Zero is not yet available. You can join the waitlist for the Zero private beta, with early users allowed in Q2 2022 and gradually expanding the number of users over Q3 2022.
¶ Overview of Zero
¶ What is Zero?
Zero is a decentralized protocol that allows you to borrow ZUSD (a USD pegged stablecoin) interest-free using RBTC as collateral. The RBTC collateral must be maintained at a minimum collateral ratio of 110%.
Loans are further secured by a Stability Pool containing ZUSD and by fellow borrowers collectively acting as guarantors of last resort.
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 or custodian. 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.
¶ What is the motivation for Zero?
Stable-value assets serve as an essential building block for decentralized financial applications and now represent over a hundred billion dollars in value. Zero offers a way to borrow stablecoins that is capital efficient, user-friendly, and decentralized.
What are the key benefits of Zero?
Key benefits include:
- 0% interest rate — Borrowers do not need to worry about constantly accruing debt.
- Minimum collateral ratio of 110% — Zero uses RBTC on deposit efficiently.
- An extension of the Sovryn protocol — All operations are algorithmic and fully automated, and protocol parameters are upgradable by Bitocracy. The protocol is censorship-resistant.
- Directly redeemable — ZUSD can be redeemed at face value for the underlying collateral at any time, guaranteeing a price floor of 1 USD.
¶ What are the main use cases of Zero?
- Borrow ZUSD secured by RBTC by opening a Line of Credit (LoC).
- Secure Zero by providing ZUSD to the Stability Pool in exchange for rewards.
- Stake SOV to earn revenue from ZUSD borrowing and redemption fees.
- Redeem 1 ZUSD for 1 USD worth of RBTC when the ZUSD peg falls below 1 USD.
¶ What is ZUSD?
ZUSD is the USD-pegged stablecoin used to pay out loans on the Zero protocol. It can be redeemed at any time for the underlying collateral at face value.
¶ How do I use Zero?
To borrow ZUSD, all you need is an RSK-compatible wallet and sufficient RBTC to open an LoC and pay the gas fees.
To become a Stability Pool depositor, you need to have ZUSD. You can borrow ZUSD by opening an LoC or buy ZUSD on the open market.
¶ Does Zero charge any fees?
Zero only charges one-time fees. A borrowing fee is charged when ZUSD is borrowed, and a redemption fee is charged when ZUSD is redeemed:
- For borrowers, the borrowing fee is a percentage of the loan amount (in ZUSD).
- For redeemers, the redemption fee is applied on the amount paid to users by the system (in RBTC) when exchanging ZUSD for RBTC. Note that redemption is different from repaying your loan as a borrower, which is free of charge.
Both fees depend on redemption volumes. They increase with each redemption as a function of 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 decay over time ensures that the fee for both borrowers and redeemers will “cool down” when redemption volumes are low.
The fees cannot become smaller than 0.5% (except in Recovery Mode), which protects the redemption function from being misused by arbitrageurs front-running the price feed. The borrowing fee is capped at 5%, keeping the system at least somewhat attractive for borrowers even in phases when the monetary supply is contracting due to redemptions. Other than the borrowing fee cap, the borrowing and redemption fees are identical and are depicted as "Fee" in the following exemplary chart:
¶ How can I earn money using Zero?
Zero users can earn money two different ways:
- Deposit ZUSD to the Stability Pool and earn RBTC liquidation gains.
- Stake SOV and earn ZUSD and RBTC revenue from borrowing and redemption fees paid to the Sovryn protocol.
¶ Can I lose my funds?
Because the system is non-custodial, all the tokens sent to the protocol are held and managed algorithmically without the interference of any person or legal entity. That means your funds are only subject to the rules set forth in the smart-contract code. This code has been audited twice by Trail of Bits, once by Coinspect, and once by Chainsulting (see audits).
Two scenarios could cause you to lose some of your funds:
- You are a borrower (LoC owner) and your collateral in RBTC is liquidated upon falling below 110%. You keep your borrowed ZUSD, but your LoC will be closed and your collateral used to compensate Stability Pool depositors.
- You are a Stability Pool depositor and your deposited ZUSD is used to repay debt from liquidated borrowers. Since a liquidation is triggered any time a borrower’s collateral drops below 110%, you will receive RBTC in return that is very likely to be worth more than the lost ZUSD funds. However, if you continue to hold RBTC and it decreases in price, you may lose value in your total pool deposits.
