Dynamic Collateral Routing

Dynamic collateral routing is one of two mechanisms Hylo uses to rebalance xASSET-vUSD pairs toward their target collateral ratio, the other being collateral rebalancing. It is also the most capital-efficient as it requires no protocol incentives. Collateral routing simply steers user flows where they’re needed through dynamic fee curves that adjust automatically based on each pool’s collateral ratio.

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Routing Schema

xASSET collateral flows cannot be directed since users want leveraged exposure to a specific asset. However, hyUSD flows can be directed. When a user wants hyUSD they are not concerned with which collateral pool backs it. Hylo employs a dynamic fee system to effectively route hyUSD mints and redemptions to and from the most optimal pool. By making it cheaper to mint hyUSD from healthier pools, the protocol naturally directs collateral where it’s needed. Vice versa on the redemption side, the least healthy pool will surface the lowest fee. The USDC pool has flat fees, so it sets the baseline that the volatile pools compete against, and it takes the flow when no volatile pool can. The DEX router (e.g. Titan, Jupiter) evaluates the proposed fee from each available pool and selects the cheapest path. In this example, the SOL pool’s high CR yields the lowest fee, so the router swaps the user’s input token to SOL LSTs and mints hyUSD through that pool.

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USDC Pool: Flat Fees

The USDC pool operates differently from standard collateral pools in that it acts as an overflow buffer for hyUSD demand. It applies a flat mint fee and a flat redeem fee, each configured separately and independent of CR. The mint fee is currently 0% and the redeem fee is 0.2%. On fee alone, the USDC pool is the cheapest mint route, below the volatile pools’ minimum fee. A router selects a volatile pool when the full path cost, including the swap into the deposit asset, is lower. The redeem fee matches the top of the volatile pools’ redeem fee curve. Redemptions therefore go to any pool below its target first, and the USDC pool pays out when no other pool offers a lower fee. USDC converts to hyUSD one for one, at $1. As a safeguard, USDC routes are only available while the Pyth USDC/USD price stays within a small configured tolerance of $1 (at most $0.001).

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Volatile Pools: Fee Curves

For volatile collateral pools (SOL, BTC, HYPE), Hylo uses two independent piecewise fee curves, one for minting and one for redemption. Each curve maps a pool’s collateral ratio to a fee percentage.

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Mint Fee Curve

The mint fee curve is active when CR is above the 150% target. As the pool’s CR rises, the minting fee decreases.

• At the lower bound: fee is highest
• As CR rises: fee decreases along the curve
• Above the upper bound: fee stays at its minimum, close to zero

If the pool’s CR falls below the curve’s lower bound, minting is blocked entirely. This means hyUSD cannot be minted from an over-leveraged pool.

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Redeem Fee Curve

The redeem fee curve is active when CR is below the 150% target, mirroring the mint fee curve. As the pool’s CR rises, redemption fees increase.

• At and below the lower bound: zero fee encouraging outflows from distressed pools
• As CR rises: fee increases along the curve
• At the upper bound (150%): fee is highest

If a redemption would leave the pool’s CR above the curve’s upper bound, that pool does not quote the redemption. This means hyUSD redemptions cannot drain collateral from a pool that is already under-leveraged. Redemptions stay available through any pool below the target, and through the USDC pool while it holds enough USDC and USDC is within its par tolerance. Together the two curves split the flow around the target. Above 150% a pool accepts mints, and below 150% it pays out redemptions. When one pool has a low CR, redemptions from it are nearly free.