Risk Management

Yield Money Multiplier Effect in Dough Finance with Delooping Strategy

Dough Finance allows users to maximize their returns by leveraging their collateral through looping and delooping strategies. The platform ensures liquidity and debt repayment by pre-liquidating positions early, thanks to an additional 5% borrowing fee. The treasury uses USDC to buy WETH for small accounts, ensuring they remain covered.

Borrowing Fee Structure

  • Dough Finance Borrowing Fee: 5% on top of Aave V3's rates, applied only to borrow transactions.

Key Points

  • Supply Rate: Users receive the same yield rates as Aave V3 when supplying collateral to Dough Finance. There are no additional fees for supplying assets and earning yields.

  • Borrowing Fee: The 5% fee is only applied on the amount borrowed, not on the supplied collateral. This fee is incurred when users loop their assets to increase their exposure and potential yield.

Health Factor (HF) Management

  • Liquidation Threshold (Dough Finance): 1.03 HF

  • Borrowing Limit Threshold (Dough Finance): 1.13 HF in contracts, with a buffer of 1.14 HF on the frontend for user safety.

  • Early Pre-Liquidation: Dough Finance pre-liquidates positions early due to the additional 5% fee, ensuring liquidity and debt repayment.

  • Safety Buffer: Maintaining an HF of 2.00 or higher provides a strong safety net, protecting users from a 50% decline in the value of their collateral.

Benefits of Borrowing vs. Drawing Profits

  • Leveraging Assets: By borrowing against your assets instead of selling them, you can continue to earn yields on the full value of your supplied assets. For example, if you supply 100K USD worth of assets, you can borrow up to 70K USD without losing the ability to earn yields on the original 100K USD.

  • Tax Efficiency: Borrowing can be more tax-efficient than selling assets and drawing profits, as borrowed funds are generally not considered taxable income.

  • Investment Flexibility: With the borrowed funds, you can hedge your investments, reinvest in other opportunities, or loop ETH to maximize your returns.

Example: Borrowing and Looping ETH

Given:

  • 1 ETH collateral

  • ETH has a liquidation threshold of 83% and an LTV of 80%

  • You can leverage ETH up to approximately 3.33x, meaning you can borrow 3.33 times more ETH

  1. Supply Initial 1 ETH

    • Collateral: 1 ETH

    • Value in USDC: Assume 1 ETH = 3000 USDC for this example

    • Maximum Borrowable (80% of collateral): 0.8 ETH

    • HF Calculation: HF=Collateral ValueDebt=3000USDC0=∞ (since no debt yet)HF = \frac{\text{Collateral Value}}{\text{Debt}} = \frac{3000 \text{USDC}}{0} = \infty \text{ (since no debt yet)}HF=DebtCollateral Value​=03000USDC​=∞ (since no debt yet)

  2. Borrow 0.8 ETH with Dough Fee (5%)

    • Borrowed Amount (including fee): 0.8 ETH \times 1.05 = 0.84 ETH

    • Supply Borrowed 0.84 ETH back to DSA

    • New Collateral: 1 ETH + 0.84 ETH = 1.84 ETH

    • New Debt: 0.84 ETH

    • Value in USDC: 1.84 ETH \times 3000 , \text{USDC/ETH} = 5520 , \text{USDC}

    • HF Calculation: HF=5520 USDC0.84 ETH×3000 USDC/ETH=55202520≈2.19HF = \frac{5520 \, \text{USDC}}{0.84 \, \text{ETH} \times 3000 \, \text{USDC/ETH}} = \frac{5520}{2520} \approx 2.19HF=0.84ETH×3000USDC/ETH5520USDC​=25205520​≈2.19

  3. Second Loop: Supply 1.84 ETH

    • Collateral: 1.84 ETH

    • Value in USDC: 5520 USDC

    • Maximum Borrowable (80% of collateral): 1.472 ETH

    • Safe Borrow: Adjusted for Dough Fee: 1.472 ETH / 1.05 ≈ 1.4 ETH

    • Borrow 1.4 ETH

  4. Borrow 1.4 ETH with Dough Fee (5%)

    • Borrowed Amount (including fee): 1.4 ETH \times 1.05 = 1.47 ETH

    • Supply Borrowed 1.47 ETH back to DSA

    • New Collateral: 1.84 ETH + 1.47 ETH = 3.31 ETH

    • New Debt: 0.84 ETH + 1.47 ETH = 2.31 ETH

    • Value in USDC: 3.31 ETH \times 3000 , \text{USDC/ETH} = 9930 , \text{USDC}

    • HF Calculation: HF=9930 USDC2.31 ETH×3000 USDC/ETH=99306930≈1.43HF = \frac{9930 \, \text{USDC}}{2.31 \, \text{ETH} \times 3000 \, \text{USDC/ETH}} = \frac{9930}{6930} \approx 1.43HF=2.31ETH×3000USDC/ETH9930USDC​=69309930​≈1.43

