Hubble proposes to raise the Stability Fee this week to drive USDH demand, and continue to build PSM reserves. The protocol is now in a good position to test out the Stability Fee mechanic, and see its effect on USDH demand; both by testing out a 1% interest rate, and by directing more yield to USDH staking.
Stability Fees can act as an additional peg management mechanism alongside the Peg Stability Module. A month ago, the USDC reserve in the PSM was at 2M. At present, the PSM USDC reserve is at 1M. This means that, for the past month, the PSM has been used for arbitrage, performing very well to keep USDH at peg.
However, raising USDH demand can drive more funds to the PSM via above-peg arbitrage, and raising the Stability Fee can prove an effective way of fueling demand for USDH, as:
- It encourages users to pay back their loans, reducing USDH supply on the market
- It generates a Native Yield that goes directly to USDH stakers
As mentioned, the PSM has been performing well, facilitating arbitrage to keep USDH at peg. Raising the Stability Fees now is a proactive measure for USDH to remain at peg, as it can ensure that the PSMs USDC reserve remains healthy, while adding further buy pressure on USDH.
Hubble wants to ensure that the PSM retains, at all times, enough USDC to facilitate arbitrage at a large scale.
The PSM reserve can act as an indicator for when it’s necessary to activate Stability Fees. No less than 15% of circulating USDH should be minted via the PSM, and ideally more, to allow for easier leverage. USDH minted via PSM directly relates to the amount of USDC in the PSM.
At present, circulating USDH is at 7.8M, with 1M minted via the PSM. Thus, 12.8% of circulating USDH has been minted via the PSM. This is by no means a problematic ratio, though an ideal ratio as identified by the protocol is between 15% and 30%.
Once the ratio reaches 30%, Stability Fees can again be reduced to encourage borrowing and increase USDH supply. This will, in turn, facilitate below peg arbitrage (USDH burning) via the PSM.
The protocol needs to be proactive in making this change, giving enough time for natural market activities to raise USDH demand while bolstering the PSM’s USDC reserve. This is not mission critical, but now is a good time to implement the change (and a small one, with the Stability Fee initially being only 1%), and see how effective the mechanism is.
Raising the Stability Fee drives demand to USDH, thus strengthening USDH peg (we will get to how this works in a moment). This will then trigger above-peg arbitrage, and build up further USDC in the PSM.
When Stability Fees are raised, loans are no longer 0% interest. In theory, this should create a demand for repaying USDH loans. The demand for repaying loans can result in USDH being bought off the market, reducing circulating supply and driving up USDH price.
In addition to the demand created by incentivizing loan repayment, Stability Fees can drive further demand via a native yield paid to USDH stakers.
To drive demand to USDH via yield, all inflows generated by Stability Fees will go to the Stability Vault.
USDH Yield can be generated via 3 streams:
- HBB emissions
- Liquidation rewards
- Stability Fee rewards
At the moment, the Stability Vault APR accounts only for the HBB emissions, whereas liquidation rewards (over $200k at this point) are not displayed, and Stability Fees have never been implemented.
HBB emissions were initially implemented to bootstrap USDH for the Stability Vault. Hubble is now at a point where it should be less reliant on HBB emissions, relying instead on internal mechanisms to drive demand. Stability Fees can facilitate this demand by creating a Native Yield on the platform.
The current 2.58% APR reflects only the HBB emissions, which translates to around 37K HBB monthly.
USDH provided: 2,987,265
$2,987,265 * 2.64% = $78,863 emissions annually
78,863 / 12 = $6,571 monthly
6,571 / 0.17567 (HBB price) = 37,410 HBB p/m
USDH provided: 2,987,265
Liquidation rewards: $211,300.92
These rewards have been awarded over the 7 month since Hubble launched in January 2022. Extrapolated to 12 months, annual liquidation rewards totals:
211,300 / 7 * 12 = $362,28.57
Liquidation APR: 362,230 / 2,987,265 = 0.1212576
APR = 12.13%
Current APR of USDH Staking: 12.13 + 2.64 = 14.77%
We propose the following changes:
- Raise Stability Fees
- Change APR calculation to account for Liquidation rewards
- Award 100% of SFs to USDH Stakers
Below are the potential APRs from Stability Fee staking, at different levels of SFs. This is calculated on the basis that 100% of SFs go to USDH stakers, as will be the case with immediate effect once SFs are active.
USDH Borrowed: 24,021,452 * 28.36% = 6,812,483
USDH in Stability Vault: 2,987,265
1% SF: 6,812,483 * 0.01 = 68,124.83 / 2,987,265 = 0.02280508 * 100 = 2.28%
2% SF: 6,812,483 * 0.02 = 136,249.66 / 2,987,265 = 0.04561017 * 100 = 4.56%
3% SF: 6,812,483 * 0.03 = 204,374.49 / 2,987,265 = 0.06851425 * 100 = 6.85%
4% SF: 6,812,483 * 0.04 = 272,499.32 / 2,987,265 = 0.09122034 * 100 = 9.12%
5% SF: 6,812,483 * 0.05 = 340624.15 / 2,987,265 = 0.11402542 * 100 = 11.4%
Taking the above values, below are the potential total USDH Staking APRs, including HBB emissions, liquidation rewards, and Stability Fee yields.
1% SF: 2.64 + 12.13 + 2.28 = 17.05%
2% SF: 2.64 + 12.13 + 4.56 = 19.33%
3% SF: 2.64 + 12.13 + 6.85 = 21.62%
4% SF: 2.64 + 12.13 + 9.12 = 23.89%
5% SF: 2.64 + 12.13 + 11.4 = 26.17%
Initially, the protocol proposes to raise the Stability Fee to 1%, and evaluate how the market reacts. This will be reevaluated on a weekly basis.
Should the USDH in circulation reach a point where 30% was minted from the PSM, the Stability Fee will likely be reduced. This will allow USDH to again flow onto the market. Below-peg arbitrage can then come into play and reduce USDC reserves in the PSM.
The protocol aims to introduce SFs on Thursday, August 25, and will reevaluate each Wednesday going forward.
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