◻️Whitepaper
Bitcoin Liquidity Protocol
Contents
Abstract
Difficulty of establishing decentralized Bitcoin liquidity in the DeFi ecosystem
Combining Bitcoin liquidity on EVM chains using TSS architecture
Aggregation and yield generation of Bitcoin liquidity on xBTC using CSMM
Synergy and competition between xBTC and wBTC
Bitcoin yield generation using omnichain lending and borrowing
Establishment of omnichain xBTC
XD token
veXD token and omnichain governance
Liquidity incentive design of xBTC and XD
Security and risk assumptions
Future works
1. Abstract
LENX introduces an innovative omnichain Bitcoin liquidity protocol designed to facilitate permissionless transactions, including transfers, exchanges, lending, and borrowing of Bitcoin across multiple blockchains. LENX is meticulously engineered to address three critical areas in the current cryptocurrency landscape, thus enhancing Bitcoin's utility and accessibility beyond its native blockchain.
1. Decentralization and Distribution: LENX aims to reform the concept of wrapped Bitcoin by offering a more decentralized and distributed framework. Unlike existing solutions that rely heavily on centralized entities for wrapping Bitcoin, LENX ensures a trustless environment, enabling users to interact with Bitcoin across various blockchains without compromising on security or autonomy.
2. Enhanced Liquidity: LENX protocol is designed to significantly increase the liquidity of Bitcoin on alternative blockchains. By facilitating seamless and efficient liquidity pools across chains, LENX ensures that users have access to deeper markets for Bitcoin, enabling more robust and versatile trading strategies.
3. Extended Utility: LENX extends the utility of holding Bitcoin or its equivalent assets on chains other than its native network. Through innovative mechanisms such as cross-chain collateralization and yield-generating activities, users can leverage their Bitcoin holdings in diverse ways, unlocking new avenues for investment and financial growth.
The protocol harnesses the power of aggregation and sophisticated lending frameworks to promote the secondary utility of Bitcoin, thereby enhancing capital efficiency. By enabling the seamless flow of Bitcoin liquidity across multiple blockchains, LENX paves the way for a more interconnected and efficient cryptocurrency ecosystem. This approach not only broadens the scope of Bitcoin's applicability but also sets a new standard for cross-chain DeFi solutions.
2. Difficulty of establishing decentralized Bitcoin liquidity in the DeFi ecosystem
LENX introduces an advanced framework in the evolution of Bitcoin's interoperability with decentralized finance (DeFi) ecosystems, particularly addressing the limitations and challenges faced by previous generations of wrapped Bitcoin. This section delineates the progression from the first to subsequent generations of wrapped Bitcoin, culminating in the innovative solutions offered by LENX.
First Generation: BTC Defi 1.0 (wBTC)
Launched in January 2019, Wrapped BTC (wBTC) represented a collaborative effort between BitGo and Kyber Network to integrate Bitcoin liquidity within the Ethereum ecosystem. wBTC provided verifiable proof of reserves through a transparent mechanism, achieving a significant milestone with a circulating supply valued at approximately $6.8 billion. Despite its success in enhancing liquidity, wBTC operated under a centralized model, with minting and burning of the ERC20 BTC tokens restricted to a consortium of approved institutions, adhering strictly to KYC/AML protocols.
Addressing the centralization concern, the subsequent iteration of wrapped Bitcoin introduced a decentralized custodian model. This model eliminated the need for a central authority by employing a decentralized network of validators or signers, incentivized through network rewards to maintain the currency peg. In this architecture, Bitcoin is deposited into a threshold signature wallet, managed by these signers under the Stacks’ consensus mechanism, Proof of Transfer (PoX). This approach necessitated the use of secondary assets, like STX, to incentivize the maintenance of the network's integrity and security.
Second Generation: BTC Defi 2.0 (xBTC)
Despite advancements, Bitcoin holders faced challenges in generating meaningful yield through DeFi protocols. Traditional avenues like lending on AAVE offered minimal returns for wBTC, compounded by risks of impermanent loss when providing liquidity.
