Hubble vs. Other Borrowing Platforms

Hubble has been designed so that users can pursue a predictable borrowing experience. This means that if users repay USDH debt, they can always retrieve their collateral, and it also means that they can always withdraw their USDH from the Stability Vault at any time.

Note: This is not financial advice. Hubble Protocol does not endorse any tokens or platforms mentioned in this article.

Key Takeaways

  • Hubble doesn't require lenders for borrowing.
  • Borrowing positions can be safely unwound.
  • Users always have access to their funds.

Hubble Protocol's smart contracts allow users to borrow a stablecoin, USDH, to leverage their positions and participate in decentralized finance (DeFi). However, the way Hubble facilitates borrowing is much different from peer-to-peer lending.

The Power of Smart Contracts for DeFi Borrowing

Hubble's borrowers are empowered to initiate the issuance and minting of USDH, without depending on the availability of lenders like other pool-based lending protocols. USDH borrowing doesn't depend on other users, just a smart contract.

In short, users don't have to worry about whales and "whales doing whale things" when they borrow from Hubble.

Hubble has been designed so that users can pursue a predictable borrowing experience. This means that if users repay their USDH debt, they can always retrieve their collateral, and it also means that they can always withdraw their USDH from the Stability Vault at any time.

What's important to note about Hubble is that when users deposit assets into the protocol's smart contracts, those assets cannot be made irretrievable by the actions of others. For most centralized and decentralized lending platforms, though, this isn't the case.

CeFi Lending Protocols Can Choose to Block User Withdrawals (Not Your Keys, Not Your Crypto)

It's been a wild news cycle for many big names in crypto lending.

Celsius halted withdrawals in early June with little word on when users would be able to retrieve their crypto. Other massive CeFi projects like Babel Finance and Vauld have also recently resorted to similar pauses on withdrawals.

These CeFi protocols custody their users' assets and lend them out to generate yield. If something goes wrong, and if the lending protocol becomes insolvent, users' funds wind up entangled in the process of meeting the protocol's obligations.

Coinbase is a publicly-traded company that recently stated what could happen to users' funds if it needed to declare bankruptcy.

Explanation of Coinbase using users' assets to settle bankruptcy proceedings.

The mantra "Not your keys, not your crypto" has resurfaced as of late while CeFi protocols are falling like dominoes. Many users are beginning to regain custody of their assets as contagion affects one centralized protocol after another–as more protocols begin freezing their users' assets.

As institutional borrowers are increasingly unable to pay their lenders, whales are attempting to regain custody of their assets from these lenders, and the liquidity problems facing centralized protocols are exacerbated in this cycle.

This is most likely crypto's first large-scale credit crisis, and individual users' liquidity is on the line when the shit hits the fan at their CeFi lender.

Users' Assets Remain Theirs and Theirs Alone to Withdraw on Hubble

As for Hubble, the only time the protocol can freeze withdrawals is to protect users' funds during the event of an exploit. Users retain custody of their assets at all times when they deposit collateral or provide stability to Hubble's Stability Vault.

Once the conditions for repaying a Hubble loan are met, users can unwind their positions and retrieve their assets. Otherwise, if a user cannot repay their loan, and it rises above its loan-to-value (LTV) threshold for liquidation, their forfeited assets are distributed to users that guarantee debts by providing USDH in the Stability Vault.

If users deposit USDH to guarantee loans are repaid, they earn token rewards from liquidations at around a 10% discount. The only time users can't withdraw the USDH they deposited is when it has already been used to cover bad debt in exchange for liquidation rewards.

Whenever users want to retrieve their USDH balance from the Stability Vault, they can.

In addition, if a whale decides to withdraw the entirety of their holdings from Hubble, other users' positions on the protocol remain unaffected.

How Whales Can Affect Users on Some DeFi Lending Protocols

Borrowing USDH requires opening a collateralized debt position (CDP), which can be briefly described as using a DeFi smart contract to borrow from oneself:

  • Deposit collateral into the smart contract
  • Mint USDH against the value of that collateral

A computer code facilitates the entire process, leaving users in charge of maintaining their accounts.

On Hubble, users' positions exist in a silo. A user's position is solely their position, and it doesn't depend on a counterparty, and it doesn't bear the brunt of another user's actions.

This doesn't mean that every DeFi borrowing and lending protocol works the same way, even if they rely on smart contracts.

For example, decentralized money markets can only create borrowing opportunities if lenders provide liquidity for their borrowers. For these protocols, a metric called a utilization rate measures how much lend-side liquidity is currently being lent out, and if this rate reaches 100%, then lenders cannot withdraw their funds.

Graphic depicting the utilization rates of USDC on Solend during its whale crisis.

During a recent liquidity crunch, many of Solend's lenders could not make withdrawals for several days as a whale racked up hundreds of thousands of dollars worth of USDC debt on the brink of a massive SOL liquidation.

In contrast to CeFi lending protocols freezing user withdrawals by executive decision, this time, it was a smart contract doing exactly what it was programmed to do.

An excellent summary of the Solend whale crisis.

Another thing lending protocol smart contracts are designed to do is adjust rates as supply and demand fluctuate, which means users who aren't constantly paying attention to their positions on their money market of choice can end up paying more than they planned.

Imagine a whale—who wasn't paying attention—owing hundreds of thousands of dollars in additional fees on their loan a day due to an algorithm. This isn't just an imaginary exercise, because it just happened...and it can't happen on Hubble.

Hubble Protects Users Seeking Leverage by Design

The community has seen how CeFi and DeFi lending protocols can leave users unable to withdraw funds for reasons outside their control. It's time to reiterate that Hubble has been designed to ensure this cannot happen.

At one point in Hubble's earliest days, a condition called Recovery Mode would ensure the System LTV was always below 66.6%. The way it worked (never triggered, though) would have adjusted users' positions to rebalance the books, so there was always at least 150% worth of collateral backing all USDH loans.

The protocol got rid of Recovery Mode, because it meant that a user's position could be affected by other users' borrowing. It wasn't a predictable borrowing experience, and borrowing USDH should be as predictable an experience as possible.

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