XY
XY is the core liquidity driver powering the Tren Finance ecosystem
Last updated
XY is the core liquidity driver powering the Tren Finance ecosystem
Last updated
XY is a synthetic dollar debt token backed by overcollateralized loans. The token was built using LayerZero's Omnichain Fungible Token (OFT) standard, allowing XY to be transferred across multiple blockchains without asset wrapping, middlechains, or liquidity pools.
Stablecoins can largely be divided into three categories. We'll take a look at each with their pros and cons along with some examples, and explain where XY fits in.
The most notable examples of fiat-backed stablecoins are USDT and USDC. Because of over-collateralized fiat-backing, these stablecoins are able to maintain peg easily. Due to their centralised nature however, these stablecoins are not decentralised.
It's difficult to envision purely algo-backed stablecoins nowadays, but for a time, stables like Terra UST gained significant marketshare. These projects offered decentralisation, but were typically under-collateralised and relied on algorithmic incentive mechanisms to maintain peg.
Stablecoins like DAI and USDe fit into this category. These projects maintain high levels of decentralisation, while being over-collateralised by crypto assets. Crypto-backed stablecoins can be viewed as a compromise between fiat-backed and purely algo-backed stablecoins. Due to the volatile nature of crypto assets, crypto-backed stablecoins do still offer risk. We explain how XY maintains its peg later on in this page.
XY doesn't fit into just one cateogory, as it is crypto-backed with algorithmic properties for scalability purposes. When we say algorithmic properties, it's important to note that XY is crypto-backed by overcollateralised loans, along with liquidity through our SSL contracts, and does not rely on purely algorithmic incentive mechanisms to maintain peg like Terra's LUNA-UST model. We'll explain what we mean by algorithmic properties below:
As explained, each $1 of XY is backed typically by over $1 worth of collateral. However, Peg Stability Contracts are used to rebalance XY balances on AMMs to keep the peg at $1. The goal of these Peg Stability Contracts is to keep the liquidity balance between XY and other stables close to 50-50 on AMMs. The way that these Peg Stability Contracts works is quite simple, which we'll show below using the XY-USDC Curve Pool as an example.
If the LP composition is 60% USDC and 40% XY, the Peg Stability Contracts will mint more XY to the pool to restore peg
If the LP composition is 60% XY and 40% USDC the Peg Stability Contracts will burn XY allocated to the pool to restore the peg
The amount of XY that can be burned is limited to the amount of XY provided by the SSL contract
Whenever the LP compositions are imbalanced, Tren Finance's Treasury calls on Peg Stability Contracts to update the liquidity pool. The XY-USDT Gamma Vault works similarly to this, and autonomously rebalances the liquidity pool composition to maintain peg. Other forms of peg stability are described below.
Users can gain yield with XY in two ways:
Users can earn high yields through adding to XY liquidity pools. The leverage functionality on Tren Finance involves swapping in and out of XY, which leads to higher volumes on XY liquidity pools, and accordingly higher yields for XY LP holders.
Insurance Providers earn yield from liquidating collateral discounted to the market value. Insurance Providers in the Insurance Pool lose a pro-rata share of their XY deposits corresponding to the amount of debt repaid. In exchange, they receive a pro-rata share of the liquidated collateral at a discount. Read more about this process in our Liquidations page.
Mint XY through isolated modules on Tren Finance
Buy XY on DEXs
When XY exceeds its target peg, the protocol takes the following steps to restore XY back to target peg upon a successful governance vote and proposal by the TrenDAO:
Mint XY: Additional XY is minted to increase the supply.
Sell for Stablecoins: A portion of the newly minted XY is sold in exchange for stablecoins.
Enhance Liquidity: The acquired stablecoins, along with the remaining newly minted XY, are used to bolster the liquidity pools. This dual approach helps drive the XY price back down to its peg and simultaneously strengthens XY liquidity reserves.
Additionally, users who possess valid collateral may notice that XY is trading above 1 USD in certain markets. They might choose to initiate positions and sell the borrowed XY to allocate funds elsewhere. This action can contribute to a decrease in the price of XY relative to the trading volume.
Users who have borrowed XY may observe that it is trading at a discount to 1 USD in some markets. In response, they might purchase XY at this discounted rate to reduce their debt. This influx of buying activity can drive up the price of XY relative to the trading volume.
Individuals holding various cryptocurrencies, whether stablecoins or not, might observe disparities in XY's trading prices across the aforementioned markets. They could opt to buy XY in a market where the price is below 1 USD and sell it in another market where the price is at or above 1 USD.
When XY is below its target peg, the protocol takes the following steps to restore XY back to target peg upon a successful governance vote and proposal by the TrenDAO:
Buy XY: Protocol revenue, and, depending on severity, other forms of protocol funds such as the Treasury, are used to buy XY
Burn XY: The XY that has been bought is burned.
This buyback and burn program is designed to increase buying pressure on XY, and decrease XY supply, allowing for greater price appreciation back to its target peg.
Overall, we have observed that redemptions act as a net negative to CDP protocols in most instances. The key benefit that redemptions offer is speed. With redemptions, debt tokens are immediately brought back to peg, whereas a debt token buyback and burn program will take more time to achieve target peg.
The detriment at which this speed is achieved, however, is too great to outweigh its benefits. Redemptions come directly at the expense of users, and we believe users are the greatest asset that any protocol has. By effectively sacrificing users' collateral and loan positions at the expense of speedy peg recovery, redemptions essentially place users in a PvP scenario resulting in increasingly lower LTV thresholds, and thereby also lowers capital efficiency. While a XY buyback and burn program may take longer to achieve peg stability in the event of a prolonged XY depeg scenario, we believe that this approach outweighs the benefits of introducing a redemption mechanism.
