How to Maintain Fund Safety As Lybra Expands The Range Of LSTs That Can Be Used As Collateral
Safety and Due Diligence
Maintaining Fund Security: The Core of Lybra
Lybra V2 introduces the functionality of utilizing various LSTs (Liquidity Staking Tokens) as collateral to mint eUSD (the world's first interest-bearing stablecoin), and peUSD (the omnichain DeFi utility version of eUSD). To ensure a smooth launch of this new feature, a rigorous protocol for fund safety is in place, allowing the expansion of various assets and preparing for potential unforeseen events.
Lybra's Multi-Level Due Diligence Process for Onboarding New LST Assets
The onboarding of new LST assets as collateral for Lybra V2 brings certain risks that require careful management. Regardless of the robustness of the minting and liquidation procedures, vulnerabilities or incompatibilities in the assets can lead to complications. To manage this, Lybra implements a dual-layer due diligence process involving the core Lybra technical team and the Lybra DAO, consisting of two key stages:
Due Diligence by Lybra Core Team: Any potential LST provider must undergo a comprehensive due diligence process led by Lybra's core team members. This review assesses all aspects of the asset, including reward mechanisms, security procedures, safety record, and technical specifications. This evaluation ensures the asset's security and compatibility with the Lybra protocol.
DAO Voting Process: The final decision rests with Lybra DAO, guaranteeing transparency, accountability, and democracy. The LST provider submits a detailed proposal subject to a consequent discussion, after which the DAO votes on whether to accept the asset and determine the eUSD mint limit for the new LST pool. By setting mint limits, the DAO can control the risk related to each asset.
Post-launch, the DAO can continually adjust the mint limit or deactivate or remove an asset if risks surface. This dynamic process ensures continuous risk management based on new information.
Separate Vaults & Isolated Pools: Minimizing Risk during the Minting Process
Lybra V2 creates isolated pools for each LST asset to maximize fund safety during the minting process. It separates Rebase and Non-Rebase LST's into different vaults, and within these vaults, specific pools for each LST asset exist. Once the DAO approves an LST asset and sets the mint limit, the Lybra Contract Admin initiates a new LST asset pool.
Post-launch fail-safes also exist where the DAO can adjust mint limits or deactivate or remove assets if risks emerge. This process ensures continuous and proactive risk management.
Ensuring Fund Safety During Liquidation
To enhance fund safety, an extra step has been introduced for eUSD liquidation on Lybra V2 and a similar process has been created for peUSD.
These processes enhance the stability and security of the Lybra protocol, ensuring that it can function effectively while also protecting the interests of its users:
eUSD Liquidation: An additional step is incorporated in the eUSD liquidation process where the eUSD is locked in the mainnet contract whenever it is converted to peUSD. This locked eUSD serves as a flash loan source that facilitates liquidation.
Here's how it works:
a. Bob borrows 10,000 eUSD from the locked pool to repay Alice's 9,000 eUSD debt.
b. Bob receives $10,000 stETH (with an extra $1,000 stETH as a liquidation reward).
c. Bob must repay 10,500 eUSD as per the flash loan terms.
d. This "Flash Loan + Liquidation" action encourages more liquidators, as eUSD holding isn't required to participate.
peUSD Liquidation: The liquidation process for peUSD on Lybra V2 is similar to the eUSD process in V1, with the global liquidation process removed, thus increasing fund safety. The source of peUSD, whether converted from eUSD or minted from Non-Rebase LSTs, doesn't impact the liquidation process.
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