Although the system is diligently audited, a hack or a bug that results in losses for users can never be fully ruled out (see disclaimer).
¶ Borrowing
¶ Why would I use Zero for borrowing?
Zero offers interest-free loans and requires less collateral than other systems. Instead of selling RBTC to have liquid funds, you can use the protocol to lock up your RBTC, borrow against the collateral to withdraw ZUSD, and then repay your loan at a future date.
For example, borrowers speculating on future RBTC price increases can use the protocol to leverage their RBTC positions up to 11 times, increasing their exposure to price changes. A user can borrow ZUSD against RBTC and sell the ZUSD on the open market to purchase more RBTC—and then repeat the cycle over and over.*
*Note: This is not a recommendation for how to use Zero. Leverage can be risky and should be used only by those with experience.
¶ What do you mean by collateral?
Collateral is any asset which a borrower must provide to take out a loan, acting as a security for the debt. Currently, Zero only supports RBTC as collateral.
¶ Is RBTC the only collateral accepted by Zero?
Yes, RBTC is the only collateral accepted by Zero.
¶ How can the protocol offer interest-free borrowing?
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 in the collateral assets.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 charges one-time borrowing and redemption fees that algorithmically adjust based on recent redemption volume in the protocol. For example, if more redemptions are happening (which means ZUSD is likely trading at less than 1 USD), the borrowing fee would continue to increase, discouraging borrowing.
Other systems like MakerDAO use variable interest rates to make borrowing more or less favorable. However, this method does not allow borrowers to determine the cost up front. Zero instead opts for a fully decentralized and direct feedback mechanism via one-time fees.
¶ How can I borrow with Zero?
You borrow by opening an LoC and depositing a certain amount of RBTC collateral to it. Then you withdraw ZUSD up to a collateral ratio of 110%. A minimum debt of 200 ZUSD is required.
¶ What is an LoC?
An LoC is a ledger where you take out and maintain your loan. Each LoC is linked to an RSK address, and each address can have just one LoC. If you are familiar with Vaults or CDPs from other platforms, LoCs are similar in concept.
LoCs maintain two balances: one is an asset (RBTC) acting as collateral; the other is a debt denominated in ZUSD. You can change the amount of each by adding collateral or repaying debt. As you make these balance changes, the collateral ratio of your LoC changes accordingly.
You can close your LoC at any time by fully paying off your debt.
¶ Do I have to pay fees as a borrower?
Every time you withdraw ZUSD from your LoC, a one-time borrowing fee is charged on the withdrawn amount and added to your debt. Please note that this fee varies algorithmically. It has a minimum value of 0.5% under normal operation. 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.
¶ How is the borrowing fee calculated?
The borrowing fee is specified by a baseRate, which is the algorithmically determined rate at or above the 0.5% floor. Thus, baseRate + 0.5% is the fee rate. The fee rate is restricted to a range between 0.5% and 5% and is multiplied by the amount of liquidity withdrawn by the borrower to determine the borrowing fee.
Example: The borrowing 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 + 0.005)*(3980 - fee) = fee, or fee = (baserate+0.005)/(1+baseRate+0.005)*3980, which results in a fee of 19.80 ZUSD. After the fee of 19.80 ZUSD is deducted, the borrower obtains a net of 3980.20 ZUSD. Since 20 ZUSD is set aside as a Liquidation Reserve charge, the amount available to withdraw is 3980.20-20.00=3960.20 ZUSD.
¶ When do I need to pay my loan back?
Loans issued by the protocol do not have a repayment schedule. You can leave your LoC open and repay your debt any time, as long as you maintain a collateral ratio of at least 110%.
¶ What is the collateral ratio?
This 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 over time as the price of RBTC changes. You can change the ratio by adjusting your LoC collateral and/or debt—adding more RBTC collateral or paying off some 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%.
¶ What are the minimum and recommended collateral ratios?
The minimum collateral ratio (MCR) is the lowest ratio of collateral to debt that will not trigger a liquidation under normal operations (Normal Mode). This is a protocol parameter, which is set to 110%. So if your LoC has a debt of 10,000 ZUSD, you must maintain at least $11,000 worth of RBTC as collateral to avoid being liquidated.
To avoid liquidation during Recovery Mode, a borrower should keep the ratio comfortably above 150% (200% or more is recommended).
