Zero is a decentralized protocol that enables you to borrow ZUSD—a USD-pegged stablecoin—with zero interest using BTC as collateral. The loan must be maintained at a minimum collateral ratio (collateral/debt) of 110%. BTC must be transferred to the Rootstock bitcoin sidechain in the form of RBTC to be used as collateral.
The Zero protocol is non-custodial, censorship-resistant, and governed by stakers. The protocol is operated purely by smart contracts with no central controlling entity. As with the rest of the Sovryn ecosystem, users interact directly with the Zero protocol with no KYC. Therefore, it is censorship-resistant and under the control of Bitocracy.
Stablecoins have become a key component of decentralized finance, currently valued at over a hundred billion dollars and enabling cross-chain transactions as well as access to fiat currency equivalents. Zero offers a capital efficient, user-friendly, and decentralized way to borrow stablecoins. ZUSD is the USD-pegged stablecoin used to issue loans on the Zero protocol. It can be redeemed at any time for the underlying RBTC collateral at face value.
Zero requires less collateral than other systems. Instead of liquidating your RBTC to access its value, you can deposit your RBTC in the protocol while continuing to own it, borrow against the collateral to withdraw ZUSD, and then repay your loan whenever you like. Once you have ZUSD, you can swap it for dollars and pay off a loan or make a purchase. You can even use it to buy more bitcoin.
Key benefits of Zero include:
Users can invest with Zero in several ways:
Zero only charges one-time fees. An origination fee is charged when ZUSD is borrowed, and a redemption fee is charged when ZUSD is redeemed:
Both fees vary as a function of redemption volumes. They increase with each redemption in proportion to the redeemed amount, and they decay over time as long as no redemptions take place. Higher fees discourage both large redemptions and borrowing immediately after large redemption volumes. The fee gradually decays so borrowers and redeemers will pay less when redemption volumes are low.
The fees will not fall below 2.5%, except in Recovery Mode. The fee floor prevents arbitrageurs from misusing the redemption function by front-running the price feed. The origination fee can go no higher than 5% so that loans do not become too unattractive for borrowers even when the monetary supply contracts due to redemptions. With the exception of the origination fee cap, the origination and redemption fees are identical. A typical fee variation over time is shown below.
Because the system is non-custodial, all user funds deposited to the protocol are held and managed by the smart-contract system without involving a person or legal entity. That means your funds are handled according to the rules coded into the smart contract. These smart contracts are available for review in the Sovryn Github. The code has been audited twice by Trail of Bits, once by Coinspect, and once by Chainsulting (see audits).
You could lose some of your funds in the following situations:
Although the system is carefully audited, the possibility of a hack or a bug that results in losses for users can never be fully eliminated (see disclaimer).
To borrow ZUSD, all you need is an RSK-compatible wallet and sufficient RBTC collateral to act as security for your debt. Zero only supports RBTC as collateral. With your connected wallet, you can open an LoC. In addition to an origination fee, you will pay a small gas fee in RBTC to fuel the transaction on RSK. A minimum debt of 200 ZUSD is required.
Loans issued by Zero have no repayment schedule. You can repay your debt whenever you choose as long as you maintain a collateral ratio of at least 110%. The collateral ratio is defined as the ratio between the USD value of the collateral in your LoC and the LoC debt in ZUSD. Zero is able to offer such a low minimum collateral ratio because it makes liquidation instantaneous and more efficient, providing the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.
The Zero system requires no interest because it enables you to borrow from yourself. ZUSD tokens are essentially certificates you issue to yourself that represent a claim on a specific value of RBTC denominated in USD.The borrowed ZUSD has no opportunity cost because it is minted rather than diverted from another use. The loan has no carrying costs; it is simply recorded in the blockchain, awaiting the execution of a smart contract to unlock the assets. The risk of the loan is borne entirely by the borrower—since the borrower's assets are locked.
The protocol is supported by one-time origination fees and redemption fees that are set algorithmically based on recent redemption volume in the protocol.
