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DYAD SSOT V3

DYAD is a stablecoin that can be created profitably (with carry cost less than
its peg value) while remaining overcollateralized under all circumstances
(collateral value exceeding peg value). The competition among DYAD NFTs (dNFTs)
to accumulate more experience points (XP) enables them to mint DYAD with a lower
carry cost, making this seemingly impossible scenario possible.

Fees from DYAD redemptions, dNFT claims, liquidations, and XP leverage are
directed to a protocol-owned vault called the Credit Pool, which serves as the
source of DYAD's safe undercollateralization potential. A dNFT's XP share, a
metadata trait rather than a token, allows it to utilize a corresponding portion
of the Credit Pool as a substitute for their own collateral when minting DYAD.
As a dNFT's XP share and the Credit Pool's funding increase, the dNFT holder
needs to deposit less of their own collateral to meet the 105% minimum
collateralization ratio, enabling safe deep undercollateralization for
top-ranked dNFTs.

dNFTs earn XP by staking their DYAD in the Stability Pool, which functions
similarly to Liquity's component with the same name. This pool automatically
covers liquidated dNFT positions by burning an amount of DYAD equal to the
outstanding liability and seizing their collateral. Most of the captured
collateral compensates Stability Pool stakers for their burned DYAD, while any
remaining amount is sent to the Credit Pool.

Here is a comprehensive ecosystem description, starting with the unchangeable
base layers that establish dNFTs and the social layer that introduces new
collateral types and vault logic:


DNFT BASE LAYER

This unalterable layer sets up dNFT ERC721s and nothing else. All dNFTs are
identical with empty metadata, and differentiation occurs later through
interactions with higher layers.

 * dNFT Claim Mechanism

   There is no limit to the number of dNFTs, but the cost to claim increases
   exponentially with each dNFT claimed.

   The dNFT base layer only recognizes wETH. Claimed dNFTs generate wETH, which
   is sent to a protocol-owned vault within the base layer. The distribution of
   wETH to licensed vaults depends on their relative portion of SLL "on"
   switches, as explained in the next section.

   Since the base layer and SLL are entirely logic agnostic, the use of the
   claim fees by each licensed vault is up to their specific vault design. For
   instance, in the V1 Vault described below, the claim fees are sent to the
   Credit Pool, but there are countless other possible uses.


SOCIAL LICENSING LAYER (SLL)

The immutable SLL controls a Vault's license to offer DYAD to dNFTs against its
collateral. If two-thirds of dNFTs opt-in, a Vault can mint DYAD, allowing its
collateral to be part of the DYAD collateral basket.

For each vault that achieves and maintains this supermajority, they receive a
portion of all dNFT claim fees from the Base Layer equivalent to their share of
"on" switches compared to other licensed vaults. They can use this revenue
stream in any way, as any logic and collateral are accepted if they pass
two-thirds.


VAULTS


OVERVIEW

Licensed through the SLL, Vaults convert external collateral into DYAD liability
tokens. Any collateral and logic can be used for DYAD minting, provided a
supermajority of dNFT "on" switches and thus a DYAD license is obtained. The
only requirement for a contract to be a Vault is its address's permissionless
submission to the SLL, after which dNFTs can asynchronously decide whether to
allow DYAD minting.


VAULT V1



The core DYAD team designed Vault V1 for liquid ERC20 collateral, showcasing one
possible design for one type of collateral. Infinite possibilities exist, and
dNFTs can onboard new designs at any time.

V1 consists of dNFT collateral positions, a Stability Pool, a vault-owned Credit
Pool, and XP. These components create a competitive environment where dNFT
holders strive for capital efficiency while maintaining DYAD’s net
overcollateralization and stability.

 * dNFT Collateral Positions

In Vault V1, dNFT holders deposit ERC20 tokens into collateral positions to mint
DYAD. A minimum collateralization ratio (MCR) of 105% applies to all dNFTs.

 * Credit Pool

The Credit Pool, consisting of DYAD tokens owned by the V1 Vault, represents the
total amount of DYAD that dNFTs can mint without collateralizing themselves.
Instead, they collateralize that DYAD with Vault-owned DYAD that will be burned
if the dNFT gets liquidated, restoring overcollateralization without socialized
loss. The Credit Pool receives the V1 Vault’s dNFT claim fee allocation from the
base layer.

The Credit Pool is also funded by DYAD redemptions, liquidation, and XP leverage
(PF) in that vault.

Credit Pool allocation to individual dNFTs depends on their share of total XP in
that Vault.

 * Stability Pool

The Stability Pool serves as a source of liquidity to repay debt from liquidated
dNFTs. The Stability Pool is funded by users locking DYAD in it to earn XP. Over
time, Stability Providers lose a pro-rata share of their DYAD deposits while
gaining a pro-rata share of the liquidated collateral and earning XP.

 * XP (Experience Points)

XP is a dynamic dNFT metadata trait. A dNFT’s portion of total XP in a given
Vault V1 determines its portion of Credit Pool access for minting DYAD at a
lower collateralization ratio. All dNFTs have some Credit Pool access, and a
Vault’s Credit Pool size is a major driver of secondary market value for dNFTs
that rank highly in a well-funded Credit Pool Vault versus a leaner Credit Pool
Vault.



