if all else fails borrowers collectively act as guaranurs of last resort so I mentioned 25% of protocol revenues for stability pools the remaining 75% is used to grow EBUSD demand primarily this is for direct ing um EBUSD USDC DEX incentives um because uh we're an early protocol and first we want like even if we offer an attractive rate you need to be able to do something like swap out of the EBUSD you borrow so DEX liquidity is our priority but in the future this 75% can be allocated between lending markets Pendle trenching protocols vaults etc so here is the collateral that are currently available to borrow against on the crypto side we have Bitcoin ETH and uh Bitcoin ETH derivatives on stable coin side we have Athena, CAP, uh syrup and uh USDA primarily used for um carry trade looping strategies and we have gold as a RWA. Uh coming soon are PTS which are like fixed yield instruments which are like extremely synergistic with IBSU's fixed rate and RWA like commodities FX credit uh instruments. This is like really hot. we can see it as like an avenue for new borrowing demand but pending uh some R&D regarding how we deal with like liquidations as many of these RWAs are carrying duration risk. So like zooming out um the protocol's key feature is fixed rate open-term loan.

Why do we think this is um something worth pursuing? The goal of our protocol's rate system is to best serve the credit needs of onchain native users and institutions. And fixed rates do this because fixed rates are predictable in their cost. Uh they enable borrowers to mitigate risks in terms of like incidents of negative carry and liquidation caused by interest acrruel. Um we're also seeing an explosion of like fixed yield instruments on chain which uh fixed rate borrowing is extremely synergistic with and uniquely like the open term allows users to repay any time and borrow at a rate that is independent of duration uh which is like our unique uh value prop to the market.

So versus like other kind of fixed rate protocols that are emerging like Morpho V2 um or some rate swap protocols which offer fixed rate fixedterm loans at an interest rate that is typically higher than the market average variable rate. IBSU offers fixed rate open term loans that historically has been on par or lower than the floating um USD borrow rate. Uh this is similar to liquidity v2 because like we're bit we are built on the liquidity v2 mechanism but uh different than liquidity like liquidity only offers eth collateral which limits their ability to expand like borrowing demand and also they use majority of their interest towards stability pool to ensure like solveny and smooth liquidations but it's a little bit inefficient. we choose to rely on just in time liquidation and in turn we're able to generate like 3x as much um margin per unit of debt which we can redirect towards growth incentives like versus liquidity. So how does this market set rate mechanism work?

Like if you know liquidity v2 it's it's the same but um essentially the system aims to offer borrowers rates that are as close to the true cost of capital for a given collateral without intermediation. So no one is setting the rate it is set by the market. This is done through using EBUSD's peg as like um the source. So if EBUSD's peg is like DPEG, this is informing the system that the rate is too low. Um because if the rate is low, borrowers borrow, they sell EBUSD for another stable coin to do carry trade.

This causes a DPEG which triggers redemptions and redemptions need to return collateral to the redeemer. The collateral comes from the borrowers who are paying the lowest fixed rate. So they're effectively like auto deleveraged to take their collateral to give to the redeemer which has the effect of pushing the average systems rate higher. Um and as EBUSD demand grows and as monetary premium improves the peg gets stronger which enables the protocol to offer lower fixed rates. So I've talked a lot about why borrowing on a BCU is great fixed borrow rate um open term but where like this generates like supply of EBUSD through minting but where does demand come from?

So demand comes from yield generated from borrowers. All the interest that borrowers pay to the protocol is given back towards EBUSD holders as yield. But how do we even get the borrowers in the first place? Like there's a cold start problem here. And we need incentives to bootstrap the flywheel.

So um external incentives in the beginning are used to build EBUSD dex liquidity for example like on curve and this creates a flywheel. So borrowers come they see wow the rate is cheap and there's deep liquidity. I can do stuff with this stable coin. I'm going to open a loan. They borrow, they pay interest, and most of the interest flows back towards the DEX pool LP to generate competitive APR.

Um, capital C's the the APR is competitive. They swap into EBUSD to earn this um like stable coin LP APR, which further strengthen the PEG enabling the protocol to offer lower rates and like the cycle continues. So, EBUSD liquidity has been our key bottleneck in in growth. um since we've launched and I'm happy to announce today that we've secured a strategic investor who's going to be funding um EBUSD DEX incentives ranging from 10K to 35K monthly um starting April 1st. So yeah, first our priority is EBUSD liquidity.

