BIP 000X: Foundation of rBTC Insurance fund/pool

Author / Authors:

Dark Knight, FlameTale, Hyde, Novax, Seidon

Introduction:

The idea to introduce an insurance fund for XUSD is at the heart of BabelFish.

Reasoning:

At this moment the product of BabelFish - the XUSD is collateralized with aggregated stablecoins only. As it is not possible to avoid all idiosyncratic Stablecoin risks, there is a way to minimize potential loses for XUSD users. At very early stage of BabelFish existence a rBTC insurance pool as an additional backup for XUSD was mentioned, which would allow to remain the 1 to 1 peg with USD and to compensate losses in case if one of the aggregated stablecoin collapses.

Before we would start lending out the collateral (or at least a part of it) for yield, which could be used to build insurance fund, we could initialize it with approx. 25% (TBD) of rBTC collected during pre-sales.

Detailed info:

Create additional Multisig wallet intended for XUSD insurance only (it has to be created anyway - once we start buying rBTC for yield) and transfer from treasury 20 rBTC, as a foundation of XUSD insurance fund.

At this point also it has to be decided who will be on guard of it.

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It’s not a bad idea to set-apart a percentage allocation of rBTC from the treasury to increase XUSD’s backing beyond a 100% reserve ratio with current stablecoins. Curious to see the opinions of the community with regards to the percent of the allocation.

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looks good to me! an insurance fund backed by rBTC is what really attracted me to bablefish… stable coin aggregration sounded great but the rBTC backing sold me.

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I like the idea of the insurance fund. Is it supposed to be self-replenishing from collected collateral? If so, do you think there will be some cutoff value (ex: 25% of the market cap of xUSD), where any spill over just goes to FISH holder rewards?

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I would love to have it at least 100% backed by rBTC. XUSD will grow, so the insurance fund will have to grow as well. It will be not so easy to maintain a fixed ratio, so setting a minimal % of insurance pool might be needed.

I think that bigger the insurance pool, the better. I can imagine 200% rBTC insurance pool - just to be safer when it goes to price fluctuations. That Would make XUSD the safest stablecoin on the blockchain - backed not only by stablecoin collateral, but also by rBTC. Demand for it would grow fast.

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I love the idea of the BTC fund. In my opinion, this fund is aiming at becoming much more than just an “insurance fund” for XUSD supply. I see this fund becoming Babelfish’s economic backbone.

This fund should be treated like a war treasure and Babelfish should always aim at accruing the value of the fund beyond any legitimate percentage of XUSD supply. If this happens, then some part of the fund could be allocated to other Babelfish projects. Also, having such a fund as a cushion , the value of Fish itself (the governance token for such a fund) should dramatically increase.

Using lending protocols to achieve this aim is a wonderful idea. However, the whole process of lending should be detailed and a financial risk assessment ran on those details.

Several questions come to my mind regarding three domains:

LENDING

  • How are the lenders chosen?

  • Are they decentralized only or are centralized lenders also considered?

  • Are these lenders only on RSK or also on other chains? How is a chain authorised by Babelfish?

  • What percentage of the aggregated stablecoins per lender is considered an adequate level of risk for the Babelfish community?

FUNDING

  • How much of the profits from lending are allocated to the fund?

  • How much profits are allocated to something else (an extra stablecoin fund?)?

  • How much of the profit is reinvested (compounding).

  • etc.

THE FUND ITSELF

  • Are the BTC of the fund put at work too?

  • If yes, same kind of question as for lending the aggregated stablecoins?

  • If yes, what percentage of the pool is put at work?

  • etc?

I hope this can help.

Cheers

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I think it may be best to start without putting the BTC in the fund to work just because of potential volatility of FISH and cryptocurrency in general for the short term. Maybe in a year or two when crypto becomes more mainstream it would be safer to make use of the BTC? Any thoughts?

But the insurance fund is to backup XUSD not FISH. FISH don’t need any insurance.

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Oops. Sorry I got confused when I wrote that. Regarding the fund, it is for backing up the aggregated stablecoins in case one stablecoin collapses right? Is the fund already larger than the aggregated stablecoins? 20 rBTC, mentioned in the original post, is about $800,000 and based on a post by FlameTale in the stablecoin info channel on discord I think the aggregated stablecoins should be far greater than this right?

If so, then it seems that we would need to focus on accumulating in the insurance fund to back a potential collapse of a stablecoin. In the short term, maybe the fund can back the aggregated coins put to work. So for example, if 10 rBTC worth of the aggregated stablecoins are lent out to collect collateral, then 10 rBTC of the fund is not put to work. This way, if stablecoins were being rapidly withdrawn for some reason, then the insurance fund could cover what was illiquid of the aggregated stablecoins. The rest of the insurance fund would be put to work for increasing the rBTC in the insurance fund and the collateral collected from the aggregated stablecoins could be converted to rBTC and added to the insurance fund.

The amount of aggregated stable coins put to work would depend on whether we think we can accumulate more rBTC with lending aggregated stable coins or the rBTC in the fund itself. If we think rBTC will accumulate value faster than we can accumulate rBTC with stablecoin lending or we think that we can get more yield from rBTC, then maybe it would be best to just put most of the insurance fund to work and not lend with the aggregated coins. I guess it would depend on the demand for rBTC vs the stablecoins in lending protocols. Does this make sense?

