Gravita is a fork of Liquity that addresses a certain demand from the community: the addition of LSTs as collateral. But as you will see, that's not all.
To begin with, it is important to clarify things. Gravita is indeed a claimed fork of Liquity, but due to the modifications/additions it brings to the original value proposition, protocol immutability is not immediately achievable. The goal will certainly be to achieve it in the future.
Since we are in the fork, I will myself fork the article by Token Brice about Liquity and make modifications, of course.
Operation of the Protocol
Borrowing with Gravita
Stability Pool: Liquity Reserve for Liquidations
$GRVT Token & Governance
Complete Understanding and Advanced Use
Risks & Limits
Dependence on the Oracle
The $GRAI against its $1 peg
A “protocol-level” game
The redemption game
Gravita, a Friendly Fork
A Successful Launch
Gravita uses the same system as Liquity: Users open "Vessels" (Troves) where they can deposit collateral to borrow stablecoins, $GRAI, directly from the protocol.
It is a borrowing service, meaning that you contract your debt directly with the protocol, which issues its own stablecoin. This model allows for greater fee attractiveness for users while eliminating the need to attract lenders.
Gravita positions itself as the solution for users who want to borrow using yield-generating $ETH-related assets as collateral.
As you may have understood, here we will not only use $ETH in its purest form but also assets related to it that generate yield. This allows for greater capital efficiency, as your productive assets continue to generate interest while allowing you to borrow.
Note that only non-censorable assets will be accepted in the protocol.
The first accepted collaterals are LSTs (Liquid Staking Tokens (LSD)) of $ETH. The goal is to support and help develop smaller high-quality projects.
Liquidity Positions (LP) Tokens will be accepted soon. We will likely see the LUSD/WETH LP among them.
The last accepted collateral is the bLUSD. It has a special place. Due to its specificities, it is the only non-redeemable and non-liquidable asset, hard-coded at $1 in the protocol. We will discuss it further.
Like Liquity, a unique fee of 0.5% is charged, providing predictability and clarity for borrowers.
The drawback with this fee is that for short-term borrowing, it is often preferable to use a platform with an annual interest rate. That's why Gravita offers a fee refund proportional to your borrowing duration if repaid within the first 6 months. However, you will be charged at least 1 week's worth of fees.
The worst enemy of lending protocols is bad debt, especially for lending services that need to ensure the solvency of their stablecoins.
That's why the Stability Pool exists. It is a reserve of funds composed of stablecoins that the protocol uses when necessary to manage liquidations.
Users can deposit $GRAI into this pool. When liquidations are triggered, the liquidated Vessels are closed, and the debts are canceled. To cover these debts, an equal portion of $GRAI is burned in the pool. In exchange, depositors receive the collaterals of the liquidated Vessels, which is generally profitable due to the over-collateralization of the liquidated positions.
Moreover, in the future, it is likely that the Stability Pool will be incentivized with $GRVT (we will discuss it shortly).
This makes it quite an attractive native yield position.
lease note that at the time of writing this article, $GRVT does not yet exist.
Its full utilities have not yet been decided. However, we can assume that, like $LQTY, it will benefit from the minting fees of $GRAI.
The major difference lies in governance. Indeed, the protocol will add new collaterals in the future and will have to decide on certain parameters concerning them. This means that $GRVT will also be a governance token.
Currently, we do not know all the parameters that can be modified by this governance (Mint Cap, LTV, accepted collaterals, etc.). However, the goal is to minimize the protocol's dependence on governance as much as possible.
Dependence on the Oracle
One day, a great sage said, "The truth about money markets is what the oracle says." The oracle is the mechanism that provides on-chain data to be used by smart contracts. The critical data here will be the prices of the assets used as collateral, which determine if a given position is solvent or needs to be liquidated.
The choice used here is Chainlink. A fallback will be implemented later.
It should be noted that multiple collaterals mean multiple price feeds must be considered. Despite the robustness of Chainlink, this adds a layer of risk for each collateral dependent on its price feed.
What makes Liquity robust is its single collateral, which is $ETH. Although Gravita has a clear guideline regarding collaterals (focused on $ETH, uncensorable, decentralized), each collateral still adds its own layer of additional risk.
Mint caps are in place to moderate the impact of each collateral in the protocol and allow for controlled growth.
This is related to the collaterals that can be added. It is highly likely that this right will be given to token holders.
This adds the possibility that in a specific situation due to unexpected factors, the DAO decides not to align with the protocol's initial ethos. This could lead to the addition of unwanted collaterals (hello Maker).
The scope of action for the DAO is not defined, so I am venturing into speculation, but the acquisition of governance power by any entity could also result in decisions made in the interest of that holder.
Currently, the protocol operates with a 5/7 multisig and a 2-day timelock.
The $GRAI against its $1 peg
$LUSD already has a price history, and we know that its price fluctuates more than a centralized stablecoin. However, its peg still holds relatively well at $1.
We can expect something similar for $GRAI.
Regarding the $GRAI peg, to simplify, there are several characteristics that allow it to establish a ceiling and a floor through arbitrage:
Floor: The redemption mechanism allows $GRAI to be redeemed for collateral through a mechanism we will discuss shortly. Therefore, the floor is at $0.97.