Solutions: tBTC and xBTC
tBTC sought to enhance utility and incentivize DeFi engagement through strategic incentives aimed at increasing trading volume and liquidity on decentralized exchanges (DEXs). This involved the use of concentrated liquidity deployment and a MEV Arbitrage engine, supported by an initial liquidity mining program using Threshold's T tokens to encourage early participation in tBTCv2.
Building on these advancements, xBTC emerged as a solution to the issues of distribution, decentralization, and utility by creating a liquidity pool of various wrapped Bitcoin types (tBTC, sBTC, wBTC) on stable swap pools. xBTC leverages liquidity mining incentives through transaction fee accrual and CRV rewards, further amplified by depositing these rewards into third-party protocols like Convex Finance for additional yield. The CRV tokens earned are instrumental in participating in Curve DAO governance, fostering a self-reinforcing ecosystem that incentivizes liquidity provision in the backing LP pools.
LENX: Unleashing DeFi's Potential
LENX positions itself as a pivotal force in the DeFi landscape by addressing key issues of decentralization, liquidity, and utility for Bitcoin in DeFi. LENX harnesses the capabilities of xBTC and other innovations to create a robust platform for Bitcoin liquidity, yield generation, and governance participation. With LENX, users can engage in a decentralized financial ecosystem that is both resilient and efficient, making it a formidable entity in the Curve ecosystem and beyond.
By integrating these advancements, LENX not only overcomes the limitations of previous Bitcoin wrapping solutions but also sets a new standard for Bitcoin's role in DeFi, enabling unprecedented levels of liquidity, utility, and decentralized governance.
3. Combining Bitcoin liquidity on EVM chains using TSS architecture
The Threshold Signature Scheme (TSS) represents a cornerstone in the cryptographic domain, enabling a distributed mechanism for key generation and signing that is pivotal for secure and decentralized digital transactions. This scheme permits a group of participants to collaboratively produce a signature on a document or message, where the resultant signature attains validity only when a predefined threshold of participants contributes their respective signature segments. TSS has been instrumental in enhancing security and trust in various blockchain applications, including the bridging of native Bitcoin to Ethereum Virtual Machine (EVM) networks.
TSS Mechanism and Application
TSS involves generating a unique public/private key pair for the participant group. The private key is securely divided into shares using algorithms like Shamir's Secret Sharing, a protocol ensuring that each participant holds a fragment of the private key. These shares are allocated such that only a group of participants meeting or exceeding the threshold can reconstruct the private key or sign messages. This distributed signing process culminates in the aggregation of the minimum required partial signatures to produce a full signature, verifiable via the group's public key. Major cryptocurrency platforms like Coinbase Wallet as a Service (WaaS) and BitGo utilize TSS to fortify their security frameworks, highlighting its importance in contemporary crypto custodianship and exchange operations.
LENX and TSS integration
LENX leverages TSS to facilitate the movement of Bitcoin and its variants across blockchains into the various EVM chains. This process involves creating a ERC20 token representation of Bitcoin on EVM, adhering to specific transactional guidelines to ensure compliance and functionality. For Bitcoin to be deposited into the ERC20 contract—and to optionally trigger smart contract execution—the transaction must include at least two outputs: one directed to the TSS Bitcoin address and another for a memo output using the OP_RETURN opcode. The memo output encapsulates the recipient's address within the smart contract on EVM intended for invocation, encoded in a byte array.
This bridging mechanism underscores a strategic approach to consolidating various forms of wrapped Bitcoin into a unified liquidity pool within the DeFi ecosystem. By amalgamating multiple Bitcoin representations, LENX not only simplifies user interaction with Bitcoin in DeFi but also diversifies the associated risks. Further innovation is anticipated with the development of LENX's native TSS, aiming to enhance interoperability across multiple EVM chains where canonical xBTC is present. This endeavor, detailed in the forthcoming sections of this whitepaper, signifies LENX's commitment to advancing blockchain technology and expanding Bitcoin's utility in the decentralized finance landscape.
