March 14 2022 | 0xYaksha

# Abstract

This paper describes UKR, a DeFi protocol for an omnichain, capital-efficient, fractional algorithmic stablecoin.

Two Token model - UKR (the USD pegged stablecoin) + ukrLOVE (the governance token)

A governance-decided portion of protocol fees goes towards supporting refugees from 🇺🇦  crisis.

# UKR Collateralisation

UKR is a fractional stablecoin backed by a leveraged delta-neutral positions on perpetual exchanges(For e.g. TracerDAO, GMX, Futureswap, Perpetual protocol, etc.)

UKR protocol has a governance controlled Collateral ratio determining what % of UKR is backed by the delta-neutral positions.

For collateral assets, protocol can accept any asset as long there exist 2 different but independently liquid perpetual markets for the same asset. This also allows UKR to use completely decentralised assets as collateral without sacrificing stability.

# Mechanisms

UKR protocol allows users to deposit $1 worth of collateral to mint 1 UKR. Conversely UKR holders can redeem 1 UKR for $1 worth of value directly from the protocol.

## Minting UKR

1. The user deposits collateral in the form of ($90 worth of ETH + $10 worth of ukrLOVE) to UKR protocol(Given 1 ETH = $3000)
2. Optional - Protocol swaps ETH for 3000 USDC. This is done because most perpetual exchanges use USDC as collateral. Can be skipped if the perp protocol directly accepts ETH as coll.
3. Protocol uses the collateral/swapped USDC to open a leveraged delta-neutral position.
1. 50% of USDC(1500 USDC) is used as collateral to open a LONG position on GMX’s ETH/USD market on a 2x Leverage. 50% of USDC(1500 USDC) is used as collateral to open a SHORT position on futureswap’s ETH/USD market on a 2x Leverage
2. If a perp exchange, directly supports ETH as collateral without swapping(like Mango markets), then no need for leverage or opening a LONG position. Simply holding the asset itself can be equivalent to having a long position and would require a 1x short position to make it overall delta-neutral.
4. The user deposited ukrLOVE tokens are burnt
5. Protocol mints & issues 100 UKR to the user
6. User can transfer, exchange, store, bridge, and use the issued UKR anywhere within the DeFi ecosystem across multiple chains.

# Redeeming UKR

1. User deposits 100 UKR to be burnt by the protocol
2. Protocol unwinds the delta neutral positions on GMX + Futureswap to receive $90(minus fees) worth of collateral
3. Protocol mints $10(plus fees) worth of ukrLOVE
4. User is issued both collateral + ukrLOVE tokens to the user

# Delta-neutrality

Example

Given `ETH = $3000` and `UKR CR=0.9`

A user mints 3000 UKR in exchange for 0.9 ETH + $300 worth of ukrLOVE. Protocol swaps 0.9 ETH for 2700 USDC and open simultaneous long and short positions using 1350 USDC as collateral with 2x leverage.

- Long position - 2x leveraged ETH/USD gives a long exposure equal to that of 0.45 ETH
- Short position - 2x leveraged ETH/USD gives a short exposure equal to that of 0.45 ETH

Then there’s 3000 UKR in circulation

2 scenarios present -

1. Price of ETH increases to $3500, the long position $1000 in profit, whereas short position is $1000 in loss. Unwinding the positions returns $2700 - $1000 + $1000
2. Price of ETH decreases to $2500, the long position $1000 in loss, whereas short position is $1000 in profit. Unwinding the positions returns $2700 + $1000 - $1000

Both of these return back $2700(minus fees).

If the user redeems 3000 UKR, he’s able to exchange them for 2700(minus fees) in USDC collateral + 300(plus fees) in ukrLOVE tokens

# Insurance fund

UKR will maintain an insurance fund to deal with the below mentioned risks -

### Funding Rates

Perpetual exchanges have funding rates. More popular side pays the less popular side.

### Leveraged Liquidations on Perpetual exchanges

Leveraged long/short positions on perpetual exchanges can become vulnerable to liquidations in times of volatile price movements. however at the time the profit from the opposite position is equal to the loss and be used to reset/rebalance both positions at the current mark price.

# Price stability

### Arbitrage Mechanics

(Assume UKR `CR=0.85`)

- If $UKR > $1, mint 1 UKR by providing $1 worth of value($0.85 ETH + 0.15 ukrLOVE) and sell it on the open mkt for profit
- If $UKR < $1, buy 1 UKR from the open mkt, then redeem it for $1 worth of value(0.85 coll + 0.15 of ukrLOVE)

# ukrLOVE

ukrLOVE tokens are used for governance use cases within the protocol.

# Avoiding death spirals with UKR + ukrLOVE

Assume a sequence of events wherein CR rapidly spikes from a low value to a high value, right before or during an event where the market cap of ukrLOVE token plummets. Such an event could trigger a bank run

`Pending`

# Buy backs and Recollateralizations !!?!?

(Add additional coll. when CR increases for discounted ukrLOVE!)
`Pending`

# Omnichain functionality

UKR employs a custom natively multichain token contract built on top of corss-chain messaging technology provided by layerzero.

# Requirements + Risks

- Requires liquidity on the underlying derivatives exchange(s). ****If the underlying derivative exchanges experience significant illiquidity in their perpetual futures markets, at the same time that a large number of UKR holders are attempting to redeem UKR for crypto assets, there may be insufficient liquidity to immediately redeem UKR for crypto assets.
- Funding Rate imbalance b/w long and short positions

## Oracle risks

`Pending`