Decentralized finance (DeFi) is taking its next big steps on Solana, the world’s fastest blockchain. With current speeds of up to 65,000 transactions per second (TPS) and block times at around 400ms per block, Solana is gearing up to supercharge DeFi for the world.
At the same time, Hubble Protocol is on a mission to supercharge liquidity on Solana.
What does that mean?
First, let’s go over the definition of liquidity. It’s essentially cash on hand, and it’s not the easiest thing to maintain when one’s net worth is tied up in assets other than cash.
For example, it’s possible for an English aristocrat to live in a historic mansion worth millions but live a life that’s cash-poor, and unless they sell the family estate, they won’t have the funds to keep the lights on.
Crypto holders face a similar issue: they’re asset-rich, but they don’t want to sell their BTC. Bitcoin maximalists want to HODL their BTC until it reaches its full potential, but what can HODLers do to access the value of their tokens without selling a single satoshi?
They can supercharge their liquidity with Hubble.
This article will explain why people borrow crypto, the origins of borrowing in DeFi, and how DeFi borrowing works. Then, we’ll explore what Hubble is doing to make borrowing as capital-efficient, user-friendly, and as profitable as possible.
Why Do People Deposit Crypto to Borrow Crypto?
There are quite a few reasons why people use DeFi for borrowing against their crypto assets. DeFi is a “choose your own adventure” kind of financial system where users are granted the independence to let their imaginations run wild. As a starting off point, here are two main use cases for borrowing through DeFi:
Increasing Liquidity for Spending
One Reddit user posted this question to r/DeFi, “I Borrowed Dai. Now what?” Another user posted a great explanation with a real-world example of how they used crypto borrowing to fix up their home:
While some people use borrowing to help them remodel their homes, other people are making big-ticket purchases by borrowing against their crypto assets. The Wall Street Journal reported in September that a growing number of users are relying on DeFi borrowing services to buy homes and cars.
More people are recognizing the long-term value of holding crypto, and for many people, this future value outweighs selling tokens today to buy a car that depreciates in price by 20% when driven off the lot.
As r/Ugli-Fruit mentioned, borrowing is what billionaires do. Instead of selling off stock to raise their liquidity, the asset-rich often borrow against their assets and by doing so avoid taxable events (and the sales of their assets making the news).
Following u/Ugli-Fruit’s logic, crypto borrowing services are creating opportunities for everyday people, not just those at the top of the financial food chain, to participate in the kinds of financial wizardry that helps billionaires pay the bills without killing their goose that lays golden eggs.
Increasing Liquidity for DeFi
Another reason to borrow stablecoins against other crypto assets is to further participate in DeFi. Borrowing can act as the base layer for building what’s called money legos—stacking DeFi services one on top of the other to realize the most gains and best possible outcomes from participating in a composable financial system.
A growing number of DeFi services are democratizing access to financial products that were once off-limits to the general public, and innovations in DeFi are creating new financial primitives that never existed in the world of traditional finance (TradFi).
Users can combine DeFi services in all sorts of ways to seek larger yields, but borrowing is usually the first step to secure the liquidity for these plays.
For example, Alice has 100 SOL that she believes will one day rise in value. She wants to HODL her SOL, but she also wants to increase the number of tokens she holds when SOL’s price shoots to the moon, so Alice turns to DeFi looking for options.
Alice can stake her SOL with a Solana validator, and that way she can earn around 7% more SOL a year. However, she may be required to lock up her SOL for a specific amount of time.
She can also stake her SOL with a project on Solana (or even another network) and earn that project’s native token as a reward. In this case, Alice won’t have to lock up her tokens. She can unstake them whenever she pleases, but if she wants more SOL, she’ll have to swap her project tokens into SOL and hope the project continues to do well while she stakes.
In both of these instances, Alice’s participation in DeFi is earning her gains on her tokens, but she’s missing out on a massive amount of value still trapped in her SOL.
If Alice first deposits her SOL on Hubble, she will receive a similar yield to staking her SOL with a Solana validator. She can also choose to have her assets earn a yield on Hubble through multiple ecosystems and strategies, and she can retrieve her SOL whenever she wants by repaying her USDH debt.
After Alice deposits her SOL on Hubble, she can borrow up to 90.9% of her SOL’s value by minting USDH. She can then use that USDH for anything she wants, including buying more SOL and staking it with another project to earn its tokens as in the first hypothetical example.
If Alice wants to pursue another low-risk opportunity for yield, she can deposit her USDH into an AMM (automatic market maker) and earn fees from helping other users swap tokens. She can then use her LP token and find a project that will reward her for depositing that token, and so on.
The possibilities in DeFi seem nearly endless, but by borrowing through Hubble as her first step, Alice guarantees she can HODL her SOL, and her position starts off with a boost in yield as she continues putting together the rest of her DeFi legos.