¶ What happens if my LoC is liquidated?
You will lose your collateral if your debt is paid off through liquidation. If your debt is liquidated, you will no longer be able to retrieve your collateral by repaying your debt. A liquidation thus results in a net loss of 9.09% (= 100% * 10 / 110) of the dollar value of your collateral.
¶ What is the Liquidation Reserve?
When you open an LoC and obtain a loan, 20 ZUSD is set aside 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 given back 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.
¶ What happens if a redemption draws from my LoC?
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. This action will tend to close the gap between the ZUSD price and USD. When ZUSD is redeemed, the RBTC provided to the redeemer is allocated from the LoC(s) with the lowest collateral ratio (even if it is above 110%). If at the time of redemption you have the LoC with the lowest ratio, you will give up some of your collateral, but your debt will be reduced accordingly.
The USD value by which your RBTC collateral is reduced corresponds to the nominal ZUSD amount by which your LoC’s debt is decreased. You can think of redemptions as if somebody else is repaying your debt and retrieving 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, redemptions improve the collateral ratio of the affected LoCs, making them less risky.
Redemptions that do not reduce your debt to zero are called partial redemptions, while redemptions that fully pay off the debt of an LoC are called full redemptions. In a full redemption, your LoC is closed, and you can claim your collateral surplus and the Liquidation Reserve 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). Let’s imagine this is the lowest CR in the Zero system and look at examples of a partial redemption and a full redemption:
Partial redemption
Somebody 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 goes down from 2 to 1.675 RBTC, while your collateral ratio goes up from 123% to 134% (= 100% * (1.675 * 40,000) / 50,000).
Full redemption
Somebody redeems 120,000 ZUSD for 3 RBTC. Given that the redeemed amount is larger than your debt minus 20 ZUSD (set aside as a 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 ).
¶ How can you offer a collateral ratio as low as 110%?
By making liquidation instantaneous and more efficient, Zero needs less collateral to provide the same security level as similar protocols that rely on lengthy auction mechanisms to sell off collateral in liquidations.
¶ How can I take advantage of leverage?
You can sell the borrowed ZUSD on the market for RBTC and use the latter to top up the collateral of your LoC. That allows you to draw and sell more ZUSD, and by repeating the process you can reach the desired leverage ratio.
Assuming perfect price stability (1 ZUSD = 1 USD), the maximum achievable leverage ratio is 11x. It is given by the formula:
maximum leverage ratio = MCR / (MCR−100%), where MCR is the Minimum Collateral Ratio.
¶ Why did the collateral and debt of my LoC increase without my intervention?
If LoCs are liquidated and the Stability Pool is empty (or gets emptied in the process of the liquidation), 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.
¶ Stability Pool and Liquidations
¶ What is the Stability Pool?
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 backed.
When any LoC is liquidated, an amount of ZUSD corresponding to the remaining debt of the LoC is burned. This process effectively removes the ZUSD from the Stability Pool balance to repay the debt of the LoC. 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). Over time Stability Providers lose a pro-rata share of their ZUSD deposits, while gaining a pro-rata share of the liquidated RBTC collateral. However, 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.
¶ Why should I deposit ZUSD to the Stability Pool?
Stability Providers make gains when liquidations occur.
¶ What are liquidations?
To ensure that the entire stablecoin supply remains fully backed by collateral, LoCs that fall under the minimum collateral ratio 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 still keeps the full amount of ZUSD borrowed but loses ~10% value overall. Thus, a borrower should always keep the ratio above 110%—ideally above 150% to maintain a safe margin.
¶ Who can liquidate LoCs?
Anyone can liquidate an LoC as soon as it drops below the Minimum Collateral Ratio of 110%. The initiator receives a gas compensation (20 ZUSD + 0.5% of the LoC collateral) as a reward for this service.
¶ How am I compensated for liquidating an LoC?
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 + 0.5% of LoC collateral (RBTC)
The 20 ZUSD is funded by a Liquidation Reserve while the variable 0.5% part (in RBTC) comes from the liquidated collateral, slightly reducing the liquidation gain for Stability Providers.
¶ Redemptions and ZUSD price stability
¶ How does ZUSD track with the price of USD?
