Introduction

PSY is a community-driven, decentralized lending protocol designed to enable interest-free loans in a stablecoin - SLSD - by collateralizing multiple LSDs (Liquid Staking Tokens and their LP tokens). The protocol is set to be launched on Arbitrum.

This article endeavors to provide a clearer understanding of PSY and its stablecoin, SLSD.

Why LSD-backed stablecoin?

We need decentralized stablecoin

Stablecoins serve as the foundation of the entire DeFi ecosystem. Nonetheless, a significant portion of the value is concentrated in fiat-collateralized stablecoins such as Tether and USDC. On the other hand, decentralized stablecoins like DAI and sUSD constitute a relatively small fraction of the overall stablecoin supply, indicating that the majority of stablecoins remain centralized.

The most scalable stablecoin with LSD

LSDs (Liquid Staking Derivatives) are cutting-edge protocols that utilize $ETH staking mechanisms. These platforms enable users to stake their $ETH and earn staking rewards without the need to run their own nodes. The market for LSDs has grown significantly and is currently at $18 billion, which is the leading DeFi category in TVL according to DeFiLlama.

Currently, the staked portion of ETH stands at a mere 15%, in stark contrast to Solana's 70% staking rate. This signifies further potential growth for LSD. As a result, the stablecoin based on these LSDs offers unrivaled scalability.

What is PSY & SLSD

We are now developing PSY to deliver a decentralized stablecoin, SLSD, with great scalability by creating a more capital-efficient and user-friendly way to borrow stablecoin, based on multi Liquid Staking Derivatives(LSD) collaterals.

PSY's code base is built upon the foundation of Liquity, which is battle tested and known for its efficiency and innovation. PSY will inherit these parts and expand its boundary by collateralizing innovative LSD assets.

Borrowing

• Scalable multi-collateralized stablecoin

  PSY delivers SLSD, which is the USD stablecoin backed by multi-collateral LSD. PSY provides the most capital-efficient way to borrow using your LST (Liquid Staking Tokens) while keeping your LST rewards flowing in.

  Currently, we have planned to include the following assets as our supporting collateral at the launch:

  • wstETH (Lido)

  • rETH (Rocket Pool)

  • sfrxETH (Frax)

  We may add more LSDs as collateral at the upcoming launch.

  Moreover, PSY will also accept their LP tokens such as the wstETH-WETH LP token.

• Interest-free loans

  PSY protocol offers interest-free loans. Instead of selling collaterals like stETH or rETH to have liquid funds, you can use the protocol to lock up your collaterals, borrow against the collateral to withdraw SLSD, and then repay your loan at a future date.

• The minimum collateral ratio of 110%

  By making liquidation instantaneous and more efficient, PSY needs less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.

  As only 110% is required as the minimum collateral ratio, PSY is more capital efficient than other borrowing systems.

SLSD Price Stability

• Hard peg mechanism

  The redemption of SLSD for collateral at a one-to-one ratio (1 SLSD for $1 of collateral token) and the minimum collateral ratio of 110% establish a price floor and price ceiling, respectively, by capitalizing on arbitrage opportunities. These mechanisms, known as "hard peg mechanisms," operate through direct processes.

• Soft peg mechanisms

  In addition to these direct mechanisms, SLSD benefits from "soft peg mechanisms" for achieving parity with the USD. Since PSY treats SLSD as equivalent to USD, achieving parity between the two is seen as the natural equilibrium state of the protocol.

  Additionally, to maintain price stability, borrowing fees on new debts increase when redemptions rise, indicating a value below $1 for SLSD. This discourages borrowing, prevents excessive SLSD supply, and ensures the price remains above $1.

  Compared to Liquity, our mechanism offers advantages. The inclusion of a leverage mechanism increases the probability of SLSD maintaining a value of $1. In contrast, LUSD has been observed to trade above $1 due to reduced incentives for shorting.

• Flash minting

  PSY provides arbitrage opportunities whenever the price of SLSD is over $1. Over-collateralized stablecoins like PSY tend to be priced at more than $1. In such cases, arbitragers can utilize flash minting opportunities from PSY to stabilize the peg and profit from it.

Why PSY?

Community-driven protocol

PSY stands out as a community-driven protocol. This ensures that decisions and developments are guided by the collective wisdom and participation of the community, fostering a more inclusive and decentralized ecosystem.

By prioritizing community involvement, PSY aims to create a protocol that truly serves the needs and aspirations of its users, promoting transparency, fairness, and long-term sustainability.

Multi-collateralized stablecoin

PSY enables users to mint SLSD using not just one Liquid Staking Token (LST), but LSD (multiple LSTs and even their LP tokens).

This means you can earn your LST rewards an extra farming and trading-fee reward from DEXes, while collateralizing them to mint SLSD.

11x Leverage

Borrowers speculating on future collateral price increases can use the protocol to leverage their collateral positions, increasing their exposure to price changes. Assuming perfect price stability (1 SLSD = $1), the maximum achievable leverage ratio is 11x. This is possible because SLSD can be borrowed, and sold on the open market to purchase more collaterals.

So, you can leverage your LST rewards or farming rewards on DEXes up to 11x by using PSY.

ve(3,3) tokenomics

PSY will launch the native token and introduce ve(3,3) token model. You can get benefits as followings:

• Earn Bribe

• Earn fee

• Control incentive emmission

• get access to future limited modules (i.e. leverage module)

We will announce further details in a future post.

Utility of SLSD

• Earn rewards on DEX

  Our partners and PSY will incentivize liquidity providers of SLSD paired with other tokens on DEXes, allowing you to earn additional farming and trading rewards on top of the LST rewards.

  Stay tuned for upcoming partnership announcements.

• Stability Pool

  The Stability Pool ensures system solvency by providing liquidity to repay debt from liquidated Troves, ensuring full backing of the SLSD supply. When a Trove is liquidated, the Stability Pool burns SLSD equal to the remaining debt, repaying the debt, and receiving the entire collateral from the Trove.

  Stability Providers gradually lose a proportion of their SLSD deposits but gain a proportionate share of the liquidated collateral. Since Troves are typically liquidated slightly below a 110% collateral ratio, Stability Providers are expected to receive a greater value of collateral relative to the debt they repay.

About PSY

PSY is a community-driven, decentralized lending protocol designed to enable interest-free loans in a stablecoin - SLSD - by collateralizing multiple LSDs (Liquid Staking Tokens and their LP tokens). The protocol is set to be launched on Arbitrum.