[kUSDH-USDC] Collateral Assessment

This post is an assessment of the kUSDH-USDC collateral token, the current parameters of the kToken vault on Hubble Protocol, and what the considerations are in Hubble’s decision to accept kUSDH-USDC as collateral on the protocol.

Introduction

The USDH-USDC Vault on kamino is an automated concentrated liquidity position that deposits funds into the concurrent Orca whirlpool. User positions are tokenized as kTokens, and are standard SPL tokens that can be priced, and used across DeFi.

Hubble was the first protocol to integrate kTokens, starting with the kUSDH-USDC position. No other kTokens have been onboarded to Hubble. The current parameters for the kUSDH-USDC deposits are:

  • 0% Stability Fee

  • 0% Minting Fee

  • 97% Loan-to-Value Ratio

  • $1M Deposit Cap

kUSDH-USDC as Collateral

kUSDH-USDC is a beneficial collateral asset as it allows for greater USDH liquidity on the market, and implies less selling pressure on USDH than a single stablecoin collateral like cUSDC would have.

The main use-case of kUSDH-USDC as collateral is to loop the borrowed USDH back into the Kamino Vault, receive the kToken, redeposit into Hubble, mint USDH, repeat. Each loop requires USDH to be sold, in part, for USDC, and both assets to be reinvested into the vault.

In contrast, accepting a single, yield-bearing stablecoin like cUSDC as collateral would require the entirety of USDH to be sold, which has significantly greater downwards pressure on the USDH price.

In addition, kUSDH-USDC as collateral also enables borrowers to fuel liquidity for USDH, as the USDH-USDC Kamino vault deposits liquidity into the Orca Whirlpool. Adding an asset like cUSDC as collateral will have no contribution to USDH liquidity.

Looking at net-positives then, its apparent that kUSDH-USDC is preferable as collateral asset.

Analysis and Risk of kUSDH-USDC

The kUSDH-USDC position can consist of any balance between USDH and USDC. The current deposit range is 0.995709 - 1.0009, and the vault has remained balanced since its inception.

USDH Backing USDH

There is no inherent risk of having USDH as backing for USDH, as the initial USDH deposited into the Kamino vault would have had to be backed by an asset initially deposited in Hubble. In essence, it always boils down to a standard crypto asset deposit in Hubble, without which the initial USDH cannot exist.

LTV and Depeg

The maximum LTV allowed in the Hubble pool is 97.08%, though liquidations are disabled. This means that either asset could depeg up to 2.92% without leaving the protocol exposed.

It’s also worth noting that, over time, the value of each kUSDH-USDC token should increase via the auto-compounded fees & rewards from Orca.

If either asset in the vault depegs, the kUSDH-USDC position will consist solely of that asset. Should USDH, for example, suffer a 5% price drop, the kUSDH-USDC position will drop roughly the same amount, as the pool will balance 100% to USDH.

In this case, arbitrage will be required to raise the peg of USDH; as this pool does not allow for the same USDH buying pressure that other pools do:

Standard Borrowing Pools & Liquidations

In a standard pool, stability fees can be used to drive users to repay their loans, as they do not want to see their debt increase. This will remove USDH from circulating supply, and strengthen the peg, as well as increase demand for USDH via the increased Native Yield in the USDH Vault.

If liquidations should happen, liquidators can step in to liquidate positions, or, if liquidators do not step in, stability fees can be raised to a point where, if users do not repay their loans, debt can increase fast enough for the protocol to act as its own liquidator. This is an absolute worst case scenario, but the solution exists.

However, this scenario looks different for kUSDH-USDC.

kUSDCH-USDC & PSM

The kUSDH-USDC Pool is, by nature, a highly leveraged pool, which makes liquidations more complex.

As an example, should USDH peg drop by 5%, there is no guarantee that liquidators will step in to liquidate the positions. Furthermore, the asset they receive will consist of 100% USDH, where each USDH is worth $0.95. In this case, the liquidators would need to swap this USDH 1:1 with USDC via the PSM in order for their liquidations to be profitable. For this to be viable, there needs to be at least the same value of USDC in the PSM as is deposited in the kUSDH-USDC Pool.

Whereas in other pools Hubble can lean on stability fees, loan repayments, and liquidations to keep the system afloat, the kUSDH-USDC pool should also have the ability to rely on arbitrage to return USDH to peg, instead of repayments and liquidations.

The PSM also provides a safety net that allows USDH - USDC arbitrage without having to liquidate kUSDH-USDC positions. In summary, keeping kUSDH-USDC caps at equilibrium with, or lower than the USDC value in the PSM is a precautionary measure that can acts as a buffer in case of a USDH depeg.

Conclusion

At present, the ideal scenario is to keep the kUSDH-USDC cap between 15-20% lower than the total value of USDC in the PSM. As explained above, this is in the best interest of the protocol, and acts as a safeguard in case of a USDH depeg.

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