Self-Regulated Zero Origination Fee


I have been in Discord pushing for something in these line. I think this deserves its own post.

Instead of just changing “randomly” origination fees (by randomly, I mean based on the opinion from one or more individuals), I think we should come up with some open and public “model”, that is predictable by anyone, and preferably automated and decentralised.

Which specific model, is not as important to my eyes as the willingness to have it. The model can be changed and improved along the way, but I repeat, we must have one. Who will put any serious money in a LOC in Zero, knowing that the future of his collateral does not depend on a method, but rather on some other individuals decision ? And I know, in an ultimate instance it depends on Bitocracy, however, it is fair to assume that not everyone trust on the decentralisation of Bitocracy, and even if that decentralisation exists, dynamics in Zero would still depend on peoples sentiment.

Here it comes my proposal:

Just please, see the numbers proposed here as some configurable parameters. They need to be well thought.

The last year accumulated funding rate in Binance is around 6%. Meaning, if you opened a position a year ago and maintained that during this time, you would have paid like 6%, plus some other Exchange fees. But this was a bear market, this number can be as high as 15% during a bull market I think. I have no idea how long the average LOC lifetime is, but I imagine something like 2 years wouldn’t be so crazy. If you are to keep open a leveraged position in any exchange for 2 years, you would end up paying something between 10% and 30% I think,

If Zero is meant to compete here, it means, origination fees above 20% wouldn’t make sense, unless you are intending to keep that open for a really long time. Of course, the risk of being redeemed here plays some important factor as well. The higher the risk, the less I’d be willing to pay for the LOC. And so, my assumption is that any origination fee above 30% wouldn’t change much the supply of ZUSD (again see this as some random parameters that can be customised).

My idea is, to set up a process that configures the origination fee within an impactful range 0% - 30% based on what I will describe next.

Part of my idea is to launch a new stability pool with funds in BTC built in the protocol. The basics is that the funds of this pool will be used to stabilise healthy LOC’s (above a fix and preset collateral ratio). The size of this pool has to depend on the supply of ZUSD, if the supply of ZUSD is increased (due to new LOC), the size of the pool has to be bigger. Therefore it has to track a % of the supply. How big this % has to be, doesn’t matter because it can be controlled by a closed-loop algorithm, where the observed parameter is the collateral ratio of the loans being redeemed. If we aim to target a 200% collateral ratio, and loans of 220% are being forcefully redeemed, the algorithm would self regulate and increase the stability pool size for the next epoch (weekly or whatever).

When force redemption come into action, it will first go to this stability pool (as long as the collateral ratio is lower than the preset level that I mentioned before), to avoid the impact on others LOCs. Only if the stability pool is empty, it will then go and redeem peoples LOC.

Now, the question is, how do we fund this pool ? well, easy… all Zero fees will be redirected to the pool if the algorithm determines that the pool hasn’t reached the target size. When it reaches the target size, the contract will stop collecting fees and start sending them to Sov stakers.

As I said before, everything will be converted to BTC in the pool. When BTC price goes down, the stability pool size is less in dollars term but we DON’T need to increase the pool size, because the redeemed amounts will be less, as the collateral is always in BTC.

If the stability pool gets below its target, the algorithm will also increase the origination fees, in order to slow down or even stop new LOCs and forcefully collect more fees for the pool. How is this control curve between “stability pool utilisation” - “origination fees level”, is something to be discussed and tune.

When BTC is in a bear market, the number of new LOCs will be less, or even negative. At the bottom of a cycle, there may be more collateral in the stability pool than needed, so there will be incentive to hodl and stake Sov, since stakers will collect all fees. As the market turns and evolves to a bull market, this is when people will start opening new LOCs, and when the size of the stability needs to increase.

So, if I am right, this should be a Beta negative force to Sov price, meaning, Sovryn stakers will receive more money during bear markets than during bull markets.

A second part of my idea is, to change redemption fees in an inverse manner to the origination fees. So when we increase origination fees, redemption fees go down and viceversa. This is also to regulate and flat down the incentives for staking Sov:
When the algorithm detects that origination fees have to go down to 0 (to increase ZUSD supply), stakers would be incentivated to sell Sov (as the staking turnover goes down), but if during this time, we increase the redemption fees, it means a higher turnover from redemption fees to alleviate the selling pressure for Sov.
This second part may get more complex and can come later.

I think the principles of this idea are beautiful and elegant, but as I said before, the important thing is not to deploy this specific idea, but to have at least any to avoid the need of human action in order to change the origination fees (and consequently makes these Zero governance meeting more unnecessary, or not as often). It is important to have Zero behaves more predictable and preferably more linearly (instead of just turning off and on Zero).


