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. sDAI) 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 from moving backing to sDAI.

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 one crucial differentiator between deUSD and alternatives, strengthening the risk/return profile and allowing the protocol to collect yield and remain stable in negative-funding environments. This is done via a protocol-powered reduction of the basis trade into sDAI, which provides a blended yield from Maker fees and US Treasuries, ensuring that deUSD holders can still earn yield and have backing in any market conditions

1. The conversion to deUSD is based on pre-set triggers linked to the health of Elixir’s OCF.

2. On a fixed rate schedule, a decline of these funds will lead to a closing of the basis trade and a conversion into sDAI (currently has an 8% yield utilizing T-Bill backing, as of July 31)

An overview of the system utilized by deUSD

3. The sloped decline of deUSD’s over-collateralization fund created by this mechanism (in extreme negative funding environments) helps ensure that backing will always be greater than one, with the capital fully in sDAI once it reaches a health factor of 20% of the initial balance.

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

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

4. Conversely, as funding rates increases, and the OCF begins climbing again (above the OCF high water mark), the protocol begins adding more funding rate exposure to capture yield. All of this will be trustlessly powered by the Elixir Network.

sDAI yield and funding rate grows the OCF

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

5. The end result of this is a yield-bearing system that finds a healthy equilibrium in both positive and negative funding rate environments.

The basket of collateral assets supporting the backing of deUSD will be fully sDAI when roughly 20% of the OCF remains. The Season 2 Apothecary program will serve as a community liquidity bootstrapping phase, with all protocol yield building up the OCF. During this phase, roughly 40% of the backing will remain in sDAI.