4. Aggregation and yield generation of Bitcoin liquidity on xBTC using CSMM
LENX pioneers a comprehensive approach to aggregating Bitcoin (BTC) liquidity across various Ethereum Virtual Machine (EVM) chains, leveraging the innovative Curve Constant Sum Market Maker (CSMM) liquidity pools. This integration facilitates the minting of xBTC tokens against liquidity provider (LP) tokens obtained from a dedicated Curve pool, encompassing a spectrum of BTC derivatives. This mechanism not only rewards xBTC holders with CRV tokens but also ensures their ability to reclaim the underlying BTC through the redemption of the associated LP tokens.
Enhanced Liquidity and Governance Dynamics
The xBTC ecosystem is designed to incorporate a diverse array of LP tokens, each representing different facets of BTC liquidity within the Curve framework. This diversity allows the veXD token holders to strategically select LP tokens associated with higher-yielding opportunities through lending pools. Contrary to a direct one-to-one minting ratio with other BTC derivatives, LENX opts for a more nuanced approach by utilizing LP tokens. This strategy effectively distributes potential losses among xBTC holders, mitigating the risk of systemic failures and safeguarding both user assets and the integrity of the LENX protocol. In the event of a compromise within any BTC derivative, this loss distribution mechanism crucially prevents a cascading failure, thereby stabilizing the xBTC ecosystem.
Revenue Distribution and Protocol Incentivization
Revenue generated from CRV tokens within the xBTC pool is allocated to xBTC holders, with a portion of these earnings redirected to support the protocol's growth. This is achieved by converting a fraction of the CRV rewards into cvxCRV, subsequently used to influence Curve liquidity gauges in favor of xBTC-associated LP tokens. Additionally, the deployment of xBTC across emerging blockchains like Zetachain, Berachain, and Fraxtal aims to foster mutual growth by bolstering BTC liquidity and promoting cross-protocol synergy.
Reward Mechanism and Decentralized Governance
xBTC holders are further incentivized through XD token rewards, supplementing the CRV distributions. The allocation of these rewards is governed by veXD token holders, ensuring a transparent and community-driven reward distribution process.
Bridging and Interoperability
The integration of Threshold Signature Scheme (TSS) technology facilitates seamless bridging of native BTC to EVM chains, enhancing the user experience by simplifying the conversion process. For instance, native BTC bridged to any EVM chain can effortlessly interact with the native CSMM pool for xBTC, enabling straightforward withdrawals back to Ethereum as any type of BTC derivative. Additionally, bridged canonical BTC from Berachain for example, is represented as beraXBTC, which can be used to mint canonical xBTC on Ethereum, illustrating the protocol's commitment to interoperability and fluid asset movement across blockchains.
5. Synergy and competition between xBTC and wBTC
xBTC: A Synergistic Approach to Bitcoin Liquidity
xBTC is designed to augment the liquidity provided by wBTC, leveraging the established ecosystems of Curve and Convex. Curve, serving as the primary yield generator in DeFi, rewards liquidity providers with CRV tokens. These tokens, when locked as vote-escrowed CRV (veCRV), confer significant governance rights, particularly in determining the allocation of CRV reward emissions. LENX strategically backs its currency predominantly with wBTC, leveraging its liquidity to facilitate seamless transfers and redemptions between xBTC and wBTC, and even enabling the redemption of native BTC.
Integration with Curve and Convex: A DeFi Flywheel
Through its integration with Curve and Convex, LENX aims to guide pool rewards effectively, accumulating a consistent and growing revenue stream. This strategy includes minting pegged assets for pool participation and incentivizing other vlCVX holders through bribes, enhancing yield opportunities across the DeFi ecosystem. This approach not only solidifies LENX's position within the DeFi market but also encourages broader participation and investment in the protocol.
Enhancing Bitcoin's Utility in DeFi
xBTC plays a pivotal role in expanding Bitcoin's utility within the LENX ecosystem, enabling leverage of BTC-related assets in lending markets. This flexibility allows users to deploy various forms of BTC, such as sBTC and wBTC, as collateral or base assets, without the need for the protocol to create new base markets. The integration of TSS-enhanced liquidity with wBTC liquidity pools opens up new avenues for users to interact with Bitcoin in the DeFi space, further diversifying the options for leveraging Bitcoin assets.
