Introducing the Backd Protocol
Backd is a trustless reactive liquidity protocol where users can earn yield and register Actions with their liquidity. Through Backd, users can make their assets autonomously reactive to market conditions. Meaning, provided liquidity can either remain on Backd, where it earns yield from strategies, or sent elsewhere (depending on user-defined conditions).
Refer to the docs for extensive and updated protocol information.
Why does Backd Exist❔
The capital efficiency of DeFi today is bounded by static or single-utility liquidity pools. Meaning, liquidity must be dedicated to only serving one function at a time. Every time a user deposits assets into a protocol they realize the opportunity cost of not having their assets allocated elsewhere. Users have to manually shift liquidity between protocols in order to try and stay efficient. This is infeasible for most users to maintain.
What if you could earn yield with your assets without the opportunity cost of locking your assets in a single-utility liquidity pool? Backd enables any liquidity provider (LP) to add customizable actions to their liquidity. The first action Backd will support is top-up positions (will be available at launch).
How Does Backd Work❔
Backd is customizable to the user. Meaning, users can provide liquidity solely for the purpose of earning yield or they can use their provided liquidity (LP tokens) to register Actions (while also earning yield).
Earn Yield 👨🌾
The first step to using Backd is depositing liquidity into a single-asset pool in exchange for pool-specific LP tokens. These are ERC-20 tokens that are unique to each Backd pool. The amount of tokens a liquidity provider receives is equivalent to his share of the pool’s total assets.
Backd Liquidity providers earn yield from strategy profits and platform fees. A variable amount of total assets in each pool are allocated to yield farming strategies. Yield generated by a pool’s strategy is compounded back into the pool and shared amongst liquidity providers. Platform fees are collected in the form of pool-specific LP tokens and are also compounded back into the pool. Rather than claiming yield earned from strategy profits and platform fees, LP tokens appreciate over the underlying (deposited) assets. This increases yield for all liquidity providers by automatically compounding earned interest.
In addition to yield earned from strategy profits, users can stake or register their Backd LP tokens to earn Backd rewards. Staked LP tokens receive Backd governance tokens on a per-block basis (based on an inflation schedule).
LP tokens, along with their accrued rewards, can be claimed at anytime
Earn and Protect💜
Liquidity deposited into Backd pools can be registered as backup collateral (top-up position). Registered liquidity is used, when needed, for collateral top-ups on external protocols. All liquidity providers have the option to open a top-up position by registering their LP tokens as backup collateral. Registered liquidity continues to earn yield until the user’s loan is at risk of liquidation. At that point, a collateral top up may be triggered which takes a portion of the user’s registered liquidity and deposits it into their collateral.
Registered Backd liquidity can be unregistered and withdrawn at anytime.
When collateral top-ups occur, a small fee is charged on the value of that top up. This fee is paid for by the user, who is topped up, and is automatically deducted from their registered Backd liquidity. A portion of all generated top-up fees are subsequently distributed amongst liquidity providers and staked Backd governance token holders.
Action 01: Top-up Positions💜
Over-collateralization is a fundamental building block of DeFi that protects borrowing and lending protocols from credit risk by ensuring protocol solvency (the ability to repay lenders). Ultimately, borrowers are left with the responsibility of ensuring that their borrow positions remain over-collateralized. If the collateral-to-debt ratio for a given borrow position drops below a liquidation threshold, the position becomes liquidable. During a liquidation the locked collateral (deposited by the borrower) is auctioned off at a discount to recover the outstanding debt. Given that any network participant can act as a liquidator (where in practice liquidations are triggered by highly efficient liquidation bots), manually maintaining a sufficiently high collateral-to-debt ratio is infeasible during times of high market volatility.
Borrowing Burdens 😒
Over-collateralization results in borrowers frequently being exposed to high liquidation risk. An alternative to actively managing the collateral-to-debt ratio is to supply a sufficiently high amount of collateral (decrease leverage). However, when excess collateral is supplied, it comes with the opportunity cost (to the borrower) of not being able to allocate these funds elsewhere to generate yield. Meaning, the liquidation protection gained by depositing excess collateral comes at the expense of an unrealized loss of yield.
Capital Efficient Borrowing 💪
What if borrowers could simultaneously protect their loan from liquidation, while increasing leverage and earning compounded yield? Backd allows any user to achieve this by depositing assets into liquidity pools which can generate yield while protecting their loans from liquidation.
Monitoring the health factor for numerous accounts across various DeFi protocols is a task that is infeasible to be done on-chain. Therefore, Backd relies on off-chain keepers to report registered borrow positions which are eligible for top up. These keepers are similar to Auction Keepers on Maker in the sense that these are external agents which are incentivized by profit opportunities to perform certain actions. Anyone can become a Backd keeper and report a position eligible for top up to the contract of the associated Backd pool. The contract subsequently checks whether the call for top up matches the registered position’s pre-specified criteria (e.g. account, total top up amount, incremental amount, threshold, the associated protocol). Should this not be the case, i.e. the collateral position is not eligible for top up, then the transaction will fail and the Backd keeper has to pay for the gas cost of the transaction. In case the top up transaction is indeed valid and the top up succeeds, a fee is charged on the top up amount and subsequently split between keepers, liquidity providers, and staked Backd governance tokens. Additionally, the keeper of a position that has been topped up is subsequently reimbursed for the gas cost, which is covered by the registrant of the top up position. Thereby the keeper makes a risk-free profit from calling out the endangered position.
Keepers will also receive Backd governance token inflation in proportion to the total value of top ups they execute — More on this in later posts