A wise man with a wealth of wisdom once said “Tables turn, bridges burn, you live and learn” - Drake.
On May 7, 2022, the tables turned for UST as it depegged from 1$, and by May 13, 40 billion had evaporated from thin air. On May 15, 2022, DEI depegged and hasn't recovered since. November 2020, OUSD is hacked and plummets to 14 cents, however; after a successful relaunch was able to recover. Historically, recovery hasn't been the norm for depegged stablecoin projects. Other stablecoin projects that depeg and never recover include Basis Cash, Iron Finance, DigitalDollar, Nubits, and many others. As such, throughout the development of Defi, there has been a need for insurance protocols. However, most insurance products have historically failed to insure and cover their users. For recency's sake, Nexus Mutual, Bridge Mutual, and InsurAce were some insurance products that were live during the LUNA/UST collapse. These insurance products had mixed payouts and varying degrees of proper user coverage. InsurAce paid out the most with 98% of claims being approved. On the other hand, insurance buyers of Nexus Mutual and Bridge Mutual were left distraught given that their insurance only covered smart contract risk and risk associated with Anchor itself.
Introduction of Y2K Finance
“The definition of insanity is doing the same thing over and over again and expecting a different result. “
Fast forward to today and we still lack a proper way to hedge risk against stablecoin projects. Lucky for you, with the launch of Y2K Finance doomsday is here. The days of improper insurance coverage and the inability to hedge risk against stablecoins are over. Y2K Finance is a fully on-chain crypto native structured product allowing for speculation on exotic peg markets launching on Arbitrum.
Big brains always find the right solutions to obvious problems!
Apes can leverage Y2K Finance to hedge and speculate on the risk of a particular pegged asset or basket of pegged assets. In addition, users have the ability to take on risk or hedge against a potential peg deviation. Y2K Finance is slated to launch with two products.
Earthquake, an ERC-4626 vault allowing users to take risk or hedge against a potential peg deviation, and Tsunami, a liquidation wrapper and aggregator that redefines how collateral auctions for bad debt are conducted. Albeit, a third product Wildfire will be added later.
What is Earthquake - Y2K Finance?
Earthquake will be the flagship structured product for Y2K allowing users to hedge, speculate and underwrite the volatility risk associated with various pegged assets. Y2K will launch with the ability to use the EQ product on the following 7 markets: DAI, USDC, FRAX, FEI, MIM, stETH, and wBTC. Users can open positions by depositing $ETH into fully collateralized ERC-4626 variant token standard vaults. I am sure some of you are asking what the heck is ERC-4626. Relax, for context, the ERC-4626 standard was originally pushed by Joey Santaro, founder of Fei Labs. The benefits of the ERC-4626 yield-bearing vault standard include better portability/integration, less error-prone, and therefore increased protocol security. This ERC variant is very much a revolutionary update to the ERC-20 standard given its plug-and-play-like ability. Users can either purchase insurance or sell insurance. Buyers of insurance will deposit ETH into the “premium vault” and sellers will deposit ETH into the “collateral vault” earning yield and collecting premiums from users purchasing coverage.
Each pair of vaults has the following properties:
Asset: The specific pegged asset the vault is trading.
Epoch: The start and end date of the vault.
Strike: How far from the peg the asset price needs to deviate in order to trigger a liquidation event and hence a payout to the “Premium” (buyers of insurance) vault depositors.
The Y2K treasury will take a 0.25% fee on Premium and Collateral Vault deposits, and 5% on risk collateral yields.
Users will be able to purchase coverage or sell insurance before the start date of a specified epoch period. All funds inside both the premium and collateral vaults beginning on the start date of the epoch period will be locked until the end of the epoch. At the end of the epoch period, one of two things will take place. In the event of a depegging, collateral vaults are liquidated and paid out to premium vault depositors. On the other hand, if no depegging occurs the collateral vault depositors are paid both premia and collateral payments, Lastly, it should be mentioned that collateral vault depositors are paid their premium regardless of there being a depegging event or no depegging event.
Let's run through an example: If the epoch starts with 1 user depositing 1 eth in the premium vault while there’s 5 ETH in the collateral vault if a depeg event were to happen the user in the premium vault would receive all 5 ETH as a payout. Conversely, if the epoch ends without a depeg event the users who deposited in the collateral vault would receive a portion of the eth deposited in the premium vault proportional to the amount of collateral they deposited.
