*NB: Recovery Mode has been disabled since this was published.
The last month has given us a wealth of data and feedback about user behavior and expectations from a borrowing platform like Hubble.
We understood very clearly what users want if they are to deposit their assets on Hubble to borrow USDH. We would like to discuss with the community what we’ve learned and what actions we plan on taking to address this feedback.
What Hubble Has Been Hearing After One Month
We’ve consistently heard users discussing three main points. Each of these points gives users clarity and certainty about what will happen to their funds:
Peg stability ensures that when users take a loan and repay a loan it will cost the same. If the peg is not tight, then it adds volatility to how much it will cost to issue and repay a loan; therefore, it's a hidden cost on top of the borrowing fee.
Such uncertainty also reduces the utility of USDH within the greater DeFi ecosystem. USDH should be a token that can replace centralized stablecoins for any purpose, and that requires a stable peg.
Currently, the liquidation threshold is 90.9% LTV. This threshold stands IF the system is well collateralized. Otherwise, it becomes 66.6% during Recovery Mode.*
Recovery Mode is scary for a lot of people since the behavior of other users could trigger the liquidation of someone who is relatively safe. It makes risk management more challenging since you cannot hedge against other peoples’ actions.
We have not enabled redemptions yet, but if we were to, risk management would become even more difficult. People will not have a guarantee that when they come back to Hubble after a month their BTC is still there.
Even if we tell users to read the fine print, they won't or they will be scared away. This will make people stay away from Hubble.
Redemptions would essentially take away collateral from someone else’s position in order to restore USDH's peg stability. Consequently, borrowers would have to forfeit collateral for the public good.
Looking at the data from Liquity, which has a very similar redemption mechanism, some users have had hundreds of ETH redeemed from their deposits in the last week.
Redemptions are an elegant solution to peg stability, but it's a less than ideal user experience. We always tell people, “If you love your BTC, but need extra liquidity, then come to Hubble. Deposit BTC for USDH, and when you come back, you will have the same BTC or more.” Not true–not if you are redeemed against!
Hubble Focuses on Improving User Experience
It's pretty clear from talking to a lot of people that borrowers want a predictable experience. If we are to keep Recovery Mode + redemptions, we are reducing the predictability of the borrowing experience, and we have to seriously address this problem.
Given that predictability is such an essential feature, we need to remove (1) Recovery Mode and (2) the redemption mechanism.
The redemption mechanism hasn’t been launched, but it should have been. We've been delaying its release, because we weren't feeling good about redemptions.
With that being said, removing redemptions requires us to come up with solutions to the problems they were solving: Recovery mode was solving capital efficiency, and redemptions were solving below-peg arbitrage (USDH, for example, trades at $0.95–buy USDH, redeem for collateral, USDH is burned, and peg is lifted.).
The Way Forward: What We’re Planning
Hubble Protocol is planning to implement the following features:
Per Collateral LTV
Your liquidation ratio will not depend on others anymore, but only your own collateral. For example, SOL will have a maximum 80% LTV, BTC will have 80%, and RAY will have 60%.
Your total debt LTV for liquidation will be the weighted sum of each. We will implement this in the next 1.5 months. Potentially, we can create different types of vaults with different deposit caps, LTVs, and stability fees (see below).
To bring the peg back up, we need to create USDH demand. Demand is made of (a) people buying USDH for yield and (b) people buying USDH to repay loans as borrowing costs rise.
The solution is a Stability Fee that will vary depending on peg stability. If USDH’s peg is below $1.00, then we raise the Stability Fee, which would be like an interest rate that is taken from borrowers and given to USDH depositors.
The Stability Fee will be managed by governance, ultimately, but until then we will do it manually to ensure USDH’s peg is maintained. We see this as a crucial step to keeping USDH's peg stable.
Zero-interest Rate Narrative
Unfortunately, adding a Stability Fee will remove the zero-interest narrative. Although it's a nice feature, both from a marketing and from an economics point of view, it comes with a lot of caveats, the main one being uncertainty about funds.
The zero-interest feature will cannibalize Hubble’s TVL, since people won't make deposits. We need to rip off the band-aid and move to a Stability Fee method.
The good news: people will receive a native interest rate on their USDH deposits. This rate isn’t based on emissions–it’s based on the Stability Fee. That is a pure SAVINGS ACCOUNT on stablecoins.
How You Can Help
From our earliest days, we’ve believed that you, the community, are vital to the success of Hubble, and we are calling on you now to give us feedback.
We’ll be hosting a Community Forum on the 10th of March at 6 PM UTC where you’ll be free to raise your thoughts, engage in an open conversation with Marius, and help us ensure all voices are heard around these topics.
The Community Forum will be held on Hubble’s Discord. After reading the above, we hope you’ll come to join us with an open mind and a willingness to shape Hubble’s future as we work together to strengthen the project and USDH.