An LoC is a ledger where you take out and maintain your loan. LoCs are similar to Vaults, CDPs, or Troves found on other platforms. LoCs maintain two balances: one is an asset (RBTC) acting as collateral; the other is a liability (ZUSD) that defines the debt. You can change the amount of either balance by adding or withdrawing collateral and borrowing or repaying debt. As you change these balances, your LoC collateral ratio changes as well. You can close your LoC at any time by repaying your debt in full.
Whenever you withdraw ZUSD from your LoC, a one-time origination fee is applied to the amount withdrawn and added to your debt. This fee is set algorithmically, with a minimum value of 2.5% ordinarily. The fee is 0% during Recovery Mode. A 20 ZUSD Liquidation Reserve charge is applied as well but is returned when you repay your debt.
The origination fee is specified by a baseRate, which is the algorithmically determined rate at or above the 2.5% floor. Thus, baseRate + 2.5% is the fee rate. The fee rate is restricted to a range between 2.5% and 5% and is multiplied by the amount of liquidity withdrawn by the borrower to determine the origination fee.
Example: The origination baseRate stands at 0% and the borrower requests 4000 ZUSD from his open LoC. After deducting the 20 ZUSD Liquidation Reserve, the amount of liquidity being withdrawn is 3980-fee, and the fee rate is applied to 3980-fee. Therefore, the fee is calculated by satisfying the relationship (baseRate + 0.025)*(3980 - fee) = fee, or fee = (baserate+0.025)/(1+baseRate+0.025)*3980, which results in a fee of 97.07 ZUSD. After the fee of 97.07 ZUSD is deducted, the borrower obtains a net of 3902.93 ZUSD. Since 20 ZUSD is set aside as a Liquidation Reserve charge, the amount available to withdraw is 3902.93-20.00=3882.93 ZUSD.
Under ordinary operations the fee rate is expected to remain at or near 2.5%.
Your LoC collateral ratio is the ratio between the USD value of the collateral in your LoC and the LoC debt in ZUSD. The collateral ratio of your LoC will fluctuate as the price of RBTC changes. You can change the ratio by adjusting your RBTC collateral or changing the level of your debt.
Example: Suppose the current price of RBTC is $40,000 and you decide to deposit 3 RBTC. If you borrow 30,000 ZUSD, then the collateral ratio for your LoC would be 3*40,000/30,000 = 400%.
If you instead took out 80,000 ZUSD, your ratio would be 150%.
The minimum collateral ratio (MCR) is the lowest ratio of collateral to debt allowed before a liquidation is triggered under normal operations (Normal Mode). This is a protocol parameter, currently set to 110%. If your LoC has a debt of 10,000 ZUSD, for example, you must maintain at least $11,000 worth of RBTC as collateral in your LoC to avoid being liquidated.
In Recovery Mode, the MCR is raised to 150%. Therefore, you should keep the ratio well above 150% to avoid liquidation in case the protocol enters Recovery Mode. A collateral ratio of 200% or higher is recommended.
Your LoC is subject to liquidation if your collateral ratio falls below the MCR. If that happens, you will lose your collateral but will no longer have a debt in ZUSD. If your debt is liquidated, you will no longer be able to retrieve your collateral by repaying your debt. Because your collateral is worth 110% of your debt at liquidation, this results in a net loss of 9.09% (= 100% * 10 / 110) of the dollar value of your collateral.
If the protocol is in Recovery Mode your LoC is subject to liquidation if your collateral ratio is below 150%. In that case, liquidation loss is capped at 110% of LoC debt. Any remaining collateral above 110% of debt can be reclaimed by the liquidated borrower using the standard web interface. This means that a borrower will face the same liquidation penalty (10%) in Recovery Mode as in Normal Mode if an LoC is liquidated.
When you open an LoC and obtain a loan, 20 ZUSD is set aside as a Liquidation Reserve to compensate gas costs for the transaction sender if your LoC is liquidated. The Liquidation Reserve is fully refundable if your LoC is not liquidated and is refunded to you when you close your LoC by repaying your debt. The Liquidation Reserve counts as debt and factors into the calculation of your LoC collateral ratio, slightly increasing the actual collateral requirements.
