Staking Yield Allocation
Design Rationale
Lenders who contribute liquidity to FILLiquid will expect to be compensated for the opportunity cost of their capital through interest income or capital appreciation.The allocation of this compensation is distributed through the Liquid Staking Derivative (LSD) token FIT, which is minted and sent to lenders when they deposit Filecoin into the pool.
To facilitate the distribution of stake benefits and determine the rate of return, an automated system has been designed with key factors that include, but are not limited to, the following:
Filecoin Trust (FIT) Tokens: The LSD tokens are minted and granted to lenders who deposit FIL into the liquidity pool. FIT serves as a proof of stake in the protocol and enables the allocation of returns.
Open Staking and Withdrawal: Stakes and withdrawals can be made at any time based on the prevailing exchange rate between FIT and FIL.
Growing Value of FIT: The value of FIT in terms of FIL is expected to naturally increase as more FIL is borrowed and returned with interest payments made to the liquidity pool. A portion of the interest borrowers pay is reflected in the value of the FIT token and distributed to lenders.
Liquidity Protection: The FIT/FIL exchange rate is dynamic and responsive to the utilization rate. This is aimed to discourage excessive redemptions and incentivize liquidity provision. Higher utilization rates cause FIT to depreciate relative to FIL, which makes staking more cost-effective and redemption less favorable economically. As mentioned in the last section, the determination of the exchange rate should apply the ex-post utilization rate to safeguard the system.
Approximation of Utilization Rate at Redemption: As determining the exact ex-post utilization rate at the time of redemption isn’t feasible, the system should adjust the current exchange rate to estimate the amount of FIL to be redeemed and approximate the utilization rate.
Providing and Withdrawing FIL Liquidity
When a lender (FIL token holder) contributes liquidity to the lending pool, they receive minted FIT tokens as proof of stake.
The exchange rate between FIT and FIL is determined by dividing the total amount of FIT outstanding by the total amount of FIL staked in the liquidity pool.
During the initial stages, when no interest income has been accrued, one unit of FIT is minted for each FIL deposited. As the lending pool is utilized, the borrowing interest is deposited back into the pool as borrowers make repayments and pay interest. As a result, the value of FIT in terms of FIL steadily increases, allowing the interest income to be distributed proportionally among lenders.
When a lender requests redemption to withdraw their FIL deposits, the maximum amount of FIL they can redeem with FIT is limited to the FIL available in the liquidity pool.
To approximate the amount of FIL to be redeemed, the current FIT/FIL exchange rate is divided by (1-U), where U represents the end point utilization rate.
The actual FIT/FIL exchange rate after redemption is expected to be higher than the current one. The system will return an error message if the approximated withdrawal amount exceeds the available FIL. Conversely, if the approximated amount is lower than the available FIL, the ex-post utilization rate is calculated based on the approximated FIL amount to be withdrawn.
A FIT/FIL exchange rate multiplier, denoted as Mu, is calculated to adjust the amount of FIT to be minted during staking and the amount of FIL to be withdrawn during redemption.
The multiplier is a function of endpoint utilization rate U.
When U surpasses the maximum borrowing Um, the protection mechanism is activated to incentivize liquidity provision and discourage FIL redemption.
In essence, a higher utilization rate corresponds to a higher value of Mu, influencing the FIT/FIL exchange rate.
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