1. What is Lybra Finance?
Lybra Finance is a project that allows users to borrow Stablecoin by minting eUSD (Stablecoin) with a 0% interest rate, using Liquid Staking tokens such as ETH, stETH, wstETH, WBETH, rETH as collateral.
The collateral model for minting stablecoin is similar to the CDP model of MakerDAO. Borrowers can collateralize assets like ETH (ETH/stETH/cbETH/rETH), BTC (WBTC/TBTC), etc., to borrow DAI.
But if Lybra Finance doesn't charge interest on borrowed eUSD, how do they make money?
=> With Liquid Staking tokens like stETH, wstETH, WBETH, rETH, they inherently earn interest from Ethereum staking. Therefore, Lybra Finance earns interest from that and redistributes a portion to eUSD holders to incentivize them to mint and hold eUSD.
eUSD is a stablecoin pegged at a 1:1 ratio with the USD. However, the difference between eUSD and MakerDAO's DAI stablecoin is that eUSD is an interest-bearing token, meaning eUSD holders receive an interest rate of approximately 8% when holding eUSD.
Additionally, Lybra also charges an annual service fee of 1.5% on the total amount of eUSD in circulation. For example, if the total circulation of eUSD is $1 billion, Lybra would collect $15 million peUSD. If you hold 1% of esLBR (LBR staked), you would receive a share of 150,000 peUSD as interest.
If there is a project that can "unlock liquidity" for Ethereum and utilize it to create more money for the market:
- To be straightforward, a project that can unlock and circulate that liquidity in the market is something that Binance would be very interested in and in great need of.
- The more circulation and transactions there are, the stronger the money flow, generating more fees, and that is precisely the domain of Liquid Staking Finance, which Lybra Finance is working on.
- Therefore, Lybra Finance is addressing two issues: Decentralized Stablecoin and Liquid Staking Finance, which Binance is eyeing.
- Binance has mentioned Lybra Finance no fewer than five times:
+ Data Insights: Liquid Staking and LSDFi Heat Up (3/7/2023)
+ Navigating Crypto: Industry Map (14/9/2023)
+ Navigating Crypto: Industry Map (28/12/2023)
+ Full-Year 2023 & Themes for 2024 (15/1/2024)
2. Why did eUSD depeg and Lybra ($LBR) experience a significant decrease?
Currently, the mechanism to maintain the peg of eUSD to 1 USD is as follows:
Ensuring collateralization level is always >150% and if there is insufficient collateral, eUSD is liquidated.
If the market price of eUSD is >$1, users can mint new eUSD to sell and make a profit.
If the market price of eUSD is <$1, users can buy eUSD in the market and redeem it for ETH worth 1 USD.
Eliminating insurance fees.
Stability fund.
2.1 Due to Lybra's mechanism:
- However, Taha believes that the reason eUSD depegged is because Lybra allows depositors the ability to refuse to become redemption providers. This strategy was effective for several months, but as selling pressure and eUSD redemptions increased, the protocol ran out of redeemers even with a 0.5% reward fee.
- Taha states that Lybra is a fork of the Liquity Protocol and LUSD. However, during the forking process, they overlooked an important part of Liquity, which is providing users with the option to participate in Rigid Redemption.
- This means that for borrowers, when choosing to participate in Rigid Redemption, they can redeem 1 eUSD for 1 USD worth of ETH from anyone, even if they purchased it from the market, to receive the reward. However, if too many people redeem, Lybra can run out of redeemers, making it impossible for borrowers to redeem their own collateral assets (ETH).
2.2 Due to dependence on a group of KOLs:
On the launch day, blurr_eth_ and 0xSifu (2 Whales + Smart Money) deposited ETH into Lybra with a total value of 80 million USD and 19 million USD, which built good trust.
However, when major LBR stakers including blurr.eth, sifuvision.eth, czsamsunsb.eth sold a significant amount of their LBR incentives, the LBR price experienced a sharp decline (according to Spot On Chain)
2.3 LBR is primarily used for incentives
$LBR is used as an incentive for users who collateralize ETH to mint eUSD. From my perspective, this is quite normal. The majority of DeFi projects utilize tokens as incentives, not just Lybra.
However, Lybra faced the unfortunate situation where several KOLs dumped LBR tokens simultaneously, which affected user confidence. This, in turn, led to the depegging of eUSD, causing a ripple effect.
As a result of reasons 1+2+3, eUSD plummeted to a low of $0.85. Consequently, the price of LBR dropped from $1 to $0.5.
[OPPORTUNITY IN RISK]
When eUSD experiences a sharp decline, it presents a significant opportunity for borrowers as they can buy eUSD from the market to repay Lybra. They can close their loan positions with an amount less than 15% of the initial borrowing amount.
3. Can Lybra Finance be revived?
- This is indeed a difficult question. Reviving Lybra is not easy, but it is not impossible like the case of Terra USD (UST) because this model is not a Ponzi scheme. However, the challenge for a stablecoin project lies in building trust.
- A stablecoin project does not need to expand rapidly; it MUST expand solidly and sustainably.
- To revive Lybra, the focus should be on the eUSD stablecoin. Lybra must take all necessary measures to bring eUSD back to the $1 peg. This challenge is not insurmountable. Currently, the price of eUSD is around $0.9, and the market cap of eUSD is only about $30 million.
- The next issue is reducing incentives for eUSD holders and instead focusing on generating profits with users' collateral assets, such as $ETH Liquid Tokens (following the example of Frax Finance), and reducing rewards in LBR. When Lybra creates a sustainable revenue model like Lido, the token price will naturally increase along with the project's value (remember the lessons from SUSHI and UNI).
- Finally, expanding the use case for eUSD is the most challenging aspect. Everyone uses USDT and USDC, so why would they use eUSD? Therefore, eUSD should not be seen as a stablecoin for general use but rather as an asset representing the amount of ETH collateralized to borrow other stablecoins.
- If viewed in this way, increasing use cases becomes less important. What matters is that the liquidity swap between eUSD and stablecoins (USDT/USDC) is large enough to prevent price slippage.
- As long as you can identify these signs, Lybra will have the opportunity to revive. Otherwise, it might be best to seek other opportunities.
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