Yield Stabilization Pool
The Yield Stabilization Fund (YSF) is designed to maintain the stability of any smartcoin index while efficiently managing costs and fee extraction to ensure continuous growth and minimize the risk of value reduction. A smartcoin’s index price, calculated as:
The goal is to ensure that each smartcoin index remains stable or increases over time. Factors like rebalancing costs, temporary negative funding periods, and market dislocations could lead to short-term reductions in the index value. However, the minting and burning of smartcoins should not affect the index, as associated trading costs are borne by users.
Rebalancing Reserve.
A major contributor to short-term negative performance is the cost associated with rebalancing the investment portfolio. To mitigate this, the protocol uses a Rebalancing Reserve, which is gradually funded by allocating a small percentage of the investment portfolio’s returns. This reserve does not require an actual transfer of assets but is instead accrued on an accounting basis. Once the reserve reaches a predefined target (e.g., 10 basis points of the portfolio’s notional value), it stops accruing.
After any rebalancing event, the reserve is drawn down to cover trading costs, ensuring the performance of the smartcoin index remains stable. Once the reserve is reduced, it begins to accumulate again, returning to its target level over time.
Stabilization Fee & Staking.
To further support the stability of the smartcoin index, a Stabilization Fund is collateralized through smartcoins staked by users. The fund absorbs volatility by applying a variable Stabilization Fee to the investment portfolio returns. This fee is redistributed from all smartcoin holders to those who stake their smartcoins, compensating them for taking on additional volatility risk while increasing their potential yield.
The Stabilization Fee is dynamic and adjusted based on the size of the fund, with a target level set as a percentage of the total smartcoins notional (e.g., 2%). For example, if a smartcoin’s gross returns are 5% and the Stabilization Fee is 2%, the effective fee translates to 0.1%. If 2% of the smartcoin’s total notional is staked in the Stabilization Fund, the staking return (excluding stabilization event payouts) would be equivalent to a 5% annualized return.
Performance Fee & Distribution.
Performance fees are calculated after the application of the Stabilization Mechanism and Rebalancing Reserve. These fees accrue continuously and are settled periodically, typically on a weekly basis. Upon settlement, the protocol mints new smartcoins for performance fees, which may then be distributed either immediately to the UMJA staking pool or in equal installments over the week.
Minting/Burning Accrual Mechanism.
To further support the stability of all smartcoin indexes, the protocol uses an accrual mechanism to manage the minting and burning of smartcoins. This mechanism tracks the required minting and burning of yBTC for various purposes, including:
Performance Fee Extraction (minting)
Stabilization Fee Extraction (minting)
Stabilization Events (burning)
Rebalancing Reserve adjustments (minting or burning)
These accruals are calculated continuously and settled periodically (daily or weekly), allowing the protocol to adjust the yBTC supply as needed while maintaining transparency around key metrics such as the Investment Portfolio NAV, the smartcoin’s Supply, Stabilization Fund size, and the smartcoin’s Index Value. However, specific accrual balances are kept hidden to prevent potential market manipulation or exploitation.
This structured approach ensures that the Yield Stabilization Fund operates effectively, maintaining the stability of yBTC while delivering consistent yields to both standard holders and stakers willing to assume higher volatility risks for greater rewards.
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