Hubble Protocol - Zero-Interest Loans on Solana: A Deep Dive
A deep dive into Hubble protocol (Need for it, How does it work, How to get started, Utility of HBB Tokens, Grand IDO, and many more!)
DeFi is growing rapidly with over $100 Billion in Total Value Locked, almost all of which comes from Ethereum. The Solana ecosystem is catching up rapidly, with many DEXs (Decentralised Exchanges) being built, but the Lending & Borrowing protocols are still new and we need more Solana-native solutions. One such protocol — which is smokingly hot right now in the market, because of its IDO (Initial DEX Offering) is Hubble Protocol.🔦
Let’s first understand a basic background of Lending & Borrowing in DeFi and then straight jump into our spotlight, Hubble Protocol. I am sure, the innovative model of Hubble will certainly blow your mind. Atleast mine did🤯
DeFi loans — The Native way
In general, all loans in DeFi are collateralized, which means we need to deposit our crypto assets as collateral (as a security) on the platform. We then have to repay the loan with interest to get our collateral back.
First of all, Why there is a need for collateral? The reason is simple, what if we don’t repay the loan! Now, what happens, if we actually don’t repay the loan? The collateral is simply sold by the platform to cover our loan.
There can be one more scenario: Let’s suppose, we take a loan in ETH (Ethereum) of $1000 by giving our MATIC (Polygon) as collateral of the equal value of $1000. On a fine day, MATIC crashes by 50%, and the lending protocol has set a threshold of 70% (of its initial value). In this case, since the price drop is beyond the threshold, the protocol will ask for more MATIC from us or sell our MATIC in order to recover at least some of the money. This process is called liquidation. Liquidation risks are a major concern for non-stablecoins.
Another major issue is Liquidity, particularly when we are holding Crypto for the long term. Let’s say, we have 10 SOL (Solana), 1 ETH (Ethereum) and we are hodling long term, but need some liquidity to purchase another exciting token or our favorite NFT? One obvious option would be to take a native DeFi Loan, but the problem is: It will not only attract a fixed interest rate but also have liquidation risks.
So, what can we do?
Enter Hubble — Zero-interest loans
What? Zero-interest Loans! Sounds suspicious and too good to be real, right?
Interest rates are the primary way, the lending platform makes money and gives a good fixed interest rate in turn to the depositors. But Hubble is changing that.
Hubble instead charges a flat 0.5% fee on amounts borrowed and there is no time limit for repayment.
For instance, if we borrow $1000, then we will have to repay $1000 + 0.5% fee = $1,005. This 0.5% is essential for Tokenomics.
USDH — The trick behind this magic!
Now, here’s the catch: The protocol allows to take a loan in USDH, the protocol’s own native stablecoin pegged to the US dollar which means:
1 USDH = $1
Let’s understand the whole process with an example:
Suppose, we have a 10 SOL, which has the current value of $1500 (with 1 SOL’s price of $150), and we need some liquidity (to buy an NFT or an exciting token), but we don’t want to sell SOL coins in our wallet. So, instead of selling, we go to Hubble Protocol and put it up as collateral. In exchange, Hubble allows us to “mint USDH” up to “110%”.
The USDH minted will be completely ours and can be used for any transactions in the Solana Ecosystem. The 110% here represents the collateral ratio, which is Collateral Value/Loan Value. That means, $110 of Collateral is required for the $100 value of Loans.
In this case, the Loan Value is the “Amount we want to borrow” to which we also have to add the 0.5% fee. So Loan Value = 1.005 multiplied by “Amount we want to borrow”.
That means, we can borrow up to ($1500/110%)/1.005=1356.2 USDH.
Now, it doesn’t necessarily mean that we have to borrow all 1356.2 USDH, we can decide to borrow only 1000 USDH, and this would make our collateral ratio well above 110%. This decreases our liquidation risk i.e the risk of being liquidated, (Our SOL getting sold by the protocol) if the SOL prices drop significantly. The liquidation risk would still exist, just that it’s reduced quite a bit.
Borrowing 1000 USDH will therefore cost us 0.5%*1000=$5 as protocol fees. Just after borrowing money, we will have 1000 USDH in our wallet and we need to repay 1005 USDH in order to get our SOL back.