If an LoC is liquidated and the Stability Pool is empty (or gets emptied in the process of the liquidation), you may discover that the collateral and debt of your LoC has increased without your intervention. If a liquidation occurs and the Stability Pool is empty, every borrower will receive a portion of the liquidated collateral and debt as part of a redistribution process. This will generally result in a gain because the liquidation of the collateral is triggered at 110% of the debt.
If the ZUSD market price falls enough below the value of USD, an arbitrage opportunity is created to redeem ZUSD for RBTC and then sell the RBTC for a higher USD price. In essence, redeemers buy RBTC at a discount. This action will tend to close the gap between the ZUSD price and USD and is an intentional part of the peg mechanism. When ZUSD is redeemed, the RBTC sold to the redeemer is allocated from the LoC(s) with the lowest collateral ratio (even if it is above 110%). If you have the LoC with the lowest ratio at the time of redemption, you will lose some of your collateral, but your debt in ZUSD will be reduced by the same face-value amount.
The USD value of the RBTC collateral you give up corresponds to the nominal ZUSD amount repaid on your LoC’s debt. You can interpret a redemption as another party repaying your debt and being reimbursed an equivalent amount of your collateral. The net value of your LoC does not change, but your debt in ZUSD and your collateral in RBTC are reduced by the same value. As a positive side effect, a redemption increases the collateral ratio of the affected LoC, making it less exposed to liquidations or further redemptions. Borrowers can avoid losing assets to a redemption by maintaining a high collateral ratio relative to the other LoCs in the system. The riskiest LoCs are the lowest-collateralized LoCs; these are first in line when a redemption takes place.
Redemptions that do not fully repay the debt of an LoC are called partial redemptions; redemptions that fully pay off the debt are called full redemptions. In a full redemption, your LoC is closed, and you can claim your remaining collateral at any time.
Example: You own an LoC with 2 RBTC collateral and a debt of 65,000 ZUSD. The current price of RBTC is $40,000. This puts your collateral ratio (CR) at 123% (= 100% * (2 * 40,000) / 65,000). Suppose this is the lowest CR in the Zero system and consider partial and full redemptions:
Someone redeems 15,000 ZUSD for 0.375 RBTC and thus repays 15,000 ZUSD of your debt, reducing it from 65,000 ZUSD to 50,000 ZUSD. In return, 0.375 RBTC, worth $15,000, is transferred from your LoC to the redeemer. Your collateral decreases from 2 to 1.675 RBTC, while your collateral ratio goes up from 123% to 134% (= 100% * (1.675 * 40,000) / 50,000).
Someone redeems 120,000 ZUSD for 3 RBTC. Given that the redeemed amount is larger than your debt minus 20 ZUSD (your Liquidation Reserve), your debt of 65,000 ZUSD is entirely cleared and your collateral gets reduced by $64,980 of RBTC, leaving you with a collateral of 0.38 RBTC (= 2 - 64,980 / 40,000 ) that you can claim. Your Liquidation Reserve is burned to pay off the final $20 of debt not redeemed for RBTC collateral.
The Stability Pool is the first line of defense in maintaining system solvency. It achieves that by acting as the source of liquidity to repay debt from liquidated LoCs—ensuring that the total ZUSD supply always remains fully collateralized.
When any LoC is liquidated, the ZUSD debt in the LoC is paid from the Stability Pool. The debt is canceled, and the corresponding ZUSD from the Stability Pool is burned. In exchange, the Stability Pool receives the entire collateral from the LoC.
The Stability Pool is funded by users transferring ZUSD into it (called Stability Providers). As liquidations occur, Stability Providers pay off loans in ZUSD from the Stability Pool and gain RBTC collateral in the process. Over time they lose a pro-rata share of their ZUSD deposits, while gaining a pro-rata share of the liquidated RBTC collateral.
Because LoCs are likely to be liquidated at just below 110% collateral ratios, Stability Providers can expect to receive a greater USD value of RBTC collateral than the ZUSD debt they pay off. This provides an incentive for investors to provide ZUSD to the Stability Pool. To become a Stability Pool depositor, you need to have ZUSD. You can borrow ZUSD by opening an LoC, or you can buy ZUSD on the open market.
