For long-term Ethereum enthusiasts in the crypto investment community, holding a certain type of Ethereum liquid staking token (LST), such as the well-known LIDO’s wstETH, Rocketpool’s rETH, centralized exchange’s cbETH and bETH, is a good choice. Although holding LST can yield considerable returns, people still need to make a living, and we cannot ignore the importance of cold hard cash.

The innovation of Gravita Protocol lies in providing an on-chain solution for interest-free borrowing of stablecoins for Ethereum liquid staking derivatives (LSD) projects, allowing you to earn staking rewards while enjoying life.

As a fork of Liquity, Gravita’s stablecoin mechanism design has been tested in the market for two years. In my opinion, Gravita solves a major pain point of Liquity after the Ethereum upgrade, which is the opportunity cost of depositing ETH. Because if your ETH can earn 4-6% APR in staking rewards, then borrowing $LUSD on Liquity with native Ethereum indirectly loses this income. Due to the recognition of the top decentralized stablecoin project Liquity, users entering Gravita will reduce trust barriers, but it is important to note that these are two different projects from different teams, so do your own research.

In this article, I have sorted out the differences between Gravita and Liquity in terms of collateral types, fees, liquidation, and redemption mechanisms, to help everyone assess the risks of the protocol and make rational investment decisions.

1. Collateral types

Gravita Protocol expands the types of collateral compared to Liquity, including native Ethereum (WETH) and liquid staking tokens (LST) such as LIDO’s wstETH, Rocketpool’s rETH, and ChickenBonds’ accelerated yield stablecoin blusd. For those unfamiliar with Liquity and ChickenBonds, you can refer to my previous article for more information.

https://mirror.xyz/darkforest.eth/mY6ICJXGWR_kxl1NEWuDDYS0BFlDmXfAqNFcFjiiqdU

In this article, I mentioned the limitations of Liquity in protocol expansion and the lack of external use cases for ChickenBonds. These two issues seem to be resolved in Gravita Protocol, which can effectively undertake the currently huge Ethereum liquid staking derivatives (LSD) market and increase the usage scenarios of ChickenBonds’ blusd, thus achieving two goals with one solution.

Gravita sets up independent lending pools (vessels, equivalent to MakerDao’s CDP, Liquity’s trove) for each type of collateral, isolating risks between different collateral types. Each collateral has different liquidation lines; for example, when the ETH price is \(2000, you can borrow up to 2000\*0.9=1800 GRAI (the system always regards 1GRAI as \)1), and you will be liquidated if the Ethereum price falls below $2000.

The risk of LST itself is higher than that of native ETH, so Gravita sets a lower LTV (Loan-to-Value Ratio) for LST. For instance, if you deposit \(2000 worth of wstETH, you can borrow up to 2000\*0.85=1700 GRAI, and your vessel will be liquidated if the collateral value falls below \)2000.

This mechanism is more similar to MakerDao, as both generate stablecoins from multiple collaterals (MAI) rather than a single collateral (SAI).

Another interesting collateral in Gravita is ChickenBonds’ accelerated yield stablecoin blusd. In simple terms, blusd is a stablecoin with a higher APR than simply holding lusd in Liquity’s stability pool to mine \(LQTY. It has a value floor price, which is jointly guaranteed by the protocol mechanism and the value of \)lusd.

Currently, the market price of blusd is 1.19, the floor price is 1.144, and the blusd deposited in Gravita as collateral is considered as \(1.00. Therefore, the LTV of the blusd pool can reach 99% without any liquidation risk within the protocol, because the ChickenBonds protocol mechanism guarantees that the price of blusd cannot be lower than \)1.00.

Under this mechanism, blusd holders have a highly efficient and risk-free way to borrow stablecoins. In my opinion, this will greatly enhance the use case for blusd and promote ChickenBonds to re-enter a positive cycle. The recent steady increase in the market price of blusd also reflects this. From a market demand perspective, whenever Gravita opens new mint caps for various collaterals, the blusd pool is always the first to be filled, indicating strong market demand.