6. Bitcoin yield generation using omnichain lending and borrowing
LENX introduces a pioneering approach to decentralized finance (DeFi) by integrating the robust mechanics of Compound protocol with the flexibility of multichain functionality. This integration facilitates the creation of dynamic money markets tailored for Bitcoin liquidity, enabling users to engage in lending and borrowing activities across multiple blockchains with algorithmically determined interest rates. This section outlines the mechanics of LENX's lending and borrowing ecosystem.
Multichain Money Markets and BTC Liquidity
At the heart of LENX's platform are the multichain money markets, specifically designed to optimize Bitcoin liquidity. These markets empower Bitcoin holders to lend their assets in exchange for competitive interest rates and XD token rewards. Borrowers, on the other hand, can collateralize various assets to secure loans in Bitcoin or its equivalent forms, adhering to ratios set forth by the protocol's governance mechanisms.
Example: xBTC/Frax Market Dynamics
In a practical scenario within the xBTC/Frax market, native BTC bridged to the platform is converted into xBTC through Curve LP. Borrowers may collateralize Frax to borrow xBTC, with the ability to redeem their collateral while paying interest, adhering to predefined collateral and liquidation ratios established by protocol governance.
Interest Rate Models and Governance
Interest rates for both lenders and borrowers are dynamically derived from two core models: the supply rate model and the borrow rate model. These models incorporate a base interest rate set by governance alongside the asset's utilization rate—defined as the ratio of total borrows to total supplies, reflecting market demand and supply dynamics. Each model features a "kink" to escalate interest rates past a specific utilization threshold, with interest accruing in real-time based on EVM’s block.timestamp.
Borrowing Capacity and Liquidation Mechanics
The borrowing capacity is determined by the borrow collateral factor (BCF), a governance-set variable dictating the maximum loan value relative to the collateral's value. Conversely, positions are subject to liquidation if their value falls below the liquidation collateral factor (LCF), another governance-determined metric ensuring a safety buffer between borrowing limits and liquidation thresholds. Liquidations are executed through the protocol's absorb function, allowing liquidators to acquire collateral at a discount, subsequently adjusting the borrower's balance to reflect the liquidation penalty.
Omni-chain Flexibility and BTC Integration
LENX leverages the omni-chain capabilities of xBTC to offer unparalleled flexibility in the Bitcoin lending and borrowing market. This approach enables the seamless lending, collateralization, and borrowing of various Bitcoin forms, including native BTC and wBTC, across any connected chain. Different BTC types are bridged as ZRC20 tokens, pooled within Curve, and subsequently utilized to mint xBTC for lending or collateralization. Borrowed BTC is redeemed in the desired form from the Curve pool, with withdrawals bridged to the specified chain.
7. Establishment of omnichain xBTC
xBTC aims to serve as the cornerstone for consolidating Bitcoin liquidity across various blockchain networks, thereby addressing the fragmentation currently experienced in the decentralized finance (DeFi) ecosystem. By enabling seamless cross-chain compatibility and fluid withdrawal processes, LENX positions xBTC as the pivotal liquidity nexus for all forms of Bitcoin existing on non-Bitcoin chains.
Cross-Chain Compatibility and Canonical Representation
To facilitate this seamless liquidity and interoperability, xBTC maintains its canonical status on the chain where it is originally minted. When bridged to another blockchain, it adopts a prefix indicative of its origin chain, ensuring clarity and traceability of assets across networks. For instance, xBTC originating from Berachain and bridged to Ethereum is designated as beraXBTC, while xBTC moved from Ethereum to Fraxtal is labeled ethXBTC on the Fraxtal network. This nomenclature not only preserves the integrity and origin of the token but also simplifies the user experience by providing a consistent representation of xBTC across different blockchains.
Seamless Bridging and Withdrawal Processes
The bridging mechanism ensures that each variant of xBTC, once transferred to a destination chain, is eligible for a one to one minting of the canonical xBTC on that respective chain. This process is designed to emulate a direct transfer of xBTC across blockchains, enhancing user experience by offering a unified and straightforward interaction model.