XP Accrual

 1. dNFT deposits collateral into a licensed vault and mints DYAD or buys DYAD
    from the market.
 2. dNFT locks the DYAD into a vault-specific Stability Pool to generate
    vault-specific XP. The XP generation to locked collateral ratio is 1:1 for
    all dNFTs.
 3. dNFT activates a boost factor (b) by paying the protocol fee (PF), which
    goes to the Credit Pool. The boosting increases XP accrual and depends on
    the XP rank of the dNFT. Low XP dNFTs boost by a factor of 10 (10:1), while
    high XP dNFTs boost only by a factor of 1.5 (1.5:1). By default, b is set to
    one, which means no boost.
 4. dNFT decides upon a locking time (t), pays the PF instantaneously, and
    generates XP.
 5. After the locking period, dNFT withdraws or rolls over DYAD remaining after
    PF and collects any exogenous collateral captured from liquidations that
    occurred during the lock period, minus the premium sent to the Credit Pool.



The amount of XP that a user generates through locking is coupled to the locking
period (t in [1,…,X]) and the maximum locking period (t_max = X weeks).
Furthermore, the protocol fee is always a constant cut of Y% (e.g., 2%) and gets
"cheaper" for longer locking times - since we still pay the same constant cut.

Important: dNFTs pay only the protocol fee if they decide to boost.



Redemption

We’re using Liquity’s baseRate method (redeem fee that winds up and decays with
volume over time) and permissionless redemptions against the riskiest positions
(lowest CR), but discretely for each collateral type that comprises the DYAD
basket. So if there’s a run on redeeming DYAD for wETH, it will get more
expensive to do so, but if the stETH vault doesn’t see similar volume, it will
be comparatively cheaper to redeem to stETH, for example.

Redemption flow:

 1. Redemption Request: A user initiates a redemption request for a specific
    amount of DYAD, indicating their desired collateral type.
 2. Redemption Queue: The request is placed in a redemption queue, sorted by the
    dNFT's collateralization ratio, riskiest first, inclusive of any Credit Pool
    subsidy they’re using.
 3. Base Rate Calculation: The base rate for the redemption is determined by the
    net mint or redeem volume for the chosen licensed vault. The base rate
    increases with net redeem volume and decreases with net mint volume.
 4. Fee Calculation: The redemption fee is calculated by multiplying the base
    rate by the collateral value being redeemed.
 5. Debt Adjustment: The dNFT's DYAD debt is reduced by the amount being
    redeemed.
 6. Collateral Withdrawal: The corresponding amount of collateral is withdrawn
    from the dNFT's vault, minus the redemption fee.
 7. Fee Distribution: The redemption fee is added to the licensed vault's Credit
    Pool, which is shared among all dNFTs holding that particular collateral.
 8. Collateral Transfer: The withdrawn collateral (minus the redemption fee) is
    transferred to the user's wallet.
 9. Redemption Completion: The redemption is marked as complete, and the user
    now holds the redeemed collateral.



Liquidation

Initiated when a dNFT's collateralization ratio falls below 110%, inclusive of
Credit Pool subsidy, liquidation occurs due to fluctuations in collateral value
or changes in XP rank. The process entails:

 1. Credit Pool Utilization: DYAD is burned from the Credit Pool (stability
    pool) based on the dNFT's proportional Credit Pool usage rights determined
    by XP.
 2. MCR Restoration: Burning the liquidated dNFT's Credit Pool portion
    eliminates undercollateralization.
 3. XP Reduction: Upon liquidation, the dNFT's XP is reduced in a portion equal
    to the portion of DYAD in the Credit Pool that had to be burned because of
    the liquidation. The reduction in total XP equals the reduction in total
    DYAD, so other dNFT allocation in the Credit Pool is not affected (they now
    have a greater share of less DYAD).
 4. Stability Pool Wrap-up: The dNFT’s remaining DYAD debt is burned from the
    Stability Pool’s balance. In exchange, the entire collateral from the dNFT
    is transferred to the Stability Pool, minus the Credit Pool share (captured
    collateral beyond the value of the burned DYAD.
 5. If the Stability Pool is empty, the system redistributes the debt and
    collateral from liquidated dNFTs to all other existing dNFTs in that Vault.
    The redistribution of debt and collateral is done in proportion to the
    recipient dNFT’s collateral amount.


COMPOSING PROTOCOLS AND METADATA

Dyad SDK enables composing protocols to append additional metadata fields to
dNFTs that opt into their protocol. This metadata creates new incentives and
capabilities for dNFT holders, driving competition and liquidity inflow within
the ecosystem.


CROSS-PROTOCOL METADATA INFLUENCE

Protocols can query the complete metadata state of dNFTs, allowing a dNFT's rank
in one protocol to influence its status in another.


SECONDARY MARKET AND METADATA PRICING

The secondary market for dNFTs prices the entire stack of composing protocol
metadata chosen by the dNFT across the ecosystem. Secondary market pricing of
metadata rank serves as an incentive for ecosystem builders.


EXAMPLE: LOW-TOXICITY DEX

A DEX could incentivize dNFTs to absorb toxic flow by rewarding them with "LP
points" each time they take a loss as market makers. A dNFT's share of LP points
determines its share of trading fees, promoting competition among dNFTs to lose
money as LPs on the DEX, ultimately making it an attractive trading platform for
non-dNFT traders and market makers.



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