Stablitity Vault Improvement Proposal

Problem:
Lockups need to be introduced on the stability vault because a whale could attack and depeg the stablecoin.
A whale can borrow USDH from both solend or port finance. Take borrowed USDH, and deposit it into the stability vault. If a said whale is big enough he would also likely push down the price of BTC, to trigger a market downtrend or market just goes down due to some unforeseen macroevent. Then the whale will then remove the USDH from the stability vault, causing it to be under collateralized relative to the amount of USDH needed to cover loans (this will likely cause panic among platform users, as even the serum whale spooked users when tons of USDH was minted and deposited into the stability vault).
If the stability vault goes to 0 USDH, loans can and will slip above the 80% LTV liquidation threshold thus causing, USDH to no longer be an overcollateralized stablecoin. Users sell USDH to retreat to another asset, destroying the project.

Solution:
Have a 5 day lock up with 20% withdraws on the initial deposit. For example, if a user deposited $100 into the stability vault, they can withdraw $20 Day 1, $20 Day 2, $20 Day 3, $20 Day 4, and $20 Day 5.

This ensures vault stability when markets reach volatility.

This Improvement proposal will be updated to eventually reflect USDH lockups on the stability vault once further understanding of veHBB and available HBB is disclosed. For now, focus on the 5-day/20% withdrawal protection.

2 Likes

Great stuff, thanks for putting this on here. Hadn’t thought of this specific scenario myself before, but its a strong idea to protect the stability vault.

thanks for sharing your big brain thoughts! i think its a great idea and will help the protocol very well for future stability… just a concern that some people may not like the lock up period though.

Interesting! I think this is taken care of by the smart contracts already, though. Check it out: USDH Vault - Hubble Protocol Official Docs

If the vault ever empties, liquidations are handled by redistributing debt and forfeited collateral to users across the protocol. In the event of a major black swan, this would continue until the buck stops with users who had a very low LTV.

Getting people to lock things up in DeFi needs to have a major incentive. What could it be for locking up stables?

I think lockups can make sense, but definitely also introduce a bit of friction. I know a whale who explicitly told me that if he has to luck up his stables, he’s not going to deposit at all. If you have a lot of money in these farms and potentially have been burned on a smart contract exploit before, you want to make sure you can pull out your funds pretty much instantly.

Maybe instead introduce a reward for locking funds up instead of forcing it upon everyone?`

There is a piece in our Gitbook documentation which covers what happens when the stability vault is empty - here’s a quote and a link:

“When the vault is empty, liquidations are redistributed amongst all debt holders. This means that both the collateral assets and the USDH debt of the liquidated position are distributed amongst current borrowers.”