Hubble aims to become a multi-asset engine, where we can deposit collaterals such as SOL, BTC, ETH, RAY, or any combination of those assets and get the loan in USDH. Hubble allows for any asset represented as an SPL token standard (any token built on Solana) to be used as collateral once approved by the Hubble DAO (the community).
The entire process is also called collateralized debt positions (CDPs) in fancy terms!
But, what the hell is USDH?
Just like other stablecoins like USDT, USDC, UST — USDH is also pegged to the US Dollar, which maintains its peg between 1.005 and 0.995 at all times, largely because of Solana’s scaling power. It’s particularly designed to be used in the Solana Ecosystem and is always backed and over-collateralized by crypto assets to prevent any turmoil.
How does USDH maintain its Peg?
Artibrage! For the uninitiated, any arbitrageur (a market player who profits from price disparities) can acquire USDH from the market and redeem it for underlying collateral whenever USDH goes below 1.0. If USDH is trading at $0.70, for example, anyone can buy 142 USDH for 100 USDT and redeem USDH for $142 worth of SOL, BTC, ETH, and other cryptocurrencies on the Hubble platform.
If USDH increases above 1.0, anyone can buy SOL, BTC, ETH, and other assets on the market, deposit them on Hubble, and mint USDH at a greater price. USDH with a higher value can then be exchanged for USDT at a profit.
With Solana’s speed, this puts USDH tightly pegged.
Interestingly, it also has a Recovery Mode, which is activated when the total collateral deposited on Hubble falls below 150 percent of the total borrowed amount. Positions collateralized at a ratio of less than 150 percent may be liquidated during this time, which is why the protocol suggests keeping a collateral ratio of at least 150 percent to avoid liquidations during Recovery Mode.
Okay, what about the Collateral deposited?
The Hubble folks are smart, they know that everyone wants a fixed return on cryptos they are holding. So, they have applied that to collateral as well. For this, they have partnered with another Solana protocol (Marinade Finance) that offers yield on single assets (like SOL). Any Hubble Protocol borrower can opt-in to stake their collateral to partner protocols and earn yield. Isn’t this amazing, your collateralized assets will earn interest when you have already used them to borrow USDH at a 0% interest rate!
For example, if Hubble’s partner offers 7% APY on Solana, you can earn more than 0.5% in just one month, which means the 0.5% fee for the loan is paid off in a month, resulting in profit going forward. It essentially enables one to go long on an asset that one would generally stake in a DeFi protocol or a yield farm. While in Hubble, you not only get the yield but also enjoy the borrowed liquidity!
You can obviously earn even more than 7% easily by staking the same coins elsewhere, but you won’t get the liquidity to buy your favorite NFTs. So a tradeoff here.🤷
The Hubble protocol allows for 11X leverage. How?
If we deposit $1000 in SOL and then take a loan. With the loan, we can buy some more SOL, deposit them, take loans, and so on. Since the collateral ratio is 110%, it allows for 11X leverage, without incurring continuous borrowing cost as it’s charged only once during the minting process.
Hubble Protocol will also issue its native token, $HBB, which will act both as governance (vote on improvement proposals) and utility token (staking). Let’s see how this staking will work:
The vast majority of the revenue fees by Hubble (for instance, 0.5% of the loan amount) are given back to the community. Now to earn along, we need to stake $HBB. The Stakers of HBB will now receive all the fees generated (~85% of revenues) from issuing anything through Hubble, whether that is a loan, a derivative, or a structured product.
For instance, if a total of $10 Billion is borrowed through Hubble, the HBB stakers will share 85% of the $50 Million fees = $42.5M🤯
The more the volume in the protocol, the more the HBB stakers will benefit.
Not just that, Anyone will be able to contribute to the stability of the protocol and be rewarded in HBB through a stability pool. Let’s understand👇
Liquidations and stability pool
Everyone wants a DeFi Lend/borrow protocol to be solvent (have enough cash) and keep default loss as low as possible. The way, it prevents default loss is by liquidating loans (selling off the collateral).