Determining Strike Price
To determine a strike price for the vaults it's important to first understand the probability of depeg risk. Why is peg important to understand? There is a fundamental problem when it comes to calculating depeg risk. People and subsequently the market underestimate the probability of the worst scenario happening. Specifically, when it comes to stablecoins and yield farming they are essentially gambling everything for the chance to win very little. Is the 10-20% APR on your stablecoins worth the risk of uncertainty of probable risk assumptions? Historically, we’ve seen the risk of a depegging event to be a lot greater than originally presumed. What good is it to make 10% when your probability to lose is likely greater than 10% and with most stablecoins, this probability is likely higher than 10%. Given that we cannot reasonably calculate the risk of a depeg because of the complexity of many variables, Y2K empowers market participants to calculate these risks in a “laissez-faire” way. The market often doesn’t imply the risk of depeg.
Everything on Y2K is decided by the market.
The insurance payout is determined by someone else depositing their ETH into collateral vaults. Y2K is a fully decentralized product, people deposit ETH into the two different vaults and the ratio of ETH in these vaults determines a market implied probability. Now you magically have a price for something you thought wasn’t priceable. Nonetheless, determining the strike price takes more thinking given that you don't want the strike price for varying stablecoins to be standardized or to be priced all at say 50 cents. This wouldn’t make sense given that each stablecoin has to logically have a different risk associated with it and also because you don’t want the market to be stale if we did price things all at 50 cents. Therefore, for each pegged asset users have the option to trade the volatility of the pegged asset and the option to trade the depegging event.
Earthquake will offer high strike and low strike vaults, and these strikes are all precisely chosen with their research findings and outcomes. I won’t delve too much into that because it's honestly over my head, however; if you are curious I will link some more information at the bottom of this paragraph. Nonetheless, the ultimate goal is to offer an efficient playing field for participants to approach these vaults using their own strategies. Perhaps after some calculations, a participant believes the market is incorrectly pricing a depeg event. The vaults will be designed for users to profit off of that with the most effective strikes.
Strike Pricing Information: Y2K’s Earthquake Vault Strikes
Earthquake Information: Earthquake
Earthquake Payout Formula: Earthquake Part 2
Chicken & Egg Problem
One of the last things I’d like to quickly speak about is how the Y2K team got around the issue of starting vault collateralization. The issue at the opening of the initial epoch is the insurance buyers' lack of knowledge of how many funds there will be on the opposite side of the trade, as well as how much their position may be ”diluted” as others join the same vault. In order to compensate initial depositors for this information asymmetry, they will receive rewards boosted rewards decided by a bonding curve tracking each vault TVL, encouraging deposits in the infancy of an epoch and solving the chicken-and-egg problem that arises with most structured product markets.
Y2K Whitepaper: Y2K Whitepaper
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What is Tsunami? - Y2K Finance
Tsunami is a Collateralized Debt Obligation (CDO) powered lending market for pegged assets with MEV-proof liquidations. This product will take advantage and ownership of the debt that backs many of these assets. Tsunami adopts a GLP-like product where the collateral is pooled from various liquidity providers into a host liquidity pool, which provides users with a mechanism for aggregation of debt positions in multiple lending agreements. These aggregated agreements will be represented by Collateral-Debt Obligation (”CDO”) NFT tokens. Users who provide liquidity to the CDO NFT have exclusive access to the liquidation bot, where in the event of a leveraged position being liquidated, the yield generated by the liquidation event is passed on to them and is added to the yield they are already earning. With Tsunami, the host liquidity pool itself represents a dedicated loan underwriter that monitors, facilitates, and liquidates loan positions. When collateral nears liquidation, the protocol uses ETH from the y2kTOKENS as a backstop to make sure collateralization always remains above 110%. While the backstop collateral is deployed the liquidated CDO pool enters auction to be bid on privately in a sealed off-chain collateral repossession. Part of the profit from the liquidation event will be returned to the user; this attracts them to borrow from Y2K and not from the providers directly.
Wildfire
(This product won’t be available on launch. There isn't too much information out on this yet...)
Wildfire is an on-chain RFQ order book where users can trade Y2K risk tokens amongst themselves, both unlocking ample liquidity and allowing for rapid repricing of semi-fungible tokens.