Delooping Strategy in 1 Transaction

When the DSA deloops, it uses the following strategy to cover debt repayment efficiently:

  1. Use USDC Collateral First:

    • Apply the USDC collateral available to repay as much debt as possible.

    • Example: If the DSA has 5000 USDC available and the total debt is 6930 USDC (2.31 ETH debt converted to USDC): Debt after USDC repayment=6930 USDC−5000 USDC=1930 USDC\text{Debt after USDC repayment} = 6930 \, \text{USDC} - 5000 \, \text{USDC} = 1930 \, \text{USDC}Debt after USDC repayment=6930USDC−5000USDC=1930USDC

  2. Swap WETH to Cover Remaining Debt:

    • Calculate the remainder of the debt that needs to be covered by swapping WETH.

    • Assume WETH equivalent to 1930 USDC needs to be swapped to cover the remaining debt.

    • Swap the necessary amount of WETH to get 1930 USDC.

    • Example: If 1 WETH = 3000 USDC, then: WETH needed=1930 USDC3000 USDC per WETH≈0.643 WETH\text{WETH needed} = \frac{1930 \, \text{USDC}}{3000 \, \text{USDC per WETH}} \approx 0.643 \, \text{WETH}WETH needed=3000USDC per WETH1930USDC​≈0.643WETH

  3. Repay Remaining Debt:

    • Use the USDC obtained from the WETH swap to repay the remaining 1930 USDC debt.

    • Ensure the DSA's HF is recalculated to confirm it remains above 1.03 after the debt is repaid.

Treasury Management

  • Small Account Coverage: The treasury uses USDC to buy WETH for small accounts, ensuring they remain covered and fully liquidated when necessary.

  • Perpetual WETH Purchase: This strategy ensures the Dough Finance bank always stays liquid and repays its debt efficiently.

HF Thresholds and Borrowing Limits

  • Borrowing Limit Threshold: Users cannot borrow if their HF is below or equal to 1.13 in contracts (1.14 in the frontend for safety). At this point, only the deloop and repay buttons are available.

  • Liquidation Threshold: If a user's HF drops to or below 1.03, their position will be liquidated to repay the debt and protect the network.

  • Safety Buffer: Maintaining an HF of 2.00 or higher provides a strong safety net, protecting users from a 50% decline in the value of their collateral.

Example of Borrowing Limits and Liquidation Protection

  1. Initial Setup:

    • Start with 1 ETH collateral (3000 USDC value).

    • Maximum initial borrow is 0.8 ETH (80% LTV), considering Dough Finance's additional 5% fee.

  2. Looping:

    • Supply 1 ETH, borrow 0.84 ETH, and loop until reaching a maximum safe HF (e.g., 1.14 in the frontend).

  3. Borrowing Limit Example:

    • If the HF reaches 1.14, the frontend will not allow further borrowing to maintain a safety buffer. Users can only deloop or repay to improve their HF.

  4. Liquidation Protection:

    • If the HF drops to 1.03 or below, the user's position is liquidated to repay the debt and protect the network. For example, if the total collateral is 3.31 ETH and the debt is 2.31 ETH, a drop in ETH value could trigger this liquidation threshold.

    • By maintaining an HF of 2.00, users can protect themselves against a 50% decline in ETH value, providing a strong safety net.

Conclusion

Dough Finance's yield money multiplier effect, combined with strategic looping and delooping, allows users to maximize their returns while maintaining a safe HF. By adhering to the borrowing and liquidation thresholds, users can effectively manage their risk and ensure the security of their positions. The frontend buffer provides an additional safety net, preventing transactions that could potentially crash due to insufficient HF. Furthermore, the treasury's strategy of using USDC to buy WETH for small accounts ensures that Dough Finance remains liquid and capable of covering all debts, ensuring a robust and sustainable DeFi experience.

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