The ability to redeem ZUSD for RBTC at face value (1 ZUSD can be exchanged for 1 USD of RBTC) creates a price floor, and the minimum collateral ratio of 110% creates a price ceiling through arbitrage opportunities. We call these "hard peg mechanisms" because they are based on direct processes.
ZUSD also benefits from less direct mechanisms for USD parity—called "soft peg mechanisms". One of these mechanisms is parity 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 borrowing fee on new debts. As redemptions increase (implying ZUSD is below 1 USD), so too does the baseRate — making borrowing less attractive. This process keeps new ZUSD from being sold on the market and driving the price below 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.
¶ What are redemptions?
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 without limitations. However, a redemption fee might be charged on the redeemed amount.
For example, if the current redemption fee is 1%, the price of RBTC is $50,000 and you redeem 10,000 ZUSD, you would get 0.198 RBTC (0.2 RBTC minus a redemption fee of 0.002 RBTC).
Note that the redeemed amount itself is taken into account for calculating the baseRate and might have an impact on the redemption fee applied in the current transaction, especially if the amount is large.
¶ Is a redemption the same as paying back my debt?
No, redemptions are a completely separate mechanism. All a borrower must do to pay back a debt is deposit ZUSD into the corresponding LoC.
¶ How is the redemption fee calculated?
Under normal operation, the redemption fee is given by the formula (baseRate + 0.5%) * RBTCdrawn
¶ How is the baseRate calculated?
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:
- baseRate decays based on time passed since the last fee event
- baseRate increments by an amount proportional to the fraction of the total ZUSD supply that was redeemed
- The redemption fee is given by (baseRate + 0.5%) * RBTCdrawn
¶ As a borrower, do I lose money if a redemption draws some of my LoC assets?
If a ZUSD redemption draws some of your LoC RBTC assets, you do not incur a net loss. Your RBTC collateral will be reduced, but your ZUSD debt will be reduced by the same USD amount. Your LoC collateral ratio will also improve after a redemption.
¶ How can I avoid losing assets to a redemption?
The best way to avoid losing assets to a redemption is to maintain 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.
¶ SOV Staking
¶ How does staking work in Zero?
To start staking you simply deposit your SOV token to the Sovryn staking contract. Stakers will earn a pro rata share of the borrowing and redemption fees in ZUSD and RBTC according to their Voting Power as well as other fees in the Sovryn protocol.
¶ How much will my staked SOV earn?
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.
¶ Can I stake ZUSD?
You can only stake SOV tokens. ZUSD can be deposited into the Stability Pool to earn yield via liquidation gains.
¶ Are staked SOV used to backstop the system (like Maker) or for governance?
Staked SOV is not used to backstop the Zero system. Staked SOV is used for governing the Zero protocol. All ZUSD issued by Zero is overcollateralized by RBTC locked in the smart-contract system.
¶ Recovery Mode
¶ What is Recovery Mode?
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.
Moreover, the system blocks borrower transactions that would further decrease the TCR. New ZUSD is only issued by adjusting existing LoCs in a way that improves their collateral ratio or by opening a new LoC with a collateral ratio>=150%. If the adjustment of an existing LoC reduces its collateral ratio, the transaction is only executed if the resulting TCR is above 150%.
¶ What is the purpose of Recovery Mode?
Recovery Mode incentivizes borrowers to behave in ways that promptly raises the TCR back above 150% and to incentivize ZUSD holders to replenish the Stability Pool.
Economically, Recovery Mode is designed to encourage collateral top-ups and debt repayments. The possibility 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 not a desirable state for the system.
¶ What are the fees during Recovery Mode?
While Recovery Mode has no impact on the redemption fee, the borrowing fee is set to 0% to maximally encourage borrowing within the collateral requirement enforced during Recovery Mode.
¶ How can I make my LoC safe in Recovery Mode?
Increasing your collateral ratio to 150% or greater will protect your LoC from liquidation. You can do this by adding collateral, repaying debt, or both.
¶ Can I be liquidated if my collateral ratio is below 150% in Recovery Mode?
Yes, 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%.
¶ How do liquidations work in Recovery Mode?
- ICR = Individual Collateral Ratio
- TCR = Total Collateral Ratio
- SP = Stability Pool
| Condition | Liquidation Behavior |
| 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 is redistributed to active LoCs. |
| 110% < ICR < TCR and TCR < 150% | 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. |
¶ How much LoC collateral can be liquidated in Recovery Mode?
In Recovery Mode, 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.