Zero uses a liquidation process to maintain full collateral backing of the entire stablecoin supply. LoCs that fall under the minimum collateral ratio (MCR) of 110% will be closed (liquidated). The debt of the LoC is paid off by burning ZUSD from the Stability Pool, and in exchange the LoC RBTC collateral is distributed among Stability Providers.
The owner of the LoC keeps all the borrowed ZUSD but loses all the RBTC collateral, amounting to a loss of ~10% value overall. Thus, a borrower should always keep the ratio above 110%. Above 150% is recommended to maintain a safe margin.
To maintain decentralization of the system, the protocol incentivizes third parties to monitor LoCs and liquidate those that become undercollateralized. Anyone can liquidate an LoC as soon as it drops below the MCR, a process that can be done either manually or with a bot. The initiator receives a gas compensation (20 ZUSD + 2.5% of the LoC collateral) as a reward for this service.
The liquidation of LoCs requires gas costs that the initiator must cover. The protocol offers a gas compensation given by the following formula:
gas compensation = 20 ZUSD + 2.5% of LoC collateral (RBTC)
The 20 ZUSD is the Liquidation Reserve set aside in the borrowing process. The variable 2.5% part (in RBTC) is taken from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.
The ability to redeem ZUSD for RBTC at face value (1 ZUSD can be exchanged for 1 USD of RBTC) creates a price floor of 1 USD, and the ability to borrow ZUSD at the minimum collateral ratio of 110% creates a price ceiling through arbitrage. If the price rises about 1.10 USD, an arbitrageur can borrow ZUSD with 110% RBTC collateral that gets liquidated but then purchase more than the lost RBTC with the ZUSD that is worth more than 110% of the USD value of the collateral. We call these "hard peg mechanisms" because they are based on direct processes.
ZUSD also benefits from less direct mechanisms for maintaining the peg to USD. These are called "soft peg mechanisms". One soft-peg mechanism is a 1:1 peg as a Schelling point. Since Zero treats ZUSD as being equal to USD, parity between the two is an implied equilibrium state of the protocol. Another of these mechanisms is the variable origination fee on new debts. As redemptions increase (implying ZUSD is below 1 USD), the baseRate increases as well. Borrowing becomes less attractive, and the rate of borrowing slows. Less ZUSD comes onto the market, and the reduced supply drives the price back up toward 1 USD.
In the Sovryn ecosystem, ZUSD can be converted directly to and from XUSD with a 1:1 value, which allows XUSD to share in maintaining the peg to USD.
A redemption is the process of exchanging ZUSD for RBTC at face value, treating 1 ZUSD as worth exactly 1 USD. In a redemption of X ZUSD you get X USD worth of RBTC in return. Users can redeem their ZUSD for RBTC at any time with no limitations.
Redemption is a completely different process from paying back a debt. Anyone who holds ZUSD can redeem it for RBTC. A borrower, on the other hand, deposits ZUSD into the corresponding LoC to pay back a debt is deposit. The process of repaying a debt is always free, whereas redemptions are usually charged a fee.
Under normal operation, the redemption fee (in RBTC) is given by the formula (baseRate + 2.5%) * RBTCdrawn
Redemption fees are based on the baseRate state variable in Zero, which is dynamically updated. The baseRate increases with each redemption and decays according to time passed since the last fee event — either the last redemption or loan of ZUSD.
Upon each redemption:
Example: Suppose the current redemption fee is 3%, and the price of RBTC is $50,000. If you redeem 10,000 ZUSD, you will receive 0.194 RBTC (0.2 RBTC minus a redemption fee of 0.006 RBTC).
Note that the redeemed amount itself is taken into account for calculating the baseRate and might have a noticeable impact on the redemption fee applied in the current transaction, especially if the amount is large.
