How It Works
Davos Protocol operates as a Collateralized Debt Position (CDP) platform, allowing users to lock up assets such as Liquid Staking Tokens (LSTs), Liquid Restaking Tokens (LRTs), and other reward-bearing assets. Each asset type is assigned a specific Loan-To-Value (LTV) ratio according to its risk profile. For LSTs, the LTV is set at 66%, ensuring that the borrowed DUSD is over-collateralized by 150%. This varying over-collateralization strategy, tailored to the risk characteristics of different assets, bolsters the overall stability of the ecosystem and provides a buffer against market volatility.
Davos Protocol deviates from traditional CDP models, which often feature near-zero borrowing rates, by adopting a more dynamic and unbiased monetary policy. Borrowing rates within the protocol are not only determined by a dynamic system that selects the higher of two rates – the Consumer Price Index (CPI) or a central bank reference rate – but are also tailored to the risk profile of the collateral used. This means that assets deemed riskier may incur a higher cost of borrowing, reflecting their risk profile. This approach ensures a balanced and realistic borrowing rate, more closely aligned with the true cost of capital and the inherent risk associated with different types of collateral.
Upon depositing collateral, users can mint DUSD, an omnichain stablecoin. This stablecoin is pegged to the dollar and offers users a reliable asset that can be used across multiple chains, thanks to the protocol's omnichain functionality. DUSD can be used within the Davos ecosystem or on any of the partnered chains like Ethereum, Polygon (PoS), Arbitrum, Optimism, BNB Chain, and Polygon zkEVM.
Davos Protocol distinguishes itself in the DeFi space through its innovative use of Liquid Staking Tokens (LSTs), Liquid Restaking Tokens (LRTs) and other Reward Bearing Tokens as collateral. When users deposit these reward-bearing tokens, they not only strengthen their Collateralized Debt Position (CDP) but also continue to earn the underlying rewards associated with these tokens. This dual-benefit model with LSTs allows users to 'double-dip' by earning staking rewards while benefiting from the stablecoin they borrow against their assets. Furthermore, with the integration of LRTs, the protocol expands this benefit, enabling users to 'triple-dip.' This means they can participate in the additional yield potential of restaking while still leveraging the liquidity and utility of the stablecoin borrowed. This multifaceted approach to rewards represents a significant advancement in how users can maximize their yield strategies within the Davos ecosystem.
Davos Protocol operates on a dynamic positive feedback loop, designed to perpetually enhance growth and reward every participant in the ecosystem. Here’s how it functions:
- Tailored Borrowing Incentives: The protocol encourages borrowing by offering incentives that are carefully aligned with the value of users’ collateral. This strategic approach stimulates borrowing activities, which in turn, contributes to increasing the protocol's overall revenue.
- Revenue Redistribution: The revenue generated from borrowing activities isn’t just accumulated; it’s actively redistributed within the ecosystem. This means that various stakeholders, including DUSD liquidity providers, lenders, and participants in the DUSD Savings Rate (DSR), directly benefit from the revenue growth.
- Rising Annual Percentage Rate (APR): As specific pools within the protocol begin to offer higher APRs, they become more attractive to investors. This attractiveness leads to an increase in the total value locked (TVL) in these pools.
- Increased TVL and Revenue Cycle: A higher TVL naturally results in a surge in revenues. These augmented revenues are then channelled back into the system as enhanced incentives.
- The Virtuous Cycle: The distribution of richer incentives feeds back into the system, encouraging more participation and borrowing. This leads to further revenue generation, which is again redistributed, thus creating a self-reinforcing cycle of escalating rewards and engagement.
- Sustained Growth and Attractive Yields: This feedback loop ensures continuous growth within the Davos ecosystem. It not only sustains the system but also provides attractive yields to the community, maintaining the appeal and vitality of the Davos Protocol.
By employing this feedback loop, Davos Protocol aims to create a sustainable and growth-oriented DeFi environment, where the benefits are cyclically amplified and shared across its user base. In essence, Davos Protocol is designed to address the traditional inefficiencies in the stablecoin realm of DeFi. Through innovative solutions, scalable yield sources, and a commitment to decentralization, it aims to set a new standard in how users interact with stablecoins and leverage their assets.