Working of the Protocol
Autonomint has a unique design where apart from minting USDA+ stablecoin, we also hedge user’s collateral price fall. If you mint & borrow a stablecoin from any of the existing stablecoin protocols then you are require to deposit a high amount of collateral. There is also the risk of liquidations which can happen as soon as your collateral value decreases to 110% of your minted stablecoin value. So, you as a user are always anxious of getting liquidated with an excess amount of collateral. Thus, that’s why users like to maintain a high buffer to avoid this scenario.
Stakeholders in the Protocol
Borrowers – Borrows or generate stablecoin debt by depositing acceptable volatile assets (Ethereum) as Collateral
Credit Default Swap owners – Deposits stablecoin and volatile tokens to provide downside protection and volatility hedging to the stablecoin borrowers.
At Autonomint, a user minting USDA+ against their ETH collateral is offered 100% synthetic LTV. It is composed of below
80% USDA+ immediately available to mint
The rest 20% value which is not minted is instead protected against any price fall.
Currently, users can borrow $USDA+ stablecoin against their ETH collateral or Liquid Restaking tokens (LRTs) specifically Kelp DAO (rsETH) and Ether.fi (weETH).
Users start by depositing collateral and borrowing USDA+ stablecoin at 80% LTV. In order to allow users to get 100% synthetic LTV, the user’s position will be attached with a put option giving user the right but not the obligation to sell the collateral at the deposited price.
User deposited ETH at $3000 to borrow $USDA+ at 80% LTV i.e. 2400 $USDA+ User position is attached with a put option giving the user the right but not the obligation to sell ETH at the deposited price i.e $3000 when the user repays back the loan.
This put option has an expiry of 1 month currently so user will be able to execute on this position anytime within a month. Initially the option fees is deducted from the LTV itself i.e the borrowed funds so nothing upfront is going out from user’s pocket. For user, it looks like that they are just getting 3%-4% less LTV i.e around 76% LTV.
After deducting the option fees from 2400 USDA+, the user finally gets 2304 USDA+
Taking Position in Decentralised Credit Default Swap (dCDS)
Each dCDS holder will deposit the USDA+ stable coins which they can get from the concentrated Liquidity pools and then deposit the same in the dCDS contract.
The contract will save each dCDS holder position and calculate the normalized amounts of the deposits made as per the cumulative rate of the option fees %age change.
The pooling of the total amount and taking a long position on a Delta neutral contract will be done.
An option seller utilizes the pooled amount in an options contract on behalf of dCDS holders. This way, the dCDS holders will get the option fees from borrowers.
The decision to unlock dCDS holder stablecoins is based on tracking a combination of fixed term and protocol parameters.
dCDS holders acquire USDA+ stable coins from the market through concentrated liquidity pools, depositing them into the dCDS contract.
The contract records each dCDS holder's position, calculating normalized amounts based on cumulative rate changes in option fees. The total amount is pooled to take a long position on a Delta neutral contract. The protocol then utilizes the pooled amount to act as an option seller on behalf of the dCDS position takers & takes a position in an options contract and receive option fees from stablecoin borrowers.
Delta-Neutral Contract (Downside Protection for Borrowers)
A Delta neutral contract involves taking two opposite positions on the price of Collateral/USD. Assuming ETH as collateral, the Delta neutral contract entails taking opposing positions on the ETH/USD price – a short position by the ETH vault on behalf of the borrowers on ETH/USD and a long position by the protocol on behald of the dCDS holder on ETH/USD. In the event of a decrease in ETH's price, the dCDS holder's short position results in a corresponding increase in USD value for each ETH in the vault. This increment is deducted from the dCDS long position. These positions are synthetic, and no cash settlement occurs with every price change; settlement only happens when a dCDS holder withdraws after a 1-month lock-in. At withdrawal, the final balance is calculated, and if positive, a fraction is deducted and given to the dCDS holder.
Calculation of balances of a long position and short position
Short position (Borrowers)
Calculate the quantity of ETH deposited in the ETH vault
Track the price of ETH at short periodic intervals (1 min or less)
If the Price of the ETH in the current periodic interval is higher/lower than the previous periodic interval, then the total balance of the short position will be deducted
X = (Total number of ETH in ETH Vault * ETH Price change (Between Periodic intervals)
Short Position Balance = Total Short Position Balance – (Total number of ETH in ETH Vault * ETH Price change (Between Periodic intervals)).
Long Position (dCDS Holder)
Calculate the total amount of stablecoin deposited in pool
As the price of collateral (ETH) changes, there is a change in the dCDS pool long position balance
Total Long Position Balance = Long position balance in previous interval + X (Real)
Unlocking dCDS stablecoins is determined by a combination of fixed terms and protocol parameters
The ratio of dCDS Pooled Value/ ETH Vault should be greater than equal to 0.2 for 20% downside protection.
Options Contract
The design of the option contract aims to offer borrowers a means of getting downside protection, achieving high capital efficiency in stablecoins on the collateral deposited and also benefiting from a increase in the ETH price . This is accomplished through the combination of put option and call option at specified strike prices selected by the borrower while taking the stablecoin credit.
The option contract facilitates the transfer of option fees from option buyers (i.e., borrowers) to option sellers (i.e. dCDS holders), thereby allowing dCDS holders to earn a high yield APY on their deposited funds while maintaining a Delta-neutral position for borrowers. Their are 5 variations of strike prices that borrowers can take – 5%, 10%, 15%, 20%, and 25%. It implies that borrowers can buy a call option on ETH price on the above percentage ranges for strike prices. The option price will decrease from a 5% strike price option to a 25% strike price option as per the formulas defined which captures the ETH volatility and protocol level risk parameters to come up with an option pricing
Earlier versions of options contracts based on the ERC20 standard failed to adequately distinguish between principal and interest payments while also accommodating for differing rolling maturities. In the past, holders encountered theta decay as all positions neared maturity simultaneously, leading to a prisoner's dilemma. The duration is measured in seconds utilizing Unix-timestamps, as permitted by Solidity.
We will also be utilising Cumulative rate here to accrue the fees from borrowers to dCDS holders. All the option fees will be treated as a percentage gain and a global cumulative rate function will help accrue these fees across dCDS holders based on their time duration and amount of deposits
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