11h ago
After spending a day with the protocol, I quite like its mechanics and I feel it's promising.
Hylo is basically a mix of DAI and AMPL. It always tries to overcollateralize like DAI with quality collateral, LSTs. Likening to AMPL is basically its "rebase" mechanism where the rebase equals staking rate * collateralization ratio and this is distributed to staked stables holders and treasury. This gives phenomenal yields in the expansion phase with a high inflation asset like SOL as collateral.
However, when collateral goes into a prolonged bear phase, it doesn't do negative rebase by auto-shrinking supply, nor does it liquidate collateral like DAI. It uses the second token that shares part of the TVL which acts like a leveraged play on the collateral. As hyUSD gets closer and closer to being undercollateralized, it first incentivizes redemptions of the stable for the collateral, then later halts new issuance altogether. At the same time, it incentivizes issuance of the leverage token on the collateral and later auto issues the leverage token to stakers.
This is great for deep dips or prolonged dips in bull markets, or if you have strong conviction in the long-term viability of the collateral token, which is SOL here.
Main risks are if the stability pool gets emptied out because nobody believes in the bull market anymore. If most of the market believes SOL is dead for a long, long time and don't want leveraged plays on SOL, then stakers pull out. There won't be any sHyUSD to pull out and issue xSOL. In that case, it is inevitable that the protocol goes undercollateralized. However, it is to be seen how the market behaves. Nobody can predict and this is a real risk.
In my opinion, in addition to the 150% and 130% thresholds, there should be another threshold of 110% or so, where the collateral is liquidated partially to bring the CR back to healthy levels. But, this means dependence on a secondary stable or something else that hyUSD holders can redeem or stay as collateral. Needs more thought here. Without any liquidation mechanism, I stay worried about the behavior of the protocol in the long term, simply because the market is unpredictable.
2d ago
Ok, so I tried out @hylo_so today. It is a very interesting protocol and the @colosseum investment intrigued me (I am an LP in the Colosseum fund). I am super wary of algo stables, even if overcollateralized, so I approached this with caution.
The mechanism is new and interesting with a 2 token model - xSOL, a leveraged SOL, and hyUSD, a pegged stable - backed by jitoSOL collateral. This is made FOR bull markets. My concerns here are twofold - cost and existential risk.
1. Cost - For anyone that uses stables to generate yields, starting with USDC or other stables means you incur a 0.1% fee + slippage to buy jitoSOL (that's the only collateral) in normal mode. Redemption costs 0.1% to redeem sHyUSD and 0.3% to redeem hySOL back to collateral. This is almost half a month of yield at the current 16% top of the line yields on the stability pool. So know what you are getting into and be prepared.
2. Existential risks -
a) SIMD228 or similar: sHyUSD basically generates its exorbitant yield using jitoSOL that is the underlying collateral. As staked SOL yields go down, this will struggle to provide market competing rates on top of the other risks it has.
b) Prolonged bear: When SOL prices grind down for prolonged periods as they do in a bear market, sHySOL keeps getting auto-converted to xSOL which is leveraged SOL. This is good for holders in bull markets as deep dips give you auto exposure to leveraged SOL for even better results. The result is the inverse in a bear. You will end up with nothing.
c) Again, in a bear, as SOL prices grind down and collateral dips and sHyUSD keeps getting converted to xSOL which will be worthless, or users redeem to avoid this (redemption fee goes to 0.1% before it gets here), the entire pool keeps getting shrunk slowly, and the protocol shall enter cockroach mode.
So, know what you are getting into before you do. The yields are great without the need to loop or monitor leverage BUT the cost you incur needs at least a month to be in the pool to be on par with the base yield. And if you are afraid of a looming bear, the risks amplify.
One last thing is I wish the protocol chose INF instead of jitoSOL as collateral, for a plethora of reasons which I don't wish to get into here.
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