backd — Interest Earning Liquidation Protection

A first introduction to the backd protocol.

backd is a decentralized protocol on Ethereum, which solves the problem of being liquidated, faced by borrowers in DeFi. The backd protocol generates interest for LPs, while protecting borrowers of over-collateralized loans on borrow and lending protocols (e.g. Compound, AAVE) against becoming liquidable.

On backd, liquidity providers (LPs) may deposit funds into asset-specific pools in exchange for pool-specific LP tokens. Pool deposits are employed in two ways.

First, by redeeming LP tokens for the underlying asset, funds in a pool may be used as back-up collateral, ready to increase collateral-to-debt ratios on borrow positions in borrowing and lending protocols. When collateral top ups occur, a fee is charged on the increment and subsequently distributed amongst the LPs for the pool of the collateral asset.

Second, a variable amount of the deposits in each pool is allocated via some investment strategy to generate additional yield via external protocols. The generated yield by a pool’ s strategy is ultimately diverted back into the pool and thereby distributed amongst the pool’s LPs.

The protocol incentivizes off-chain monitoring of borrow positions across DeFi protocols to report positions registered on backd that are eligible for collateral top ups. Any network participant may act as a backd keeper, call top ups in the backd protocol and be rewarded for it.

In the remainder of this post, we explain the use case for backd and outline the core components of it.

Why does backd exist?

backd by Example:

Let’s first assume that Alice’s collateralization ratio does not drop below 120% and therefore her deposited funds on backd are not eligible for top up. A portion of all deposits in the backd DAI pool gets allocated to generate interest for LP token holders according to some investment strategy. For example, the pool could generate interest via depositing funds into the Curve Compound pool, earning trading fees and CRV rewards, which are subsequently sold for DAI. As interest is aggregated over time, the value of 1 bDAI will appreciate over 1 DAI, thereby accruing interest for Alice, as well as all other bDAI holders.

Let us now assume that Alice’s collateralization ratio on Compound falls below the specified 120% threshold. In this case, any Ethereum network participant may act as a backd keeper and report to the backd protocol that Alice is eligible for a 25 DAI top up. If this report is valid, Alice will pay for the collateral top up by redeeming 25 DAI worth of bDAI, while a small top up fee is charged on the top up amount. The incurred fee is in part paid to the backd keeper which reported the top up, while the remainder is distributed to holders of bDAI, i.e. liquidity providers of the bDAI pool.

Components

Pool LP tokens

There are two reasons for holding backd LP tokens: to pay for top ups and to earn interest. When a borrow position is reported for top up, the position’s registrant has to pay by redeeming LP tokens for the top up amount in the collateral asset. Part of the charged top up fee is paid to the backd keeper which reported the top up, while the remainder is retained by the pool and thereby distributed to all holders of the respective pool’s LP token.

Registering Collateral Top Up Positions

For example, upon depositing DAI, Alice may register a position for herself for top up, by providing the required information (for parameters i-v): Alice, Compound, 100 DAI, 120%, 25 DAI.

Top ups are paid for by redeeming LP tokens of the respective pool for the underlying collateral asset. A top up fee will be charged on the incremental top up amount at every top up. Note that in case the registrant of the top up position has an insufficient amount of LP tokens to pay for the top up, the transaction will not succeed.

Keepers

Interest

Liquidity providers on backd (i.e. depositors into backd pools) earn interest through their LP tokens. The interest generating mechanism is two fold.

  1. For each top up, a small fee is charged on the top up amount and retained by the pool.
  2. Each pool allocates a proportion of its total deposits to some other protocol(s) according to a pool-specific (i.e. asset-specific) yield farming strategy.

Earnings generated by yield farming strategies and top up fees are ultimately claimable by LP token holders when they redeem the underlying asset, as the exchange rate of one LP token to the underlying appreciates over time as the pool grows from strategy returns and accrued fees.

Governance

Disclaimer: there will not be a governance token sale, so please do not fall for scams.

The backd protocol is decentralized and we believe in decentralized governance. However, we also believe that a prerequisite for it to work is that the first release of backd is robust and safe. Decentralized governance will incrementally come to backd.

What’s next?

To stay in the loop, follow us on Twitter: https://twitter.com/backdfund

Note: There is no official Telegram group. For any official communication channels check Twitter or https://backd.fund/. Any additional communication channels will be announced via Twitter and backd.fund

Backd is a trustless and interest generating protocol designed to prevent collateralized loans from becoming liquidable.

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