Over Collateralization Fund (OCF)

deUSD's Over Collateralization Fund is the heart of a resilient system. deUSD’s backing shifts into MakerDao’s T-Bill protocol (e.g. USDS) as funding rates become more negative. It does this by tracking the health of the OCF.

The OCF serves less as an "insurance fund" to protect against sustained negative funding rates, and is instead primarily built to cover potential execution related costs associated with transferring deUSD’s backing into USDS.

It is important to note that the OCF does not guarantee any losses that a holder of deUSD or a user of the Elixir ecosystem might experience.

OCF: The Core of deUSD's Resiliency

The introduction of the OCF is a key differentiator between deUSD and alternatives, enhancing the protocol’s risk/return profile. This mechanism allows the protocol to accrue yield while maintaining stability even in negative-funding environments. This is achieved through a protocol-driven adjustment of the basis trade into USDS, which generates a blended yield from Maker fees and US Treasury holdings. This ensures that deUSD holders can still potentially benefit from both yield opportunities and have backing under varying market conditions.

1. The conversion to deUSD is governed by predefined triggers linked to the health and status of Elixir’s OCF, ensuring dynamic and responsive risk management.

2. On a fixed-rate schedule, a significant reduction in the OCF will automatically trigger the closing of the basis trade and conversion into USDS, which currently offers an 8% yield supported by T-Bill backing (as of July 31, 2024), although these figures may fluctuate depending on external market conditions.

An overview of the system utilized by deUSD

1. The gradual reduction of deUSD’s OCF, enabled by this mechanism in extreme negative funding environments, is designed to maintain a backing ratio. Once the health factor reaches 20% of the initial balance, the capital is fully allocated to USDS, helping to preserve stability. While the protocol is designed to manage risk dynamically, users should be aware that market conditions may still impact these mechanisms and outcomes.

As funding rates begin adversely impacting the OCF, deUSD backing shifts towards USDS until equilibrium

The result of this is an logarithmically decreasing decline leveling off around 20%

1. Conversely, as funding rates increases, and the OCF begins to rise above its high-water mark, the protocol dynamically reintroduces funding rate exposure to capture additional yield opportunities. This entire process is intended to be trustlessly executed by the Elixir Network’s validators, ensuring transparency and minimizing the need for centralized intervention and execution. However, while the protocol is designed to optimize yield, users should be mindful of the inherent risks associated with fluctuating market conditions.

USDS yield and funding rate grows the OCF

As the OCF grows above 100%, deUSD backing shifts and increases long-basis

1. The end result of this is a yield-bearing system designed to achieve an equilibrium in both positive and negative funding rate environments. While the system seeks stability, users should recognize that yield outcomes may vary depending on market conditions.

The basket of collateral assets supporting the backing of deUSD will be fully USDS when roughly 20% of the OCF remains.

Initially, 38.5% of deUSD's proceeds on an ongoing basis will be contributed to grow the OCF; this percentage is projected to decrease significantly as the OCF grows, subject to governance.