The introduction of Stability Fees brings with it numerous mechanisms, all of which the Hubble team is confident will greatly benefit the protocol in the long term. These mechanisms include:
- Hubble Native Yield
- Additional Inflows into the Hubble Reserve Buffer
- Isolated Vaults
- Peg Management
Let’s dive in!
What Are Stability Fees?
Stability Fees are equivalent to interest rates. When a user mints USDH from a specific vault, the Stability Fee setting on that vault will determine at which rate their debt accrues, set at an annual rate.
Stability Fees will initially be adjustable by the Hubble team, and once governance is active, Stability Fees will be determined by DAO voting.
These fees will flow to two distinct parts of the protocol, defined under the Hubble Native Yield (HNY) and the Hubble Reserve Buffer (HRB).
Bringing Value to Users via Hubble Native Yield
As Stability Fees incentivize borrowers to repay their debt over time, the settlement of debt will also include the payment of the debt accrued by the Stability Fee. A large portion of this debt will go to USDH and HBB stakers, thus resulting in a “native yield” created within the Hubble ecosystem.
The introduction of Stability Fees is significant as it brings an additional use case to both USDH and HBB, giving further value to users who choose to hold onto their assets and stake them in the protocol. The Hubble Native Yield will be awarded in USDH and will be taken directly from the Stability Fee debt repaid by borrowers.
Provisionally, Stability Fees will be distributed as follows:
- 50% to USDH Stakers
- 30% to HBB Stakers
With another 20% going to the Hubble Reserve Buffer.
The Hubble Reserve Buffer Explained
All inflows from Stability Fees not distributed to stakers will flow into the Hubble Reserve Buffer (HRB). The HRB pool is used to further USDH adoption, product development, and team growth. At present, the management of the HRB is done by the protocol itself (thus far, there has been no need to make use of the HRB).
Once governance is active, community members will be able to vote on how the HRB is deployed to advance the protocol.
A Vault-Based Borrowing System
At present, Hubble has a global borrowing vault containing nine assets. The borrowing parameters across all these assets are the same: 75% LTV, 0.5% minting fee, and 0% Stability Fee.
Moving forward, we will be introducing Borrowing Vaults, containing different assets/combinations of assets, as well as different parameters, such as the maximum LTV, deposit and withdrawal caps, and Stability Fees.
Vaults will function independently of one another. The maximum LTV in one vault will not determine the LTV of another, and, similarly, changing the Stability Fee on a certain Vault will have no impact on the fees in other vaults.
This enables Hubble to set up vaults for various purposes and to manage the inflows and outflows in specific vaults. With regards to Stability Fees, this will allow us to set up vaults of various risk types and to set Stability Fees that are applicable to these assets.
Now that we’ve introduced the new features that will accompany the introduction of Stability Fees, we can get into our motivation behind Stability Fees and why they’re called “Stability Fees.”
Why Hubble is Moving Away from Zero-Interest
Undeniably, zero-interest loans were a strong selling point for Hubble, as they gave borrowers peace of mind that their USDH debt would never increase unless they borrowed additional USDH.
However, as attractive as zero-interest is for borrowers, we do not believe that a model without interest rates is fully sustainable. It severely limits how an entity like Hubble can adjust parameters to affect supply and demand.
Why call it Stability Fees if it serves the same function as interest rates? Because the ability to adjust these fees gives Hubble an effective tool to manage the USDH peg. Adjusting the Stability Fee can incentivize users to borrow or repay loans. As a result, this enhances the stability of Hubble and USDH.
How Stability Fees Enable Peg Management
When the Federal Reserve raises interest rates, demand for the US dollar increases, and the value of the dollar appreciates. Conversely, when interest rates decrease, the demand for the Dollar will eventually ease, and the value of the dollar will gradually weaken, barring any additional factors.
Similarly, when Hubble increases or decreases Stability Fees, the price of USDH can respectively increase or decrease. Because USDH is soft-pegged to the dollar, market forces can push USDH above or below its 1:1 peg with the US Dollar.
USDH Below Peg:
When USDH is below peg, Hubble can increase Stability Fees. Because borrowers are averse to having their debt increase, an increase in Stability Fees incentivizes them to repay their loans. This can lead to borrowers acquiring USDH from the market to repay their debt.
More USDH being bought on the market signals higher demand, and the repaying of loans decreases the circulating supply of USDH. These factors combine to increase the price of USDH, pushing it back to its 1:1 US Dollar peg.
USDH Above Peg:
When USDH trades above its 1:1 US dollar peg, Hubble can decrease the Stability Fees. A decrease in Stability Fees incentivizes borrowers to take advantage of the lower fees by borrowing more USDH. Increased borrowing should increase the supply of USDH on the market, ultimately pushing USDH back down to peg.
Stability Fees are, at least in theory, an effective way of managing the peg of USDH. However, this does not guarantee that Stability Fees will always be fully effective, and Hubble will certainly not be relying on Stability Fees alone to manage USDH's peg. You can read more about Hubble’s pegging mechanisms in the USDH Peg Stability Section of our docs.
Moving Forward in a New System
Stability Fees signal quite a significant shift in the Hubble borrowing experience. That being said, we believe this is a natural transition as Hubble grows into a more mature and robust platform. We are excited about what the future holds for the protocol, and as always, we are ready to discuss new ideas, be it in Discord or in the Hubble Forum.
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