Moreover, the LENX ecosystem introduces a zapper contract mechanism to further streamline the withdrawal and conversion process. This feature allows users to convert and withdraw xBTC in their preferred format based on available liquidity on the target chain. For example, a user holding xBTC on Ethereum, backed by beraXBTC as collateral, can initiate a withdrawal to Berachain. This process can extend to facilitate the withdrawal of the bridged xBTC back to the native Bitcoin network in a single, efficient transaction.
8. XD token
The LENX ecosystem leverages the XD token as a pivotal component for incentivizing engagement and fostering the growth of its platform. This section delineates the mechanics, governance, and strategic implementation of the XD token within the LENX ecosystem, highlighting its role in rewarding users for various activities such as holding veXD tokens, possessing xBTC tokens, and participating in the lending protocol.
XD Tokenomics and Emission Strategy
The XD token is engineered with a governance-defined emission rate, meticulously calculated to ensure a balanced distribution of rewards within the ecosystem. Starting with an initial supply of 64 million XD tokens out of a maximum supply of 100 million, the protocol is designed to mint an additional 36 million tokens as rewards over a span of three years. This emission schedule is characterized by a halving event each year, a measure designed to sustain long-term value and engagement within the platform.
Emission Equation
The emission rate, denoted as ‘R’, represents the number of XD tokens minted per second, adhering to a predefined formula that takes into account the annual reduction in emission rate. 31,536,000 represent the number of seconds per year. This formula is pivotal in maintaining a consistent reward structure throughout the initial three-year period, ensuring that token distribution aligns with the ecosystem's growth and user engagement.
Reward Distribution Mechanism
Reward emissions are managed through a distributor contract, which allocates XD tokens according to the activities of users within the ecosystem. This allocation process is governed by specific gauges that dictate the distribution of rewards, ensuring that token emissions are aligned with the ecosystem's strategic objectives.
Multichain XD Rewards System
The XD token's multichain reward system exemplifies the token's interoperability and flexibility, enabling reward distribution across various blockchain networks. This system is managed by the main XD token contract on Ethereum, which coordinates the emission and distribution of XD tokens to other chains through a multichain reward control contract. The deployment of rewards to networks such as Berachain is facilitated by automated decentralized schedulers, for instance, Chainlink Keepers, ensuring timely and efficient reward distribution. Moreover, the XD tokens awarded on auxiliary chains can be seamlessly repatriated to Ethereum, showcasing the token's fluidity and the ecosystem's interconnected nature.
Transition to Protocol Revenue and Supply Flexibility
After the initial three-year period, the XD token's emission-based rewards are slated to transition towards a model sustained by protocol revenue. This evolution will be elaborated upon in the future works section of this whitepaper. Additionally, while the XD token's maximum supply is initially set at 100 million, a provision exists to elevate this cap to 200 million, subject to governance approval. This flexibility allows the ecosystem to adapt its token supply in response to evolving demands and opportunities, ensuring the long-term viability and prosperity of the LENX protocol.
9. veXD token and omnichain governance
The LENX Decentralized Autonomous Organization (DAO) represents a foundational pillar in the governance and strategic decision-making processes within the LENX ecosystem. This section elaborates on the mechanisms and principles guiding participation in the LENX DAO, emphasizing the role of vote-escrowed XD (veXD) tokens, the proposal execution framework, and the multifaceted utility of veXD across the ecosystem.
veXD Token Mechanics and Governance Participation
Participation in LENX's DAO governance is facilitated through veXD tokens, akin to the veCRV model employed by Curve Finance. veXD tokens are non-transferable and exhibit a linear decay in value correlating with the time remaining until token unlock. This model ensures that longer commitments to the protocol are rewarded with greater influence in governance decisions. For instance, locking 4 XD tokens for one year yields an equivalent amount of veXD as locking 1 XD token for four years. Accounts have the flexibility to select their staking duration within a range from 1 week to a maximum of 208 weeks, equivalent to 4 years.
