Please review Disclaimer: Risk of Using Protocol and Terms of Service before using the Yeti Finance and/or interacting with YETI or YUSD. Yeti Finance & YETI/YUSD are not avaliable in the U.S.
Note: This is a simplified explanation of all the mechanisms and calculations that make up Yeti Finance. If you want to learn more, please visit our Technical Documentation.
The ability to redeem YUSD for collateral at face value (i.e. 1 YUSD for $1 of collateral) and to mint YUSD against USDC at a minimum collateral ratio of 103% creates a price floor and price ceiling respectively through arbitrage opportunities. We call these "hard peg mechanisms" since they create profit opportunities anytime YUSD moves off peg and those opportunities remain profitable until YUSD returns to peg. They set hard bounds within which the YUSD price can deviate, at $1-redemption fee and $1.03.
Additionally, the debt issuance fee increases during times of significant redemptions volume (implying YUSD is below $1). This makes borrowing less attractive and keeps new YUSD from entering the market, which reduces downward price pressure. See more information about YUSD Price Stability here.
Redemptions are a process where a borrower's collateral is traded to the redeemer, and in return the redeemer pays down the borrower's debt. $X worth of collateral is traded for X YUSD.
Redemptions do not incur a loss for the borrowers. If your trove is redeemed against, your trove's collateral ratio will improve, and you will be less at risk for liquidations. However, you will lose some exposure to the assets in your Trove. To compensate for this, 20% of the redemption fee is given back to the borrower.
Troves in Yeti Finance are ordered based on risk, and redemptions can only occur on the most risky Trove and go up from there. If you want to avoid being redeemed against, an easy way is to maintain a high collateral ratio relative to other troves in the system. Having a higher amount of stablecoins in your Trove allows for shielding against redemptions as well. See more information about Redemptions here.
To ensure YUSD remains fully backed by collateral, Troves that fall under the minimum collateral ratio of 110% will be closed and have its debt paid back externally or redistributed.
The collateral of liquidated Troves are distributed among Stability Pool Providers who profit the ~10% difference in the collateral value and the debt. The Trove owner will keep the YUSD which will be worth less value than the collateral they lost.
Therefore, it is critical to keep your Trove's collateral ratio above 110%.
Anyone can liquidate a Trove as soon as it drops below the Minimum Collateral Ratio of 110%. The liquidator receives gas compensation of 200 YUSD + 0.5% of the liquidated collateral as reward for liquidation.
The Stability Pool is a pool of YUSD which is used during liquidations to offset the debt from liquidated troves, maintaining the peg of YUSD and also the system solvency.
When a Trove is liquidated, the amount of YUSD corresponding to the debt of the Trove is burned from the Stability Pool’s balance in exchange of the entire collateral from the Trove.
Stability Pool depositors receive a share of liquidated collateral in exchange for their YUSD. See more information about Stability Pool mechanisms, and what happens when the stability pool is empty here. Depositors are also incentivized with Yeti farming rewards.
The most important invariant in our system is making sure YUSD is fully over-collateralized and redeemable. We offer very highly-capital efficient and low collateral ratio loans. But in order to preserve redeemability in all conditions, we also want to have some safer (more well-capitalized) loans in our system to offset the low-collateral-ratio loans. Recovery mode captures this idea.
When the system's Total Collateral Ratio (TCR) drops below 150%, meaning that YUSD isn't as well-collateralized, the system moves into recovery mode. It goes back into Normal Mode once TCR goes back to above 150%.
During Recovery Mode, Troves with an adjusted collateral ratio below the TCR of the system are eligible to be liquidated. Moreover, the system blocks borrower transactions that would further decrease the TCR. New YUSD may only be issued by adjusting existing Troves in a way that improves their collateral ratio, or by opening a new Trove with a collateral ratio >= 150%.
Stablecoin troves are still safe during recovery mode. Since this uses Adjusted Collateral Ratio, troves with purely stablecoins as collateral are not subject to these conditions due to having a higher AICR. See tech docs for more information here.
Recovery Mode incentivizes borrowers to behave in ways that raise the TCR back above 150%.
In order to be safe in all conditions, a user should maintain their Trove collateral ratio above the TCR, and even better, above 150%.
Recovery mode is designed to encourage healthy and safe borrowing practices as it acts as a deterrent. The possibility of Recovery Mode inherently guides the system away from ever reaching it. Recovery Mode is not a desirable state but a necessary mechanism for the system. See more information about Recovery Mode here.
When you deposit collateral on Yeti Finance, you continue earning the farming rewards you were eligible for. For now, we always auto-compound farming rewards, but we may build other alternatives down the line.
Auto-compounding means we sell the farm tokens back into the underlying asset. So for example, when you deposit Trader Joe LP tokens into Yeti Finance, we deposit them into the Trader Joe Master Chef contract to earn JOE yield. We periodically claim the JOE rewards and sell it for more JLP tokens. Yeti Finance takes a small cut of these rewards but even after that, our levered farming strategies will offer yields superior to anything out there today on Avalanche.
On most collaterals, we simply take a cut of the farming reward at the time of the auto-compound. This is true for Curve and Trader Joe LP tokens as well as sJOE.
However, for lending market collateral (deposited collateral on Aave, Benqi, or Banker Joe), we also take a cut of the collateral's yield. This is because it is a straightforward process to do so, and because the farming rewards are typically a small part of the overall yield meaning the protocol would not be making significant revenue on these collaterals otherwise.
Our philosophy in general is that we want to make the best farming experience possible while building a sustainable economic model around it. We realize that the best way to do this is to align incentives. The one-time fees are a good revenue source, but the primary way the protocol makes money is this cut of yield. We do this so incentives are aligned in the sense that we only make money if you make money.
Joe LP Tokens
Cut of JOE reward on auto-compound
Curve av3CRV LP Tokens
Cut of WAVAX and CRV reward on auto-compound
sJOE (coming soon)
Cut of USDC reward on auto-compound
Aave Deposited Collateral (coming soon)
Cut of WAVAX reward (from Avalanche Rush) and yield on deposited collateral
Benqi Deposited Collateral
Cut of QI, WAVAX rewards (from Avalanche Rush), and yield on deposited collateral
Banker Joe Deposited Collateral (coming soon)
Cut of JOE and yield on deposited collateral