Recovery Mode was officially removed on April 21, 2022. With its removal, the maximum LTV for all loan across Hubble was reduced to 75%.
This is a proposal to raise the maximum LTV to 80%, allowing for more leverage and greater capital efficiency.
Before Recovery Mode was removed, the maximum LTV of the protocol was 90.9%. This meant that if all loans were to approach a 90.9% LTV, USDH would be only 110% collateralized by crypto assets, or around 10% away from insolvency.
To reduce the risk of insolvency, Hubble implemented Recovery Mode, a mechanism that would begin liquidating users with an LTV approaching 90.9% whenever the System LTV rose above 66.6% (less than 150% collateral ratio). Liquidations would begin on the highest LTV loans, and they would work their way down until the System LTV was back below 66.6%.
Recovery Mode was an effective way of keeping the system solvent and ensuring USDH remained at a minimum 150% overcollateralized. However, Recovery Mode itself made for a poor user experience. In this system, one user’s actions could put other users at risk of liquidation. If, for example, a whale borrowed 10 million USDH at a high LTV, it could vault the System LTV to the edge of the 66.6% threshold with that loan.
To replace Recovery Mode, a system has been implemented wherein all loans across all assets have a 75% LTV. This means that individual users alone are responsible for their position, but it also means they have less flexibility in how much USDH they borrow.
With a 75% LTV, USDH remains at a minimum 133% overcollateralized at all times, thus still keeping the protocol healthy, while providing a more predictable loan experience.
The feedback received since Recovery Mode’s removal has made it apparent that a 75% LTV is too conservative. We are now in a situation where long-time users prefer to keep their “grandfathered” loans to prevent themselves from migrating to the 75% LTV contract.
This is antithetical to the borrowing experience that Hubble aims to offer. A significant value proposition of borrowing from Hubble is the flexibility of loan management that the protocol enables.
Depositing or withdrawing collateral and repaying or minting more USDH should be actions with which users freely engage, but it is evident that users with loans still grandfathered into the previous LTV ratio prefer to keep this status instead of regularly interacting with the protocol, since any action would migrate them to the new contract with a lower LTV.
In light of community feedback regarding this point, we propose to raise the maximum LTV up to 80%
Users will be allowed more flexibility in managing their loans, a bit more breathing room when unwinding their positions during, and they will have the possibility of seeking more leverage if they choose.
This is an initial proposal, and it could be followed up by additional proposals to adjust the LTV parameters of the protocol.
It is important to bear in mind that USDH and Hubble have not experienced periods of high stress or large volumes of liquidations. All decision making should take this into account.
If anyone in the community is willing to help model the liquidations to improve USDH’s capital efficiency, we are willing to sponsor the task paid in USDH or HBB. The task would consist of a python model following some recently published white papers such as: (https://arxiv.org/pdf/2106.06389.pdf)