There is a mismatch between Zero and DLLR in terms of carrying cost - if assume that ongoing funding is required to incentivize holding DLLR. The origination fees are 1-off fees while holding fees are ongoing fees. So any system which depends entirely on continuous funding (like a pool) but receives 1-off funding is going to have the same mismatch.

However, as a stablecoin, the carrying cost of DLLR should trend towards 0 over time. Which is to say, people should hold dollars not for yield but for safety.

The interplay of these factors is complex. My view is that we should want to see most borrowing demand focused on the interest-bearing lending pools - with Zero being used to issue DLLR into existence as the economic base grows.

yeap, I get your point. However, if we say the pool has to be 5% of the ZUSD supply, then origination fees have to be > 5% to catch up with supply.
So, your assumption on the mismatch I think is only true if origination fees are set to be lower than the size of the pool in % of the ZUSD Supply.

The pool here is mainly used to make ZUSD less inflationary when it needs to, and to cushion selling pressure (by setting up an “OTC” way of converting ZUSD into BTC) and therefore useful to stabilise peg.

Of course, we may argue whether or not this 5% pool would stabilise anything, and that is a fair question, but here there are 2 stabilisation factors:

  1. increasing origination fees (by setting the pool size to be a high % in the algorithm), slow down ZUSD supply, and makes ZUSD less inflationary, pushing the peg up.

  2. stability pool even if it is in a small part, should reduce the number of forced redemptions, hence help increasing TVL…

However one important point to make here. The longer we wait for a pool, the more difficult it will be to implement it. Luna USTC revitalisation team know what I am talking about… At some point ZUSD supply will be huge for the market cap of Sov.

Sov value proposition is much more increased, if Zero is stable, self-regulated and have enough liquidity to guarantee a stable revenue for Sov.

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First, I want to thank you for your posts on Discord and here, with imaginative and well-analyzed ideas.

What comes to my mind while reading your proposal? I’m not against it, I just suggest these comments as additions to your analysis, in case they help spark other possibilities.

“Zero” is distinctive for having zero interest. The uniqueness of ZERO would be enhanced if the fees were close to zero, as they were initially. That way, we would surpass other lending protocols. I focus on the total cost, interest plus fees. The concept of ZERO becomes blurred in my mind when fees play the hidden role of an interest type.

On the other hand, the creation of a safeguard fund to counter redemption attacks raises the question of whether it might become an easy and well-known target for those seeking to exploit it. Any small liquidity-rich whale might systematically challenge it if they strategize accordingly.

I don’t understand why the quantity of new LOC would be lower in a bear market. I would think it remains constant.

Perhaps there are endogenous ways for ZERO to increase redemptions without reducing the redemption rate when necessary. Voluntary, automated, and scheduled redemptions could be encouraged, where the line opener specifies a certain date or a specific Bitcoin/DLLR value for redemption, providing predictability to the peg. For example, when I open my line, I could set it for two months, until a certain Bitcoin value is reached, or until it’s necessary to protect the peg. And in exchange for my commitment to voluntary redemption, I wouldn’t lose a single satoshi in the process?

I can’t think of any endogenous way within the protocol to reduce originations without raising the origination fee.

new LOC will be lower in bear market, for the same reason, funding rates tend to be negative during bear markets (people is afraid of leveraging its BTC, as the risk of liquidation is higher)… LOC openings should mimic funding rates… I would think…

What you are saying about a redemption attack is true, but the risk exists also now without my pool. A big whale can be liquidated, and if that exceeds the stability pool, it will push the price low enough to liquidate other people right?. The solution to this problem has to come in a different way, maybe limiting the size of a LOC position, and forcing LOC positions to have liquidation levels that do not overlap.

Having a Zero, that is always 0% origination and 0% interest rate, is just impossible… Forget about that, it is basic economics… But, it can be close to that, during some times in a cycle (just not forever). It is up to you to arbitrage those opportunities.

Your second suggestion is a good addition to Zero I think, basically automatic TP points for automatic redemptions… But this can come later I think, and it is out of the scope of this topic.

As an investor in SOV what’s the point of hodling SOV if ZERO origination and redemption fees are close to zero, and it’s all automated and the Bitocracy has no real power to change and control things? I would get a better return elswhere and liquidate my SOV. I like SOV for the Bitocracy and active management and potential for reasonable returns. You can already get ZERO with super low fees on Liquity using ETH. I like the concept of SOV better, and feel the Bitocracy will actively react to problems and make things work for the best long term. If fees are too high or low they can adjust them as Sovryn grows.