Then demand side endeavors like adding more collateral will have a higher impact. Um we have also been exploring EBUSD yield vaults and looping structured products like we have built like a fixed rate looping vault on Ipore and this helps both drive both supply and demand like assuming that there's like deep enough liquidity to loop on and then lastly integration of EBUSD and these vault shares into thirdparty venues like Pendle lending markets trenching protocols uh will help to to improve EBUSD demand um down the line. So this is our road map and uh thank you.

Quick question on the EBUSD borrow demand. How do you navigate your mechanics if there's low to no demand on borrowing it?

So the question is if there's no demand like what do we do? Um so we have currently around like 300k TVL that's collateral that's been supplied. it's enough to kind of like kick off the interest rate mechanism. So you can go to the website now and you can view the market set rates per collateral. So luckily we have like we don't have the problem of like zero borrowing demand.

Um but the main constraint is dex liquidity like the rate for borrowing let's say against your bitcoin or against your yield stable coin is competitive but it can't support size because user cannot borrow and swap eB to another stable coin. That's been our main constraint. Um I think solving the dex liquidity supply side um is how we get more borrowing demand. Is that I don't know if that answers the question.

Maybe a follow-up question on that. Uh so if there is no or low demand uh means also the stability pools are empty right technically.

So we have uh stability pools they're not empty and uh just different than liquidity. We don't really use stability pool for liquidation. It's primarily through like uh just in time flash loans via meb bots. So

this is this is like another level, right? Level two.

Yeah, level two. And it doesn't it hasn't happened like since we made this change to liquidity. We have never had a problem. There's like a lot of flash liquidity versus our outstanding debt.

I have a follow-up question on this. How uh just in time liquidation work and uh how did you change liquidity v2 to implement this?

For sure. So this change was audited by Dub and it involves um a JIT liquidation contract that is embedded into the stability pool. So stability pool is still used for liquidation but instead of burning EBUSD in the stability pool it first checks whether profit like a viable flash loan path is available. So liquidator comes they call liquidate function on specific troves that are at the LTV and then JIT contract checks if it's possible if it is the JIT contract executes the flash loan and then the liquidator receives the collateral through the stability pool. So usual flow is that stability pool depositors they get their EBUSD burned and they receive the collateral back.

In this case the you can think of the liquidator doing like a just in time deposit into the stability pool and then he receives most of the collateral from the liquidation. So we kind of like front run the stability pool and this way we don't have to waste money on incentivizing EBUSD to just sit there doing nothing because we are trust we're trusting that like a curve balancer it's going to have flash liquidity.

Are you doing any OEV capture on your own liquidity pools? So we talked to chain link uh for for our assets that we support only WBTC has like the OEV chain link oracle it's not yet implemented but we signed LOI already with chain link to implement this and then any savings from OEV will be redirected back to curve pool incentive

and then one more question how do you set your LTV on your on your pools is that dynamic or is it just static? Yeah. So just static for now like most lending protocols um set conservatively and like ver like for EBUSD it's like um EBUSD holders bear all like bear the risk of all the collaterals. It's like socialized risk versus like Morpho which is like isolated. So we're being a bit more conservative on the LTV side and we work with Antheus which is like a D5 boutique risk shop who advises us on LTVs as well.

Do you see any uh peg keeping effect uh with redistributing the yield instead of stability pool to other uh pools?

Yeah, it's a interesting experiment we're running in real time. So stability pool is great because 100% of the incentive to stability pool fuels EBUSD demand. When you transfer that incentive to DEX LP, it's split between however many assets are in the DEX pool. So that hurts EBUSD demand by 50%. But it has the effect of deepening DEX liquidity which reduces the DPEG effect from selling.

So it's helping the PEG in some sense because there's deeper liquidity but it's reducing demand because you you have no longer the buyer who's coming to buy it for stability pool. So we're running the experiment in real time but uh our peg has still maintained like within like the 99 cents to $1 range. So it's like yeah but uh we chose to make the change like incrementally. So first we reduced it to 50/50 split. Then we saw it's nothing bad happened.

We reduce it to like 7525 and our goal is to actually reduce it to closer to like 955%. Because every lending protocol using flash loan for liquidation and we're not as like decentralization maxi as liquidity to to want to have enshrined liquidity for liquidation.

Okay. Thanks.

Thank you.