Proposal and Voting Framework
Governance proposals within the LENX DAO are structured as executable code, set to be implemented upon successful passage through the governance framework. These proposals undergo a 3-day voting window, allowing veXD holders to cast votes in favor or against. A majority vote in favor leads to the proposal being scheduled into a timelock, becoming executable after a 2-day waiting period. This structured approach ensures a transparent, secure, and democratic governance process, allowing for the deliberate execution of community-driven decisions.
veXD Utility and Governance Actions
veXD tokens serve as a versatile tool within the LENX ecosystem, granting holders the right to vote on key governance decisions. These decisions span a broad spectrum, including but not limited to, adjustments to financial parameters such as borrow and liquidation collateral factors, the integration of new asset types into the xBTC framework, and the distribution of XD rewards across different chains and functionalities. This broad utility underscores the central role of veXD in steering the ecosystem's development and strategic direction.
Cross-Chain Staking and Governance
The LENX platform acknowledges the importance of cross-chain functionality and has implemented a veXD aggregator contract on each supported blockchain. This aggregator unifies an account's veXD balances across all chains where veXD is present, using the aggregated balance for governance purposes on each respective chain. Consequently, staking XD on the Ethereum mainnet offers equivalent governance rights and benefits as staking on other EVM-compatible chains, such as Berachain. This cross-chain staking mechanism not only enhances the flexibility and accessibility of governance participation but also fosters a unified and coherent strategic vision across the diverse landscapes of the LENX ecosystem.
10. Liquidity incentive design of xBTC and XD
The cornerstone of the protocol’s incentive strategy is the encouragement of xBTC liquidity across various chains, capitalizing on the unique proposition of xBTC as a multichain-compatible asset. Chains hosting LENX lending pools stand to benefit from integrating xBTC, as these pools are designed to support the borrowing and lending of the chain’s native tokens against xBTC. This symbiotic relationship between xBTC and network tokens enhances the liquidity and utility of both assets within the ecosystem, effectively providing a "liquidity-as-a-service" model. The backing of xBTC by CRV, FXS and XD rewards creates a compelling case for chains to foster xBTC liquidity, thereby enhancing the desirability of their native tokens for lending and borrowing activities. In turn, xBTC ultimately increases capital efficiency and lending interest for Bitcoin holders.
CRV and XD Reward Mechanism
The incentive model extends to the accrual and distribution of CRV rewards, derived from xBTC’s participation in Curve’s Constant Sum Market Maker (CSMM) liquidity pools. A portion of these CRV rewards is strategically allocated for bribing vlCVX holders to secure Curve gauge votes in favor of xBTC-related liquidity pools. This mechanism enhances the visibility and attractiveness of xBTC within protocols of a given chain.
Furthermore, the accumulation of veXD emerges as a pivotal strategy for chains and protocols alike, aiming to amplify xBTC liquidity and foster a deeper engagement with the ecosystem. By accumulating veXD, entities can incentivize increased liquidity for xBTC on their respective chains and bolster interest in their native tokens. This strategic accumulation serves as a leverage to enhance the overall attractiveness and functionality of xBTC, aligning the interests of various stakeholders within the DeFi landscape.
11. Security and risk assumptions
Smart Contract Vulnerability
The operations of yield farming are heavily reliant on the integrity of smart contracts. Given the complexity of these contracts, they are susceptible to bugs or vulnerabilities, potentially leading to substantial financial losses. It is imperative that these contracts undergo rigorous testing and auditing processes to identify and rectify potential security flaws before deployment.
Impermanent Loss Exposure
Liquidity providers face the risk of impermanent loss, which occurs due to fluctuations in the relative value of assets within a pool. This phenomenon can result in a temporary devaluation of a provider's assets compared to holding the assets outside the pool. Strategies to mitigate this risk include choosing pools with less volatile assets or those offering compensatory rewards that can offset potential losses.
Market Volatility Impact
The DeFi ecosystem is characterized by its high volatility, which can significantly affect the profitability of yield farming strategies. Sudden shifts in market conditions can render certain strategies unprofitable, necessitating constant vigilance and adaptability from participants to navigate these changes effectively.
Dependency on External Partners
LENX's infrastructure relies on external entities such as blockchain networks, oracle services, and bridge protocols. The security and operational integrity of these partners are crucial, as any compromise could adversely affect LENX's functionalities. Continuous monitoring and diversification of dependency on external services are essential to manage this risk.
