General
What is Palladium?
Palladium is a decentralized borrowing protocol that allows you to draw interest-free loans against BTC (Bitcoin) used as collateral.
Users deposit BTC and mint PUSD (stablecoin). These individual collateralized debt positions are called Troves.
The minted stablecoins are economically geared towards maintaining a value of 1 PUSD = $1 of BTC value, due to the following properties:
The system is designed to always be over-collateralized.
The dollar value of the locked BTC exceeds the dollar value of the issued stablecoins.
The stablecoins are fully redeemable.
Users can always swap PUSD for BTC (minus fees), directly within the system.
The system controls the generation of PUSD.
The operations are done algorithmically, through a variable issuance fee.
After opening a Trove mint their stablecoin to a collateral ratio of at least 110%.
As an example, a user with $11,000 worth of BTC can mint up to 10,000 PUSD.
The tokens are freely exchangeable – anyone can send or receive PUSD tokens. PUSD tokens are burned upon repayment of a Trove’s debt or via a direct redemption process.
The Palladium system regularly updates the BTC: USD price via a decentralized data feed.
When a Trove falls below a minimum collateralization ratio (MCR) of 110%, it is considered under-collateralized and is vulnerable to liquidation. This is to ensure the protocol remains solvent at all times, and 1 PUSD can always be redeemed for $1 worth of BTC.
What’s the motivation behind Palladium?
The protocol was developed to allow owners of BTC a method of extracting value from their holdings, without the need to ever sell their tokens.
By locking up BTC and minting PUSD, a BTC holder can take a 0% interest-free loan against their holdings, with no repayment schedule.
Stablecoins are an essential building block on any blockchain. However, the vast majority of this value is made up of centralized stablecoins. Decentralized stablecoins make up only a small portion of the total stablecoin supply.
Palladium Labs addresses this by creating a more capital-efficient and user-friendly way to borrow a decentralized stablecoin.
Furthermore, Palladium Labs is completely immutable, governance-free, and non-custodial.
What are the key benefits of Palladium?
0% interest rate – as a borrower, there’s no need to worry about constantly accruing debt
110% MCR – a low Minimum Collateral Ratio means more efficient usage of your deposited BTC
Governance-free – all operations are algorithmic and fully automated, and protocol parameters are set at the time of deployment
Directly redeemable – the protocol allows you to exchange 1 PUSD stablecoin for $1 worth of BTC at any time
What are the main use cases of Palladium?
Borrow PUSD against BTC by opening a ‘Trove’
Provide PUSD in stability pool to earn liquidation gains.
Redeem 1 PUSD for $1 worth of BTC at any time
Arbitrage potential gains if the 1 PUSD peg falls below $1
What do I need to use Palladium?
To borrow PUSD, all you need is a wallet (e.g. MetaMask) and sufficient BTC to open a Trove and pay the gas fees.
To help provide stability, you’ll need PUSD to deposit into the Stability Pool.
You can also use a decentralized exchange to buy PUSD and BTC on the open market.
Does Palladium charge any fees?
There is a one-off fee whenever PUSD is borrowed, and when BTC is redeemed.
Borrowers pay a borrowing fee on loans as a percentage of the issued amount (in PUSD).
Redeemers who wish to redeem BTC need to pay a redemption fee. Note that redemption is separate from repaying your loan as a borrower, which is free of charge.
Both fees depend on the redemption volumes, i.e. they increase upon every redemption as a function of the redeemed amount, and decay over time as long as no redemptions take place.
The intent is to throttle large redemptions with higher fees and to throttle borrowing directly after large redemption volumes.
The fee decay over time ensures that the fee for both borrowers and redeemers will “cool down”, while redemptions volumes are low.
The fees cannot become smaller than 0.5% (except in Recovery Mode), which protects the redemption facility from being misused by arbitrageurs front-running the price feed.
The borrowing fee is capped at 5%, keeping the system attractive for borrowers even in phases where the monetary supply is contracting due to redemptions.
What is the mechanism that determines the borrowing fee and redemption fee?
The base fee fluctuates when there are PUSD redemptions for BTC. As more occur and the frequency increases, the base rate goes up.
As redemptions subside, the base rate goes down. There is always a default of 0.5% + variable base rate.
Can I lose my funds?
As a non-custodial system, all tokens sent to the protocol will be held and managed algorithmically without the interference of any person or legal entity. That means your funds will only be subject to the rules set forth in the smart contract code.
There are a few scenarios under which you may lose a part of your funds:
You are a borrower (Trove owner) and your collateral in BTC is liquidated. You will still keep your borrowed PUSD, but your Trove will be closed and your collateral will be used to compensate Stability Pool depositors and/or other Trove owners (during redistribution).
You are a borrower and either Recovery Mode is activated or redemptions occur. You could lose 130% collateral and any remainder would be claimable. This would result in collateral loss, which is why a suggested higher collateral ratio helps reduce risk.
You are a Stability Pool depositor and your deposited PUSD is used to repay debt from liquidated borrowers. Since liquidations are triggered any time borrowers’ collateral drops below 130%, you will receive more BTC in return with a very high probability. However, if BTC decreases in price and you maintain exposure, you may lose value in your total pool deposits.
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