This will be useful in that it will allow traders to speculate and profit on depegging sentiment in a secondary market without needing to lock in their positions. Tokenizing vault positions also gives initial depositors the option to take profits or stop out of positions. Wildfire allows for more flexibility when it comes to insurance buying and selling. People can hedge or underwrite outside of epoch times.
Additional Use Cases
One of the best/most obvious use cases for the Y2K product would be from DAOs and protocols hedging their money market risks. Y2K plans to work with protocols and DAOs to set up fully customizable vaults where the DAOs and protocols can sell insurance on the stability of their asset to their users. Users of their protocol would then be able to hedge their exposures on Y2K, being sure that their payouts would be honoured on-chain. Therefore, generating the following positive feedback loops:
- Builds user trust in the protocol, as the protocol themselves is putting up money to show confidence in the stability of their product.
- Provides ample liquidity for users to hedge their exposures in case of depeg.
- Creates a steady monthly revenue stream for the protocol in the event of no insurance payout.
- Expands the Y2K ecosystem/depth of liquidity.
Here is an example provided by Y2K of how a DAO could have hedged their UST exposure if they had been live during the UST depegging event:
Commitment To Security
The Y2K team has made clear time and time again that security is of the greatest concern to them. As such, Y2K has gotten audited by the following auditors:
- Three audits by Code4rena.
- One audit by Peckshield.
- Hired a lead engineer who was formally an auditor to help audit the Y2K contracts.
Doing the final round of audits with Code4Rena. Half of the audits are done. In addition, Y2K just partnered with Halborn to commission auditing for the Y2K Earthquake product. Halborn is a very well-respected auditing firm with a strong track record having audited many major Defi projects such as Solana, Polygon, Bancor, Sushi, and more. Lastly, the Y2K team has committed $50,000 for a public audit to be conducted. To learn more about how Y2K is protecting its users go here.
Code4rena: $50,000 Public Audit
Y2K Tokenomics
Some of the currently planned utility for the Y2K token is detailed below:
(Not aware of what supply, market cap, launch liquidity, etc… will be. This is all I know)
Fee Revenue
a. 5% fee from risk collateral yield (Claim fee). 70% of the 5% will go to Y2K treasury and 30% will be redistributed back to lockers.
b. 0.25% fee from premiums and collateral deposits. 70% of the 0.25% will go to Y2K token lockers and 30% will be redistributed back to the protocol
veY2K
a. Conviction locking for our strongest supporters and heaviest users.
b. Emissions allocations to incentives usage of specific vaults.
c. Revenue boosting based on lock duration.
d. Marketplaces for veY2K.
Governance and Bribery
a. Governing power over the addition of new assets and derivative products.
b. Opportunities to generate yield by selling rights to projects seeking inclusion.
C. Token holders will be able to dictate where portions of funds in money markets of their choice are allocated to supplement yield generation.
Roadmap
Shortly after launch, use-cases and functionality will be expanded to the following niches:
- Multichain stablecoins
- Rebasing mechanisms to prevent position dilution in each vault
- CDOs
- Peg arbitrage vaults
- Ability to lend semi-fungible risk tokens (for leverage and short-selling)
- Auto-compounding of Y2K hedge deposits
Closing Thoughts
As someone who personally suffered from the LUNA/UST collapse, I’m glad to see a fully on-chain crypto-native structured insurance product. I think it's about time we have this and it makes me think how many people could have been saved if we had Y2K sooner. In addition, I always get really excited seeing advancements in Defi, and this definitely a win for the space as a whole. The Y2K team is highly knowledgeable of the market dynamics and environment that come with the DeFi space. They know all the ins and outs of their product like no other team I’ve encountered before. To me, this demonstrates a great degree of investment in thought and time. I don’t think it takes much time for that point to be apparent and I’m sure this sentiment will become clear in the weeks and months to follow. The Y2K team knows what they're doing and I’m excited to see what more comes out of them. I’m also interested in seeing how the Y2K tokenomics play out in terms of specifying supply, FDV, etc… Doomsday is here and the Y2K team is ready to take the new world by storm.
Additional Links:
Whitepaper: Y2K Whitepaper
Twitter: Y2K Twitter
Discord: Y2K Finance Discord
Medium: Y2K Finance Medium
Blocmates x Y2K Youtube AMA: Y2K Finance | The Next Great Arbitrum Project | Hedge Against Pegged-Asset Risks | Stablecoin Risk
