Like some pioneering DeFi protocols before us, Lydian wants to launch a free-floating reserve currency (LDN) backed by a variety of assets. By focusing on supply growth rather than price appreciation, Lydian hopes that LDN can function as a currency capable of maintaining its purchasing power regardless of market volatility.
Unlike most stablecoins, the impact of price depreciation of the US dollar will be significantly less for LDN, since its value is backed by a variety of assets.
Lydian will grow as the ecosystem grows. Lydian's treasury should be used in various farming opportunities in the ecosystem, while also maintaining the RFV. This will benefit the Lydian community by investing the income that flows into the treasury. It will also benefit the Stacks ecosystem because Lydian's treasury results in TVL and protocol revenue.
No, LDN is not a stablecoin. Rather, LDN represents a share in the Lydian DAO and underlying treasury. As the treasury grows, your share becomes more valuable. You'll also be earning rebase rewards through the underlying mechanism of protocol owned liquidity.
Each LDN is backed by the assets in the treasury. Because the treasury backs every LDN, the protocol would buy back and burn LDN when it trades below the treasury backed value. This has the effect of pushing LDN price back up to the treasury backed value.
You might say that the LDN floor price or intrinsic value is equal to the treasury value. We believe that the actual price will always be above the treasury value, but in the end that is up to the market to decide.
At a high level, Lydian consists of its protocol managed treasury, protocol owned liquidity (POL), bond mechanism, and staking rewards that are designed to control supply expansion.
Bond sales generate profit for the protocol, and the treasury uses the profit to mint LDN and distribute them to stakers. With liquidity bonds, the protocol is able to accumulate its own liquidity. Check out the entry below on the importance of POL.
(3,3) is the idea that, if everyone cooperated in Lydian, it would generate the greatest gain for everyone (from a game theory standpoint). Currently, there are three actions a user can take:
- Staking (+2)
- Bonding (+1)
- Selling (-2)
Staking and bonding are considered beneficial to the protocol, while selling is considered detrimental. Staking and selling will also cause a price move, while bonding does not (we consider buying LDN from the market as a prerequisite of staking, thus causing a price move). If both actions are beneficial, the actor who moves price also gets half of the benefit (+1). If both actions are contradictory, the bad actor who moves price gets half of the benefit (+1), while the good actor who moves price gets half of the downside (-1). If both actions are detrimental, which implies both actors are selling, they both get half of the downside (-1).
Thus, given two actors, all scenarios of what they could do and the effect on the protocol are shown here:
- If we both stake (3, 3), it is the best thing for both of us and the protocol (3 + 3 = 6).
- If one of us stakes and the other one bonds, it is also great because staking takes LDN off the market and put it into the protocol, while bonding provides liquidity and USDA for the treasury (3 + 1 = 4).
- When one of us sells, it diminishes effort of the other one who stakes or bonds (1 - 1 = 0).
- When we both sell, it creates the worst outcome for both of us and the protocol (-3 - 3 = -6).
As the protocol controls the funds in its treasury, LDN can only be minted or burned by the protocol. This also guarantees that the protocol can always back 1 LDN with treasury assets. You can easily define the risk of your investment because you can be confident that the protocol will indefinitely buy LDN below the treasury value with the treasury assets until no one is left to sell. You can't trust the FED but you can trust the code.
As the protocol accumulates more TBV, more runway is guaranteed for the stakers. This means the stakers can be confident that the current staking APY can be sustained for a longer term because more funds are available in the treasury.
Lydian owns most of its liquidity thanks to its bond mechanism. This has several benefits:
- Lydian does not have to pay out high farming rewards to incentivize liquidityproviders a.k.a renting liquidity.
- Lydian guarantees the market that the liquidity is always there to facilitatesell or buy transaction.
- By being the largest LP (liquidity provider), it earns most of the LP fees whichrepresents another source of income to the treasury.
- All POL can be used to back LDN. The LP tokens are marked down to their risk-freevalue for this purpose. You can read more about the rationale behind this in this
It is extremely important to understand how early in development the Lydian protocol is. A large amount of discussion has centered around the current price and expected a stable value moving forward. The reality is that these characteristics are not yet determined. The network is currently tuned for expansion of LDN supply, which when paired with the staking, bonding, and yield mechanics of Lydian, result in a fair amount of volatility.
LDN could trade at a very high price because the market is ready to pay a hefty premium to capture a percentage of the current market capitalization. However, the price of LDN could also drop to a large degree if the market sentiment turns bearish. We would expect significant price volatility during our growth phase so please do your own research whether this project suits your goals.
Rebase is a mechanism by which your staked LDN balance increases automatically. When new LDN are minted by the protocol, a large portion of it goes to the stakers. Because stakers only see staked LDN balance instead of LDN, the protocol utilizes the rebase mechanism to increase the staked LDN balance so that 1 staked LDN is always redeemable for 1 LDN.
Reward yield is the percentage by which your staked LDN balance increases on the next epoch. It is also known as rebase rate. You can find this number on the Lydian staking page.
APY stands for annual percentage yield. It measures the real rate of return on your principal by taking into account the effect of compounding interest. In the case of Lydian, your staked LDN represents your principal, and the compound interest is added periodically on every epoch thanks to the rebase mechanism.
One interesting fact about APY is that your balance will grow not linearly but exponentially over time! Assuming a daily compound interest of 2%, if you start with a balance of 1 LDN on day 1, after a year, your balance will grow to about 1377. That is a lot!
Return on investment of 1 LDN after 1 year, showing the effect of compounding yields.
The APY is calculated from the reward yield (a.k.a rebase rate) using the following equation:
It raises to the power of 1095 because a rebase happens 3 times daily. Consider there are 365 days in a year, this would give a rebase frequency of 365 * 3 = 1095.
Reward yield is determined by the following equation:
The number of LDN distributed to the staking contract is calculated from LDN total supply using the following equation:
Note that the reward rate is subject to change by the protocol. For example, it has been revised due to this latest proposal.
Let’s say the protocol targets an APY range of 1,000% to 10,000%, this would translate to a minimum reward yield of about 0.2105%, or a daily growth of about 0.6328%. Please refer to the equation above to learn how APY is calculated from the reward yield.
If there are 10,000 of LDN staked right now, the protocol would need to mint an additional 63.28 LDN to achieve this daily growth. This is achievable if the protocol can bring in at least $63.28 of daily revenue from bond sales or yield farming. Even if the protocol doesn't bring in that much revenue, it can still sustain 1,000% APY for a considerable amount of time (see the runway chart for instance) due to the excess reserve in the treasury.
No. Once you have staked LDN with Lydian, your staked LDN balance will auto-compound on every epoch. That increase in balance represents your rebase rewards.