Ceiling: The protocol guarantees a minimum collateralization of $GRAI with its collaterals at 110% in all conditions. Therefore, the ceiling is at $1.10.
Understand that the fluctuation of such assets is not a bug but inherent to their design.
Brice introduces this concept, which describes the possible interactions with the protocol where the consequences depend on the actions of other players.
Gravita joins Liquity as one of the most permissive protocols for leverage on $ETH (minimum collateralization of 110%) and also ranks high for leverage on LSTs (minimum collateralization of 125%).
This is made possible through implemented solutions that encourage users to re-collateralize when necessary: the Recovery Mode and Redemptions.
The Recovery Mode is triggered based on an asset's "Total Collateral Ratio," which is the ratio between the total collaterals and the owed $GRAI.
When it falls below 128.6% (71.4% LTV), the Recovery Mode is activated to restore balance: the minimum collateralization threshold for a Vessel becomes 128.6% (71.4% LTV). Risky users are thus prompted to re-collateralize or repay debt and/or be liquidated if needed when the recovery is initiated.
Note that each asset (except bLUSD) has its own system, which means that a specific collateral can be in Recovery Mode while others are
Such a system maximizes the protocol's efficiency by aligning as many users as possible to adopt the least risky behavior for the protocol's sustainability.
Recovery Mode has never been activated since Liquity's creation, even during periods of extreme market volatility. We can hope for the same for Gravita because Recovery is certainly not desirable.
The redemption game
Redemption is the arbitrage mechanism that allows exchanging $GRAI for collateral.
As mentioned earlier, $GRAI is backed by underlying collateral. DeFi users have the opportunity, for one reason or another (mainly $GRAI < $0.97), to acquire $GRAI and exchange it for $1 of collateral through the protocol.
When a redemption occurs, Gravita uses collaterals from the least collateralized Vessels and goes up the ladder as needed to facilitate the exchange.
The least collateralized Vessel (in addition to having the lowest collateralization ratio) then becomes the least desirable position as it will be the first to lose collateral in this situation. However, the user will see their debt decrease during the operation (proportionally to the $GRAI exchanged). To "compensate" for this event, a 3% fee is charged to the redeemer and goes to the owner of the redeemed Vessel.
This means that when you use this mechanism, you do not receive $1 of collateral but $0.97. Hence the floor price at $0.97 for the price of $GRAI.
Here too, the system encourages players to remain reasonable even when the Recovery Mode is not activated. It is a kind of regulation mechanism between players (PvP).
Gravita has chosen a friendly approach towards Liquity by fully embracing its identity as a fork, but not only that.
There is a genuine desire to support the growth of the immutable protocol.
It starts with the addition of $bLUSD as collateral. 1 $bLUSD is worth at least 1 $LUSD, and 1 $LUSD is always redeemable for $1 of $ETH, so $bLUSD is hard-coded at $1 in the protocol. It is therefore the most special asset in Gravita as it is not liquidable, not redeemable, and you can borrow up to 99% of its value in $GRAI.
Note that $bLUSD has a floor price in $LUSD that increases over time. This floor price is higher than 1 $LUSD, so higher than $1. Therefore, an oracle will be added soon to unlock the full utilization of its minimum collateralization ratio (LTV).
As a reminder, $bLUSD is an asset that generates yield, and you are starting to grasp the magnitude of this proposition. We can see that in less than 48 hours, the utilization cap has been reached.
The positive effects have not been delayed:
Of course, this also benefits $GRAI, which becomes partially collateralized with an asset that possesses the immutable characteristics of $LUSD.
We can consider Gravita as a vessel and each collateral as one of its thrusters, with $bLUSD being the one that helps maintain stability in turbulent zones.
The integration with Liquity does not stop there. In the future, we can expect:
Integration of the LP token WETH/LUSD
A function allowing the deposit of $bLUSD as collateral to borrow $GRAI, which will be deposited into the Stability Pool. Double yield through bLUSD and the Stability Pool, while implicitly providing liquidity to the SP of Liquity and Gravita
Manage Vaults with strategies related to Liquity
As you can see from the screenshots, the launch of Gravita went well. This is a good sign considering that there are no incentives or all functions deployed yet. It will be very interesting to observe the behavior of the TVL and $GRAI in the coming days, weeks, and months.
We are only at the beginning of the protocol, and there is still a lot to build. That's partly why Gravita launched without a token, allowing it to be agile and integrate new features/collaterals quickly.
To thank you for staying until the end, here are some interesting points:
There are plans to deploy on Layer 2 solutions, although we don't know which ones yet. You can express your preference on Discord. This would lower the barrier of fees and borrowing minimums.
Manage Vaults will be integrated. For example, a user deposits collateral, and the smart contract opens a Vessel, borrows, deploys liquidity in LPs and the SP. If the Collateralization Ratio (CR) drops to a certain level, an automatic mechanism adjusts the position to avoid liquidation or redemption.
A single token claim when providing liquidity to the SP to avoid ending up with multiple collaterals after liquidations.
The $GRVT token for platform users.
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