Asset Liability Management Module (ALM)
Last updated
Last updated
UXD initially launched backed by a delta-neutral position consisting of collateral and a short perpetual futures position. Although this strategy has the benefit of being stable, capital-efficient, and decentralized, it does not scale automatically as its effectiveness is capped by levels of liquidity on decentralized exchanges.
More concretely, each UXD token created requires holding $1 of open interest on a decentralized perpetual futures exchange. To help combat this scalability issue UXD introduced the The Asset Liability Management Module (ALM), a generalized structure which should allow UXD to scale more efficiently while aiming to generate diverse, sustainable yields. As before, the goal will be to back 1 UXD by 1 USD of assets in various forms. Building upon the initial delta-neutral strategy, the ALM will consist of a collection of additional strategies that appear to be relatively on the risk spectrum to generate diversified yields which will accrue to the protocol.
The generalized structure of the ALM Module is shown in the figure below:
The ALM module consists of a collection of yield-generating assets, the yields of which will accrue to UXP stakers and the insurance fund. The ALM Module will include the following strategies, among others which may be added from time to time by governance processes:
Delta-Neutral position The delta-neutral positions consist of long positions in crypto assets hedged by short perpetual futures positions. This position has a delta of zero, which means that price fluctuations in the underlying asset have no effect on the value of the position. When funding rates are positive, the UXD protocol earns yield. Negative funding rates are paid out of the insurance fund.
Third-Party Overcollateralized Lending The ALM’s lending strategies consist of supplying stablecoins on overcollateralized lending platforms to earn yields, similar to MakerDAO’s D3M.
Native Overcollateralized lending Users will be able to borrow UXD on an overcollateralized basis by supplying crypto assets. This will enable traders to gain leverage and UXD Protocol will earn yields in the form of a borrow interest rate and/or fee.
Real-world Asset Investing By utilizing platforms such as Credix, Maple, Goldfinch, Clearpool, UXD Protocol can lend stablecoins against real world assets as collateral. This enables UXD Protocol to access real-world credit opportunities and earn superior risk-adjusted yield.
UXD Protocol’s insurance fund, currently at $54m, will become the final buffer of the protocol, acting as the “equity” portion of the balance sheet. Losses from strategies are paid out of the insurance fund, whereas yields will accrue to the insurance fund and staked UXP token holders.
Under the ALM Module, the UXD mint fee is free and the redeem fee is 0.05%. These fees remain subject to change in the future via standard governance processes.
As a first step, UXD protocol plans to integrate the ALM module with Mercurial’s vault, which acts as a yield aggregator for various lending protocols on Solana such as Solend, Mango Markets, and Port among others. The vault will automatically manage UXD Protocol’s stablecoin reserves and deploy its capital across various lending protocols to generate yield. Initially, this yield will be used to repurchase UXP tokens from the open market and in the future transition to veREV. The initial version will support USDC with plans to add other stablecoins as UXD scales.
Since UXD will be backed by multiple strategies, the protocol is exposed to various risks including but not limited to smart contract risk, liquidity risk, solvency risk, counterparty risk, and market risk. At the same time, spreading capital across multiple strategies and protocols helps to diversify these risks, limiting the loss in the case of loss of capital from any single investment. In a scenario where the asset side suffers losses, the insurance fund will pay out the losses. If the losses exceed the capital in the insurance fund, UXP stakers will pay for the losses through an auction sale of their stake.
UXD Protocol plans to develop (i) a risk report framework for new ALM strategies (ii) a governance process framework for new ALM strategies.
For a more detailed discussion of the risks, please refer to the Risks section.
