Insurance Pool: Amazing Use Case For Wrappers/LP Tokens

By Equilibrium | Equilibrium | 25 Nov 2022

Wrappers and LP tokens provide solutions to various challenges in the cryptocurrency market. Wrapped tokens exist to solve interoperability issues by facilitating asset transfer between different protocols. They represent the value of their underlying coin (wrapped asset). Similarly, LP tokens hold the worth of locked assets and unlock asset liquidity to facilitate activities within a protocol.

While providing utility and unlocking liquidity, more often than not these tokens don’t give their holders any additional utilities on their value — you can’t trade them or use them as collateral. There is no platform for users to stake and earn meaningful rewards from them, making the wrapped or LP tokens useless.

Equilibrium provides a sustainable solution, providing a practical use case for wrappers and LP tokens. Equilibrium enables LP and wrapped asset owners to extract optimal value from their digital coins by rewarding insurance services through bailsmen.

Dead-weight to Profitable Assets

As bailsmen, cryptocurrency owners with LP or wrapped assets benefit from the insurance model by Equilibrium. They profit from the dead-weight tokens by leveraging EQ yields via the Equilibrium insurance pool.

Here’s an example: there’s a curve xcDOT / stDOT pool that gives users LP assets to stake to curve gauge to get f-gauge tokens, which are like a dead-weight — nothing to do with them, nowhere to stake the assets, which is unsustainable.

Equilibrium creates utility from dead-weight wrapped or LP tokens through the insurance pool. Users deposit these assets and receive EQ tokens as yield following market activity.

Insurance as a Service for Yield

Equilibrium provides an insurance service where users earn from insuring borrowers. To cover liquidations by borrowers, Insurers provide liquidity in advance. When borrowers fall behind on their payments, the collateral and debt are distributed pro-rata among insurers. Borrower liquidation is the only way insurers can obtain negative balances (liabilities). Borrowers pay 5% more as a penalty to insurers as borrower collateral.

Insurers secure the system, ensuring its constant over-collateralization. Interest fees are paid to insurers by users who borrow assets. The Equilibrium money market employs a pool-based approach in which user-supplied assets aggregate into a single Insurance pool in which all users share profits, risks, and losses.Insurers escrow assets as insurance, earn premiums from borrowers, take over, and recapitalize under-collateralized loans.

Equilibrium on-chain risk model which underpins the insurance pool scales input to the interest pricing model. This is a feedback loop we’re looking for: If there is more insufficient collateral than there is stressed insurance liquidity, the scale is > 1 and the borrowers’ interest rates scale higher. If there is excess insurance liquidity, the scale is < 1 and borrower interest rates scale lower. This market mechanic is designed to achieve equilibrium in system solvency. This is market mechanics that assures enough capital in the insurance pool to cover for borrower losses.

DOT Wrappers as insurance liquidity

Within Polkadot DeFi, DOT wrappers are popular with many protocols. They include Equilibrium’s xDOT, Alcala’s LDOT, Parallel’s sDOT, Bifrost’s vDOT, and Lido’s stDOT and xstDOT currently; Equilibrium’s insurance product adds a yield-bearing opportunity to their utility as well.

We at Equilibrium are aiming to support if not all then most of the wrappers mentioned above, which will give their holders an opportunity to use them as collateral for borrowing, or using them as an insurance liquidity for securing the protocol. The interesting aspect here is pricing of these wrappers, as we need price and liquidity for effective liquidations on the platform.

While most of the solutions calculate the wrapper price including accumulated staking rewards, actual interest rates vary across solutions, so there has to be a clever way of taking into account these discrepancies when pricing wrappers collectively.

When it comes to Equilibrium’s own DOT wrapper, Equilibrium plans to support xDOT once we go live. One thing that differs Equilibrium solution from others is the introduction of reserve ratio: a constant fraction of DOT liquidity is kept unstaked at all times to allow for immediate withdrawals, even though this approach reduces the effective staking APY, it allows for instant unstakes without the need to wait for 28 days prescribed by the relay chain staking logic. This instant unstaking comes at a cost of around 1% for all withdrawers, with fees further accumulating in the pool for everyone to share.

EQ Rewards

The native EQ token is among the assets Equilibrium supports as collateral. EQ holders who desire to take loans from Equilibrium have EQ tokens to their advantage, and EQ tokens back up any loans on Equilibrium.

In Equilibrium, users leverage their EQ earnings by paying transaction fees to conduct any business on the platform. EQ tokens also give owners access to governance privileges such as determining the amount and weights of fee distributions and upgrades and fixes to Equilibrium’s parachain.

Staking into the insurance pool ensures more EQs at a minimum of ~ 2% APR, which fluctuates (up to 100%) based on user demand and market volatility.

The EQ/EQD trading pair facilitates entry into the Polkadot ecosystem. EQ token owners extract value from their wrapped assets through Equilibrium and enter the Polkadot ecosystem with digital assets for more yield-bearing activities. Users access other chains beyond Polkadot by trading the EQ/EQD pair. The EQD is a 1:1 Dollar pegged stablecoin facilitating interoperability through cryptocurrency transactions.

Make Every Asset Count

The Equilibrium insurance product ensures users obtain value from all credible assets. Instead of earning dead-weight coins in other protocols, users grow their portfolio by gaining EQ tokens through Equilibrium insurance.

About Equilibrium

Equilibrium is a one-stop DeFi platform on Polkadot that allows for high leverage in trading and borrowing digital assets. It combines a full-fledged money market with an orderbook-based DEX. EQ is the native utility token that is used for communal governance of Equilibrium. xDOT is a liquid and tradeable wrapped DOT that unlocks liquidity of DOT locked in parachain auctions and delivers multiple crowdloan bonuses on Polkadot.

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