The Origins of DeFi Borrowing and Collateralized Debt Positions
Borrowing is most likely the first use case for what is now known as DeFi. The concept of borrowing that became MakerDAO even preceded the existence of Ethereum, and information about the prototype for DAI, Maker’s stablecoin, was posted on Reddit months before Ethereum’s launch.
At the end of 2017, Maker paved the way for collateralized debt positions (CDPs) by launching a protocol that accepted deposits of ETH in return for DAI. Around the same time, the crypto ICO bubble had heated up to epic proportions, and BTC reached an all-time high of $19,783.06, so obtaining DAI created an opportunity for users to keep their ETH and participate in what looked like upside everywhere.
Theoretically, users could deposit ETH on Maker, get DAI, buy other tokens at a low, sell those tokens at a high for more ETH, borrow more DAI, and repeat this process ad infinitum. Eventually, the ICO bubble burst, a lot of lessons were learned (DeFi’s rise has been compared to the ICO bubble by its detractors, but DeFi and the ICO days are worlds apart), and during the following crash, the interest rates for borrowing DAI rose from 0.5% to 19.5%.
However dire the market may have seemed in those days, MakerDAO proved that a stablecoin backed by crypto could survive a crash, and that was incredible news.
Eventually, Maker voted to allow additional collateral besides ETH into its treasury, and the first addition was Basic Attention Token (BAT). Since then, additional assets have been whitelisted as collateral by Maker, including USDC.
DAI is currently one of the Top 5 stablecoins in all of crypto. It has a market cap of around $8 billion, which means there are currently 8 billion borrowed DAI in circulation backed by other cryptos on the Ethereum network.
How Hubble Improves Where MakerDAO Left Off
Hubble Protocol has been described as “the MakerDAO of Solana.” While this is an extraordinary compliment, there are several improvements Hubble has made that sets it apart from its predecessors.
The minimum collateral ratio for lending on MakerDAO is 150%, which means that users can only access around 67% of the value locked in their deposited assets. Additionally, Maker and other borrowing platforms charge users variable interest on what they borrow, which means that borrowing for longer periods can reduce the capital efficiency of borrowing in the first place.
Hubble, on the other hand, is a zero-interest borrowing protocol that lets users access up to 90.9% of the value trapped in their collateral assets. This means that users can leverage their positions up to 11x when looping through Hubble, although it’s highly inadvisable to proceed with this much leverage.
Hubble also lets users earn yields on their collateral while borrowing against it, so the value of a user’s collateral grows over time while it sits on Hubble, no matter what the market conditions.
Earning yield on collateral also creates the potential for zero-cost borrowing that can negate Hubble’s 0.5% fee for minting USDH. With enough time, this yield can even make borrowing through Hubble a loan that pays itself off.
In order to ensure the health of the system, liquidations on Hubble occur when accounts borrow more than 90.9% loan-to-value (LTV) on their collateral. Users who are liquidated get to keep their borrowed USDH, and since Hubble offers borrowing at an extremely capital-efficient LTV, users experience minimal value lost when their position becomes unhealthy during market slowdowns.
On other borrowing platforms that liquidate users when their LTV reaches 70%, users lose about 30% of their assets’ value to the system. What’s more, when liquidations are triggered on Hubble, they are triggered by members of the community instead of the system itself, and community members who deposit USDH into Hubble’s stability pool for repaying loans earn from the ~9.5% value difference in liquidations.
The effect of liquidations on Hubble is similar to traders setting a stop loss with a 10% guaranteed cut for the community supporting it. As a hedge, Hubble’s users can bolster their position by depositing USDH into the stability pool and receiving a portion of all liquidations.
How the Value Created on Hubble is Returned to Its Users
Hubble currently distributes 100% liquidations to the Hubble community. Users who deposit USDH into the stability pool will effectively swap their stablecoins for other assets at a major discount, and a small portion of these liquidations goes to fund Hubble’s treasury to sustain the protocol through its future transition into a DAO.
In addition to receiving liquidated assets at a discount, stability pool depositors are also rewarded with HBB, Hubble’s governance token, as it is emitted at regular intervals.
HBB can be staked on Hubble to receive rewards from the protocol for participating in Hubble DeFi.
This system creates something like a positive feedback loop within Hubble where maximum participation in the protocol can lead to maximum returns:
- Deposit assets and earn a positive yield on collateral for minting USDH
- Deposit USDH into the stability pool and earn from liquidations and HBB rewards
- Deposit assets to earn more yield and borrow more USDH or
- Stake HBB to earn protocol rewards
Hubble gives users the opportunity to access the capital trapped in their HODLed tokens, and the protocol allows users to earn yield while they borrow at extremely capital-efficient rates.
Please note, this article is not financial advice.