Hubble has decided to take a different approach: give back the liquidation revenues to its community. The users who trigger liquidations, which are generally bots built specifically for liquidation purposes, receive 0.5% of the assets liquidated. The rest of these assets liquidated are distributed to users who deposit USDH in the Stability Pool.
Now, what’s the Stability Pool?
It serves as an embedded stability layer and it employs a smart mechanism to ensure that there is enough USDH to repay the remaining balance on over-collateralized loans. The way it works is:
Users deposit their USDH to support the protocol and share the liquidation fee. If a liquidation occurs, USDH from the pool is burned and the providers receive a share of the collateral in proportion to their share in the pool. To understand, let’s take a case:
Consider there are only two providers of USDH in the pool: user A brings in $8000 (80% of the total) and user B $2000 (20%).
Imagine someone borrows 1000 USDH with 10 SOL deposited (1 SOL = $150, the collateral ratio is 1500/1000=150% (Let’s exclude any fees to avoid any complexity). If SOL has a massive drop and goes to about $110, the ratio falls to 1100/1000=110% and this is enough to trigger liquidation. Here’s what will happen: The borrower gets liquidated and their loans are cleared. They lose the 10 SOL deposited as collateral but get to keep the 1000 USDH borrowed.
The user who triggered the liquidation receives 0.05 SOL as liquidation fees. The protocol now has 9.95 SOL and needs to recover the 1000 USDH owed to it. It uses the stability pool to recover the 1000 USDH by taking 80% ($800) of the debt to user A and user A gets paid 80% of 9.95 SOL (7.96 SOL) and similarly for B, 20% of the debt and SOL. User A and B will get paid at the value of 1000/9.95 ~ $100.5 which is well below the current market price of SOl at $110, which means the user gets a good discount of ~10% (as the minimum collateral ratio is 110%). The user can simply sell the SOL and buy back the USDH to keep participating in the stability pool.
So, in a nutshell, users who deposit in the Stability Pool and help keep the protocol healthy are rewarded in collateralized tokens from liquidations, with a discount of approximately 10%. But they also get an additional incentive in the form of HBB tokens. This makes participating in the stability pool quite lucrative!
Hubble DAO & Community:
Hubble Protocol has chosen to give its community the right to govern the future of the organization through DAO governance — a step to make it a community-centered DeFi platform. The HBB Tokens will play an essential role in this.
To enable a community-first approach, they have an active discord server with 7500+ members, who ask questions, share memes, give feedback, and many more!
Hubble Feature Summary
Let’s quickly summarise all the features of Hubble in a nutshell:
~7% yield on SOL, and optimized yield for other tokens.
HBB stakers earn the majority of fees
Up to 110% collateral ratio and up to 11x leverage
Hubble IDO & Mainnet
HBB is ready for its big debut! It will be launched through three different launchpads: SolRazr, Solanium, and DAO Maker. The Hubble Protocol is currently in Devnet and will go Mainnet on January 28th.
Not just that, Hubble has also raised $10 million from marquee investors DeFiance Capital, Jump Capital, Decentral Park Capital, DeFi Alliance, Mechanism Capital, and more to prepare for the mainnet launch in addition to $3.6 Million raised earlier.
So far so good, but what’s next?
Hubble will keep building on its borrowing protocol. It will come up with many structured products and under-collateralized lending to its community, built on top of its current protocol. This will effectively allow for customized yield and fees for Hubble token holders.
It has also two other phases planned:
Phase 2: Introduce structured products like capital-protected notes by combining PoS yield and options.
Phase 3: Introduce vanilla lending & undercollateralized bond issuance.
Hubble Protocol: To the Moon🚀
While Hubble Protocol is built on Solana, which is incredibly fast and cheap, there’s a similar protocol — MakerDAO which is built on Ethereum! Just like DAI became one of the flagship stablecoin in Ethereum, USDH has the potential to become the core Solana Stablecoin! With Solana growing rapidly, Hubble Protocol has a very bright future. It will be interesting to see whether Hubble is able to lay the foundations for the future of a robust DeFi ecosystem on one of the world’s fastest and most scalable blockchains! Can Hubble be the “MakerDAO of Solana”?
That’s all folks! DM me on Twitter (@yashhsm) for any discussions or collaborations around DeFi :)