It’s great to see the conversation starting here! Just to reiterate for anyone unfamiliar with our intentions:

  1. XUSD is a stablecoin aggregator. XUSD is backed 1:1 by deposited stablecoin collateral. We deposit the stablecoin collateral into trusted stablecoin yield farms to generate the rBTC insurance pool which will provide an additional layer of security to XUSD holders in the event of underlying stablecoin collateral insolvency… like if USDT gets shut down or something crazy like that. We may not be able to make XUSD holders whole until we’ve accumulated sufficient rBTC in the XUSD insurance pool to equal 100% of XUSD collateral. That would protect in the event of a stablecoin black swan event in which all stablecoins were rendered insolvent. We don’t anticipate this sort of idiosyncratic risk in the stablecoin market in the short term, but the threat lingers on the horizon & we intend to provide a proverbial bridge over troubled waters, if we have any Paul Simon fans in the house?

  2. We raised 45.7298 BTC during the Origins FISH Pre Sale. XUSD presently has a market cap of about $15,366,825. With rBTC price presently ~$43,690, 20 rBTC is worth $873,800. That would get us to about 5% rBTC insurance coverage of existing XUSD in circulation (0.05686 to be precise). So we’re still a long way from 100% insurance in the rBTC pool however we slice it. And we do need to consider sell pressure on FISH if we intend to liquidate FISH to cover operational expenses. It seems preferable to reserve some rBTC in a protocol treasury multi-sig to lquidate for operational expenses (without creating excess sell pressure for our FISH governance token).

  3. 20 rBTC is a great start in our insurance pool. However, we’ll need to also agree upon and implement a savings product in order to begin earning yield from the ~$15.4 Mil stablecoin collateral. I’m not sure what sort of average yield we’ll generate between the various stablecoins which compose XUSD’s underlying collateral. But if we’re netting 8% APY, we’d generate $1.23 Mil in the first year (while continuing to receive stablecoin deposits & minting 1:1 XUSD… so we’ll be chasing a growing target). We’ll need income from additional token sales & bridge tolls to bridge the gap and reach our ultimate target or 100% rBTC insurance. Of course a healthy rise in BTC price will aid our cause by the critical juncture, the 3 year mark… when the FISH development budget runs out (based on original token distribution model… we’re not spending FISH at this rate presently, so we’re in good shape there).

Okay… with all of that as background information, how do you feel now about this proposal? The context seems important for some of our community members who aren’t familiar with these specifics (I had to look them up to get present figures myself, and they’ll be different tomorrow).

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Also I propose one of those thermometer style fundraising meters embedded in Babelverse & our website visually representing the dynamically updating percentage of XUSD backed by our Bitcoin Insurance Pool. It will be awesome.

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We had two presale rounds.

In total it was raised approx. 85.658 rBTC worth approx. 4,111,000 USD at that time.

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This is great, thanks NOVAX.

Then we should really look into how to earn yield from collateral stablecoin.

Do you already have ideas on what are the most robust protocols to earn yields on stablecoins or should we start to make some market research ?

Also, I have this silly idea - Should Babelfish deposit part of the stablecoin collateral in Sovryn’s XUSD BTC pool ? That could give a good boost to the insurance fund. Every other weeks the reward would be changed back to XUSD and BTC at an agreed ratio.

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As I recall AAVE and Compound were taken into consideration. Also Venus - before it’s problems.

Some additional research would be good for us. The more eyes are looking at it - the better.

That is not silly idea - I would use every reasonable and safe opportunity for BabelFish Protocol to earn yield. It is up to Community to decide that. That could be another BIP.

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Thanks for the overview! I think this concept sounds good we just need to look into which protocols to use. Should we start a separate thread for debating protocols? Or maybe just continue that conversation here?

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You can start a new topic about it. I think that it is better to have it separated.

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Hi @odran! We do need market research on stablecoin farming options. This thread is intended for discussion of rBTC Insurance Fund for XUSD. So, I don’t want to get off topic here. Let’s continue that conversation over on the BIP Thread “Selection of protocols for generating yield

This may be an out to lunch idea, but anchorprotocol currently is giving 19.5% for depositing UST, would it be possible to convert some xusd to ust to stake, and use the interest earned to buy BTC? 2M would get about 0.75BTC a month.

That would require BabelFish to aggregate UST too. This is something that would require voting on as well.

We had a small discussion on our Discord (Discord) and I do think that 20rBTC might be a bit too much. We need to have the funds for building, but also for SHTF situation. During pre-sale of the FISH tokens the protocol has collected ~85 rBTC - so maybe 10% of this amount 8,5 rBTC is more reasonable as foundation of rBTC insurance fund for XUSD. The other issue that we could discuss is whether we want to lend out rBTC from insurance pool to earn an additional yield and grow the insurance pool. If yes - we have to determine the amount and where we are going to lend it out.

Galileo had idea to lend out whole insurance pool on Sovryn platform.

@Flametale proposed another approach - 10% of the current TVL Locked in XUSD, but that would require ~32.5 rBTC - I don’t think that it is worth shooting out too many bullets at once. We can always vote to add more if needed. But the principle lending out the collateral is supposed to earn yield for the insurance pool for XUSD. The main idea with this proposal is to jumpstart the insurance pool.

Another aspect to think of is if we want to set a minimum and maximum thresholds for Insurance fund. That would be quite hard to maintain, but should be also taken into consideration.

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