Risk Management
Understanding Hylo’s risk management system and stability mechanisms
Collateral Ratio
Hylo implements a multi-tiered risk management approach centered around one key metric: the system collateral ratio (CR). The CR is a measure of system health, indicating the ready availability of the backing assets behind hyUSD.
The system requires a CR over 100% to stably back every dollar worth of hyUSD. When CR is over 150%, the system is considered fully healthy. If the CR falls to 100% the NAV of xSOL becomes zero and hyUSD loses its hedge, exposing its peg to the full volatility of SOL.
Hylo’s risk management system employs two stability mechanisms to keep the CR as high as possible: mint/redeem controls and the stability pool.
Stability Modes
The protocol may engage two successive stability modes to defend hyUSD’s peg, determined by two CR thresholds. The rationale behind these specific thresholds is detailed in the Value at Risk Analysis.
- Stability Mode 1: Activated when CR drops below 150%
- Stability Mode 2: Activated when CR drops below 130%
Stability Mode 1: Fee Controls
When the collateral ratio drops below 150%, the protocol adjusts minting and redemption fees. Fee controls financially incentivize users to perform actions which increase the CR, while disincentivizing actions which decrease it.
Decreasing the supply of hyUSD
Minting Fees (Increasing)
hyUSD minting fees increase to discourage new hyUSD creation
Redemption Fees (Decreasing)
hyUSD redemption fees decrease to encourage hyUSD burns
Increasing the supply of xSOL
Minting Fees (Decreasing)
xSOL minting fees decrease to encourage new xSOL creation
Redemption Fees (Increasing)
xSOL redemption fees increase to discourage xSOL burns
Fee Table
| Mode | hyUSD mint | hyUSD redeem | xSOL mint | xSOL redeem |
|---|---|---|---|---|
| Normal | 0.2% | 0.2% | 1% | 1% |
| Stability Mode 1 | 0.3% | 0.1% | 0.25% | 4% |
| Stability Mode 2 | DISABLED | 0% | 0% | 8% |
Stability Mode 2: Stability Pool Drawdown
When the collateral ratio crosses the second stability threshold at 130%, signaling severe market volatility, more drastic measures are taken. Fees to control token supplies are more aggressively adjusted and the stability pool is activated.
The stability pool provides steady upward pressure on the Collateral Ratio (CR) when it falls below 130%. Staked hyUSD in pool is converted to xSOL to support CR recovery.
Stability Pool Intervention
Introduced in Earning Yield with hyUSD, the stability pool provides users the opportunity to earn multiplied LST yields from the reserve as a reward for securing the protocol.
When the collateral ratio falls below 130%, staked hyUSD in the stability pool is drawn down and converted to xSOL. The double positive effect of burning hyUSD and minting xSOL quickly recovers the CR a healthy level.
Stability pool users acknowledge this potential swap as a risk, in exchange for financial rewards during normal operation. When users wish to withdraw from the pool during market turbulence, a pro rata share of the minted xSOL is returned to them.