Risk Mitigation
1. How does Yala mitigate risks?
The white paper details that the Yala protocol's risk operation centers around creating a robust framework for DeFi on Bitcoin by leveraging advanced cryptographic techniques and modular architecture. Here's a summary of the key elements:
1.1 Liquidation Management
Collateralized Debt Positions (CDPs): Users can borrow against their cryptocurrency holdings by locking them up as collateral in CDPs. If the market value of the collateral falls below a certain threshold (known as the liquidation ratio), it triggers a liquidation event to protect the system and lenders from defaults.
Automated Liquidation Process: Yala automatically liquidates the collateral if a CDP falls below the required liquidation ratio and the borrower fails to act. This process involves selling the collateral on the open market or through an auction system to the highest bidder to cover the debt and any associated fees.
Emergency Reserve: The treasury can act as a financial buffer or insurance pool, specifically reserved to cover losses that exceed the normal operational scope, such as in extreme market conditions or unexpected liquidity crises.
Loss Coverage: In a liquidation where the proceeds from the collateral sale are insufficient to cover the outstanding debt, treasury funds can cover the shortfall, preventing the losses from affecting other users or destabilizing the overall system.
1.2 How would you maintain the $YU peg?
Yala will employ several mechanisms:
Over-Collateralization: The stablecoin’s over-collateralization mechanism ensures that the value of collateral exceeds the stablecoins issued, providing strong security and reducing the likelihood of YU losing its peg.
Liquidity Reward Program: Yala will launch a liquidity farming program on Uniswap V3 to incentivize users to add liquidity for YU/USDT, YU/USDC, YBTC/WBTC, and YBTC/other BTC pairs. Users will earn points redeemable for Yala tokens and partner BTC project tokens. This creates consistent arbitrage opportunities, helping maintain price alignment between AMMs and the broader market. Additionally, the Yala platform will offer a 1:1 BTC/YBTC ratio, further enhancing arbitrage potential.
Market Maker Collaboration: Yala will partner with major market makers (MMs) to maintain the peg. MMs are incentivized by arbitrage opportunities, ensuring continuous price stability.
Peg Stability Module (PSM): The PSM will actively maintain the peg by managing YU supply. If YU trades above the peg, more will be minted; if it trades below, YU will be burned.
Direct Deposit Module (DDM): The DDM allows third-party lending protocols to offer YU at fixed interest rates. By influencing YU supply, the DDM directly supports the peg.
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