Zero uses two different price oracles to determine the USD price of BTC for the purposes of liquidations and redemptions: a primary oracle (Money On Chain) and a secondary oracle (RSK Oracle) that will be used if the primary oracle does not report prices for longer than four hours. If both oracles go offline for more than four hours, the last reported price is used until both oracles come back online and report prices within 5% of each other. SOV Bitocracy can be used to replace either or both oracles if they are determined to be indefinitely unreliable.
Users who would like to profit from fees collected by the Zero protocol may do so by staking SOV, the governance token of the Sovryn protocol. To start staking you simply purchase SOV and then deposit it to the Sovryn staking contract. Stakers earn a pro rata share of the origination fees in ZUSD and redemption fees in RBTC according to their Voting Power as well as other fees in the Sovryn protocol. Your SOV stake will earn a share of the fees equal to your share of the total Voting Power at the instant the fee occurred.
While it is not possible to stake ZUSD, you can deposit ZUSD into the Stability Pool to earn yield via liquidation gains.
In some similar protocols such as MakerDAO with the DAI stablecoin, staked tokens are used to backstop the system. Zero does not use the SOV governance token in this way. All ZUSD issued by Zero is overcollateralized by RBTC borrower deposits that are locked in the smart-contract system.
Recovery Mode is a special operating mode of the system that is designed to improve the system collateral ratio if it gets too low. Recovery Mode is triggered when the Total Collateral Ratio (TCR) of the system falls below 150%. The TCR is the ratio of the Dollar value of the entire system collateral at the current RBTC:USD price to the entire system debt. That is, the TCR is the collateral of all LoCs expressed in USD, divided by the debt of all LoCs expressed in ZUSD.
During Recovery Mode, LoCs with a collateral ratio below 150% can be liquidated.
As a further recovery step, the system blocks borrower transactions that would further decrease the TCR. New LoCs can only be opened with a collateral ratio ≥ 150%. New ZUSD is only issued to existing LoCs if users simultaneously deposit RBTC and withdraw ZUSD in a collateral ratio that is higher than the current TCR.
While Recovery Mode has no impact on the redemption fee, the origination fee is set to 0% to maximally encourage borrowing within the collateral requirement enforced during Recovery Mode.
Recovery Mode incentivizes borrowers to promptly raise the TCR back above 150%. It also incentivizes ZUSD holders to replenish the Stability Pool due to the higher likelihood of liquidation gains. Recovery Mode is designed to encourage collateral top-ups and debt repayments. The potential threat of Recovery Mode also acts as a self-negating deterrent: the undesirable consequences of Recovery Mode actually guide the system away from reaching it. Recovery Mode is an undesirable state for the system.
You can be liquidated in Recovery Mode if your LoC collateral ratio is below 150%. To avoid liquidation in Normal Mode and Recovery Mode, you should keep your LoC collateral ratio above 150%. You can raise your collateral ratio by adding collateral, repaying debt, or both.
Individual LoC liquidations in Recovery Mode (TCR < 150%) are executed as follows:
|ICR ≤ 100%||All debt and collateral in the LoC (minus RBTC gas compensation) is redistributed to active LoCs. (This condition should rarely if ever occur.)|
|100% < ICR ≤ 110%||ZUSD in the Stability Pool pays off the LoC debt. The LoC RBTC collateral (minus RBTC gas compensation) is shared among depositors in the Stability Pool. If the Stability Pool is empty (or becomes emptied), remaining debt and collateral in the LoC are redistributed to active LoCs.|
|110% < ICR < TCR||If the Stability Pool has sufficient funds, ZUSD in the Stability Pool pays off the LoC debt. The LoC RBTC collateral (minus RBTC gas compensation) is then shared among depositors in the Stability Pool up to 110% of the debt. Remaining collateral can be reclaimed by the borrower. The LoC is closed.|
|ICR > TCR||Do nothing.|
In Recovery Mode, liquidation loss of collateral is capped at 110% of LoC debt. Any remaining collateral above 110% of debt can be reclaimed by the liquidated borrower using the standard web interface. This means that a borrower is subject to the same liquidation penalty (10%) in Recovery Mode as in Normal Mode if an LoC is liquidated.