Liquidation Risk in Leveraged Positions
Engaging in leveraged yield farming amplifies the risk of liquidation, should the value of the collateral fall below a predetermined threshold. This necessitates careful management of leverage ratios and continuous monitoring of market conditions to avoid unexpected liquidations.
Threshold Signature Scheme (TSS) Vulnerabilities
The adoption of TSS for enhancing security and decentralization of BTC derivatives also introduces exposure to potential vulnerabilities, including both known issues and unforeseen exploits (e.g., TSHOCK). Ongoing research, development, and collaboration with security experts are critical to fortify the TSS implementation against such vulnerabilities.
12. Future works
Native TSS Implementation for Bitcoin Bridging
LENX is committed to enhancing the interoperability between the Bitcoin network and various blockchain ecosystems. A key initiative involves deploying a "plug and play" Threshold Signature Scheme (TSS) that facilitates the seamless bridging of Bitcoin (BTC) to partner networks. This innovation enables other chains to effortlessly integrate this mechanism, thereby allowing the minting of xBTC—a tokenized representation of BTC on the LENX platform.
Collateralized Debt Positions with FRAX
Following the establishment of xBTC's cross-chain functionality, LENX aims to introduce a Collateralized Debt Position (CDP) system, leveraging xBTC as collateral to mint a stablecoin backed by FRAX. This system permits users to convert xBTC into FRAX upon reaching a specified collateral threshold, maintaining an over-collateralized stance to ensure the stability of the newly minted xCDP. The xCDP then serves as a versatile financial instrument, enabling users to generate yield through mechanisms such as staking in sFRAX or participating as a liquidity provider in Curve pools. This model not only enhances revenue for the protocol through borrower interest but also allocates a portion of these profits for XD token burn or distribution to veXD holders, aligning with the protocol's value accrual strategy.
Perpetual xBTC
LENX is exploring options to expand its DeFi offerings in the future by introducing two novel BTC derivative assets, drawing inspiration from the f(x) Protocol's approach with ETH. We will create a lower-volatility asset, xsBTC, and a higher-volatility asset, xlBTC, by partitioning BTC collateral. By setting the volatility constraint for xsBTC to β < 1, specifically at 0.1, this asset will offer growth potential while maintaining stablecoin-like volatility levels. Conversely, the leveraged BTC derivative will operate as a long perpetual future contract with zero funding costs and adjustable leverage, designed to meet the demand for leveraged BTC positions. This system will be underpinned by a robust mix of pure BTC and highly liquid staked BTC derivative collateral, ensuring it remains unaffected by centralized risks associated with real-world assets. The introduction of xpBTC (perpetual xBTC) is anticipated to quickly achieve maximum liquidity, surpassing that of CDP-issued stablecoins, due to its appeal to users seeking leveraged exposure to BTC without the drawbacks of maintenance and capital inefficiency typically associated with CDPs.
Sustainability without XD Token Emissions
With the XD token emission schedule set to reach its fully diluted supply within three years, LENX is strategizing to develop sustainable revenue streams. These streams will originate from multichain lending operations, CDP engagements, and yield-generating activities with xBTC. This approach is designed to maintain rewarding incentives for token holders post-emission period. Additionally, governance has the flexibility to adjust the timeline for reaching full dilution, given the hard cap of 200 million tokens compared to the initial maximum supply of 100 million.
Dynamic Interest Rates in Lending Protocol V2
The forthcoming Version 2 of the LENX lending protocol will introduce dynamic interest rates for lenders based on the duration of their locked positions, ranging from 2 to 208 weeks. This feature aims to incentivize longer-term commitments by offering higher interest rates for extended lock periods. Furthermore, the protocol will possess the capability to algorithmically reallocate unutilized lending capital to other yield-generating protocols, optimizing returns based on the length of the lock period. This strategic redeployment underscores LENX's commitment to maximizing yield efficiency and enhancing lender rewards within its ecosystem.
Through these initiatives, LENX is poised to significantly broaden the utility of Bitcoin in the DeFi sector, fostering a more interconnected and financially robust blockchain ecosystem.
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