At the end of this article, I will analyze the investment opportunities related to ChickenBonds.

2. Fee Mechanism

When it comes to borrowing stablecoins with LST as collateral, why would I choose Gravita over MakerDao? The reasons are twofold:

(1) Lower liquidation line and higher capital utilization. Gravita’s LTV is 85%, which translates to a coll. ratio of only 116%, much lower than MakerDao’s minimum 160% liquidation line. For example, if you deposit \(1600 worth of stETH in MakerDao, you can borrow up to \)1000 DAI, but if ETH falls slightly, you will be liquidated. In Gravita, borrowing \(1000 GRAI with the same collateral allows you to withstand the value of the deposited stETH falling to \)1160.

There is a huge difference in capital efficiency between these two protocols.

(2) Interest-free loans vs. interest-bearing loans. Borrowing stablecoins through Gravita requires a one-time Borrowing Fee of up to 0.5%, while MakerDao has varying annual fees, with the lowest rate for rETH collateral requiring a coll. ratio of at least 170% and an annual fee of 0.75%. The other two are for stETH collateral loans.

A unified table can more clearly show the differences between these two protocols in terms of capital utilization efficiency and cost.

It should be noted that using Gravita Protocol allows for interest-free borrowing, with a one-time maximum fee of only 0.5% for positions over six months. For users repaying their debt before six months (approximately 182 days), the 0.5% fixed borrowing fee will be refunded proportionally based on the time used, but at least one week’s interest must be paid.

To some extent, Gravita’s fee mechanism for short-term borrowing is more outstanding compared to Liquity. For users who only need a few days for fund turnover, this significantly reduces borrowing costs and enhances Gravita’s competitiveness in short-term borrowing compared to Liquity.

3.Liquidation and Redemption

Gravita’s liquidation and redemption mechanisms are broadly similar to those of Liquity, with the main difference being that although there is a common stability pool in Gravita protocol, each type of collateral has an independent system state. Therefore, specific collateral types can be in recovery mode while others remain in normal status.

Recovery Mode

Recovery mode in the Liquity protocol is the most effective mechanism for value protection of its stablecoin. This has only happened during the extreme market conditions on May 19th in the two years of Liquity’s operation. The effectiveness of this mechanism was verified at the time, with the total CR quickly recovering to over 150%, and LUSD rapidly returning to its peg. As a result, LUSD became famous as the top decentralized stablecoin and consolidated its king status in subsequent stablecoin crisis events (LUNA, USDC).

As a fork of Liquity, Gravita naturally inherits this excellent mechanism. However, for collateral borrowers, this must be an event to be carefully dealt with. It is like Thanos’ snap, which brings peace to the chaotic world and leaves everything clean and empty, including your positions.

Of course, if you can manage to keep your LTV below 71.4% during the recovery mode period, you can avoid the worst. However, achieving this in extreme market conditions is quite difficult and requires excellent risk management at all times.

An LTV of 71.4% is equivalent to a Coll.Ratio of 140%. In Liquity, this value triggers a global liquidation when the global CR drops to 150%. In this regard, the Gravita Protocol is more aggressive than Liquity, with a lower CR required to trigger global liquidation.

Recovery mode, although it makes collateral borrowers very fearful, is an opportunity to pick up bargains for those who are prepared, such as GRAI holders who deposit into the stability pool.

Liquidation Profits

When WETH Vessel is liquidated, users can expect to get WETH at a discount of about 10% below the market price. For LST Vessels that allow users to borrow GRAI at an 85% TVL, stablecoin providers can expect to get LST at a market discount price of about 15% during liquidation.

In summary, liquidation profits are inversely proportional to the LTV of the collateral type being liquidated on Gravita. This means that in extreme market conditions (referring to a sharp drop in the market, not a collapse of a specific LST in the protocol collateral), users who deposit into the Stability Pool can buy LST at an 85% discount, which is very attractive.

