Why Davos?
DAVOS is an over-collateralized stablecoin with an innovative tokenomics. The intent behind Davos is to learn from all of the failures and success of DeFi stablecoins and to build on top of them. 2022 has taught us many lessons about what types of stablecoins work and which types don’t.
The biggest lesson we’ve learned is that algorithmic stablecoins just don’t work. Algorithmic stablecoins tried to use solely arbitrage and supply/demand manipulation to keep a peg which failed miserably. No matter how well designed the tokenomic architecture is, if there isn’t a higher value of assets held in a reserve than TVL of stablecoin in circulation then it will always be unstable to some degree.
On the other hand, over-collateralized stablecoins are much more secure and less-risky. Yet, certain forms of collateralization can introduce more risk than others. Some collateralized stablecoins store assets off-chain, think USDC, which is more risky than a crypto over-collateralized stablecoin like DAI. When assets are hosted off-chain you introduce custodial risk. In short, you’re putting all your trust in the centralized custodian, in USDC’s case the company Circle.
That being said, the amount of crypto over-collateralized stablecoins has risen due to the fact that CDP architecture offers a low borrowing interest, as one can mint a stablecoin infinitely so long as they have collateral. The takeoff of CDP stablecoins has led to a decrease in DeFi stablecoin yields that were previously witnessed. Davos protocol plans to enhance this CDP architecture by remedying this capital inefficiency and offering a stable and attractive yield.
The intent behind Davos Protocol is to propose a solution to the stablecoin trilemma by combining the best of the MakerDAO Collateralized Debt Position (CDP) model with the utility of liquid staking and the economic incentives of liquidity pools.
We’ve built Davos with the user in mind. The Davos protocol is an appealing solution for receiving reliable stablecoin yield and enabling more complex and higher-yield strategies to the true DeFi degens. Whatever your level of expertise in the DeFi space, Davos has options for you.
How Is Davos Built?
Davos is built with a similar architecture as that of MakerDAO but with a few innovations built on top.
First, the Davos Protocol holds a reserve that is more capital efficient than that of MakerDAO. Whereas MakerDAO holds their reserve in each network’s native token, Davos holds a proportion of the reserve in liquid staking tokens (LSTs). Liquid staking is a new development in the world of blockchain and cryptocurrency that allows users to earn rewards on their staked assets without sacrificing liquidity. For the Davos Protocol, liquid staking is an important feature that allows the reserve to be held in staking tokens, which can then be converted back to yield for DAVOS holders. This creates a more efficient system for earning rewards and distributing them to token holders, as the reserve can be actively used to generate yield instead of simply sitting idle.
In order to reach this level of capital efficiency, Davos Protocol has built a yield converter that extracts the liquid staking yield from the over-collateralized MATIC and pays it back to DAVOS holders in the form of DAVOS staking yield. As a result, in our web app you can earn up to 9% APY by staking DAVOS, in which the yield is a direct result of liquid staking MATIC yield.
Core Functionality
At the core of the Davos Protocol are collateralized debt positions with a built-in competitive yield. The system that the protocol has implemented generates liquid staking yield in the reserve and puts your collateralized MATIC to work.
In the Davos web app you can borrow DAVOS by collateralizing your MATIC. With these DAVOS tokens you can stake them and earn a competitive 9% yield as a result of the capital efficient MATIC that Davos Protocol is storing in the reserve. Or, if you’re into more complex strategies you can engage in yield farming on secondary exchanges.
Then whenever you’re ready you can repay the loan and withdraw the original MATIC collateral, meanwhile claiming DGT rewards in the process.
Yield Model
There are two main avenues for receiving yield with the Davos Stable Asset:
- Stake your DAVOS token in the web app (7-9% yield).
- Deposit DAVOS and USDC into a liquidity pool and receive yield from the LP token
The staking yield of DAVOS token is simple. When a user collateralizes their MATIC and borrows DAVOS, a percentage of the MATIC gets converted into ankrMATIC reward-bearing tokens. Then, the reserve of ankrMATIC accumulates in value over time and the rewards get converted back into DAVOS and a proportion is granted to stakers and liquidity providers.
Another aspect in which the protocol generates yield for DAVOS stakers or liquidity prooviders stems from the borrowing interest paid to the protocol. The borrowing rate for DAVOS is 2% and these fees get collected in the Davos Protocol Revenue pool and is then distributed respectively.
Yield is also generated through liquidity pools. If you want to maximize your yield from DAVOS you can also add DAVOS liquidity pairs to the available liquidity pools (Uniswap and Quickswap) and can receive rewards from the yield farming process on these decentralized exchanges.