The removal of recovery mode has been discussed extensively throughout the past month, with numerous users voicing their discontent with the potential of their positions being at risk of liquidation by factors outside of their control. We first clarified our intention to remove Recovery Mode in the March Community Forum.
Hubble is a borrowing protocol first and foremost. Recovery mode leads to a potentially unpredictable borrowing experience, and thus defeats one of the primary goals of the platform: providing a predictable borrowing experience.
Recovery Mode was inspired by Liquity, an Ethereum Protocol that exclusively accepts ETH as collateral. Liquity was the main inspiration behind the creation of Hubble Protocol. Hubble’s Maximum LTV (Liquidation Ratio) of 90.9% and Recovery Mode were both mirrored from the Liquity model. However, Hubble is fundamentally different to Liquity.
Hubble sees itself as a flexible, community-focused project. We want the freedom to react to changes in the market and build continuously to expand the features and functionality of the protocol.
As mentioned above, Hubble’s Liquidation Ratio is 90.9% across all collateral assets. However, when the system-wide LTV reaches 66.6%, Recovery Mode kicks in. When Recovery Mode activates, liquidation on loans with an LTV above 66.6% can be triggered, starting from those with the highest LTV. Liquidations continue on a loan-to-loan basis until the system LTV is once again below 66.6%.
Recovery Mode ensures that USDH is always 150% backed by crypto-assets, as a system-wide 66.6% LTV ensures that at least $1.50 of crypto is deposited for 1 USDH at all times. For example, at the time of writing, the System LTV is ~50%, which translates to USDH being ~200% crypto-backed.
Recovery Mode was necessary to ensure that system LTV doesn’t reach as high as 90.9%, as this would essentially bring the protocol within 10% of insolvency.
In the Liquity model, Recovery Mode makes sense, as it means that the stability of the protocol is automated with the liquidation mechanism of Recovery Mode. Moreover, because Liquity accepts only ETH as collateral, a single LTV is a sensible approach.
In Hubble’s case, multiple collateral types entail different levels of risk, and having a 90.9% LTV for all assets regardless of risk, with Recovery mode to counteract it, is not in the best interest of borrowers or the protocol.
Furthermore, because Recovery Mode is triggered by the system LTV ratio, positions can be liquidated as result of other positions being opened.
- Protocol TVL (Collateral) = $50M
- Total borrowed USDH = 31M
- System LTV = 62%.
- Current Borrower has a 10x leverage on a position with an 85% LTV. They closely manage their position, repaying USDH or adding collateral as needed to keep their position safe.
- New Borrower is a whale. They deposit $15M in collateral, and mint 12.45M USDH. They have an 83% LTV ratio.
- Protocol TVL is now $65M
- Total USDH borrowed = 43.45M
- System LTV = 66.8%
If a whale borrows millions of USDH at an extremely risky LTV, this could have an adverse impact on the system-wide LTV, and users who had managed their position closely, but with a high LTV, can then be liquidated by a factor outside of their control. We believe that this is an undesirable outcome.
Recovery Mode has never been activated, as users have generally borrowed in responsible manner. However, according to feedback, Recovery Mode is undesirable. In response to this, we are planning to remove Recovery Mode entirely. To replace Recovery Mode, Hubble will implement a series of changes, starting with:
A protocol-wide 75% LTV ratio.
This will be implemented in the first phase of the transition away from Recovery Mode. All new loans will have to be taken with an LTV lower than 75%, and liquidations will occur if a loan reaches 75% LTV
Eventually this will transition into:
Per-asset LTVs, where different assets have different maximum allowed LTV ratio’s. In the case of a multi-asset loan, the LTVs of the different assets will be aggregated to calculate a local liquidation ratio (maximum LTV).
An in-depth look into this second phase is beyond the scope of this discussion, and it will be raised in future discussions once Recovery Mode has been phased out and the protocol-wide 75% LTV has been implemented for a sufficient period.
- No risk of other users impacting your risk of liquidation
- Potential for risk-based LTV ratios
- Higher system-LTV
- More predictable loan experience
- Lower maximum-LTV on individual loans
With system LTV now shifting to 75%, new loans can only borrow USDH at a maximum 75% value of deposited collateral. This will reduce the flexibility in terms of borrowing, but will serve for an overall safer experience.
High-risk borrowers, of which there are relatively few on the platform, will be most affected. At the time of writing, there are 561 loans on the platform, and 23 of them have an LTV higher than 70%: View liquidation page
- Loans that are active and above 75% LTV when the changes are implemented will not be liquidated.
- All users will be prompted to acknowledge the change.
- All actions taken on loans above 75% will have to be directed at bringing LTV below 75%
– Adding collateral
– Repaying a portion of USDH
To summarise, the changes are as follows:
- Remove recovery mode
- No maximum system-LTV of 66.6%
- No maximum loan LTV of 90.9%
- Maximum-LTV changed to 75% across all assets & loans
- System LTV moves fro 66.6% to 75%
- USDH backed by minimum 133% crypto-assets at all times
- Current loans above 75% will not be liquidated
- Users will be clearly notified of the changes when entering/using the app
- All actions on current loans will have to bring LTV below 75%
From Hubble’s point of view, the removal of Recovery Mode will increase the user experience with more predictable loans.