Stability Mechanism

As a liquidator, it is impossible to enjoy risk-free excess returns. The risk lies in whether the stablecoin GRAI generated by Gravita Protocol can always remain stable. On this point, Gravita also inherits Liquity’s excellent mechanism - redemption, which we can also call: Hard peg

The protocol can redeem GRAI at a price of \(0.97 to obtain collateral (i.e., 1 GRAI for \)0.97 worth of collateral). This forms the price floor for GRAI stablecoins. It should be noted that 0.97 implies a 3% redemption fee paid to the redeemed borrower.

At the same time, a 90% LTV collateralized WETH minted GRAI can create a price cap through arbitrage opportunities. For example, when the GRAI market price is \(1.2, ETH holders can collateralize Ethereum and mint GRAI at 90% LTV and sell it in the market for arbitrage, with a single arbitrage profit of nearly 8% (0.9\*1.2). So theoretically, GRAI moves within a range of -3%/+10% around \)1 in the decentralized market. However, this does not mean that the token is always within these ranges.

4.Risks and Opportunities

In my opinion, the emergence of GRAI cannot shake the position of LUSD as the king of decentralized stablecoins. However, it can significantly increase the scalability of decentralized stablecoins. The price to pay for the improvement of scalability is a decrease in decentralization. No matter whether the added collateral is stETH or rETH, the LSD project itself is a centralized existence. Regardless of how decentralized it is in node verification, the withdrawal private key is ultimately in the hands of the project party, and the actual controllers of the project are only a few people, and the protocol is upgradeable.

Of course, the market does not need every stablecoin to achieve the same level of decentralization as LUSD. Diversified choices are ultimately good for users.

Another significant risk comes from the different liquidation lines set by different collateral vessels. If the market collapses quickly, especially when a certain type of LST has a risk event, GRAI holders may redeem (redemption) native Ethereum WETH first, and then redeem blusd. When these two underlying assets no longer serve as the cornerstone of GRAI value protection, the collapse of GRAI will be inevitable.

One of the significant innovations of Gravita compared to other LSDfi projects is the integration of ChickenBonds, a more stable bond asset. Together with native Ethereum, they form the cornerstone of GRAI value. This is much more stable than using a single type or several types of LST as collateral, and it is more beneficial for the ecosystem than many projects blindly increasing LST leverage.

I have also found some potential opportunities. Currently, there are 3.74M lusd still in the pending state of ChickenBonds, and the total supply of blusd is 10M, of which 2M blusd already exists in Gravita. If Gravita continues to open up the mint cap for blusd, the blusd in the market will be quickly drained. The only channel to create blusd is through holding ChickenBonds, a unique bond that takes nearly two months to make a slight profit (this time is dynamically adjusted). This huge difference between the supply and demand sides may further promote the appreciation of blusd and significantly shorten the profit cycle for ChickenBonds holders, accelerating the supply of blusd to the market. For the specific operation mechanism of ChickenBonds, please refer to my previous article.

https://mirror.xyz/darkforest.eth/mY6ICJXGWR_kxl1NEWuDDYS0BFlDmXfAqNFcFjiiqdU

Currently, the $lusd reserve in Liquity’s stability pool, earning a meager APR, has reached 179M. These reserves are likely to participate in the creation of ChickenBonds and the generation of blusd, which means enormous growth potential for both Gravita and ChickenBonds.

In my view, the DeFi composability between Liquity, Gravita, and ChickenBonds has completed a closed-loop product logic for the first time. ChickenBonds promote the issuance of Liquity stablecoin LUSD, Gravita promotes the issuance of ChickenBonds bonds, and Liquity stablecoin issuance mechanism guarantees the stable operation of Gravita protocol. The three protocols benefit each other, creating the possibility of a flywheel effect. As for whether the flywheel can spin, let’s wait and see.