How it works
In a nutshell
The main goal of the GasStation protocol is to tokenize blockchain transaction costs. This allows these tokens to be used as a unit for transaction costs, independent of the native currency (e.g., ETH, POL, SOL) price fluctuations over time. To achieve this, we incorporate several concepts from both DeFi and traditional finance:
Collateralized Debt Positions (CDP)
Parametric Insurance Costs
In the following sections, we will briefly explain how these concepts work and how we have integrated them into the protocol.
Collateral Debt Positions (CDPs)
CDPs are a common feature in lending protocols, widely known to users. The process involves several interconnected steps:
Users deposit collateral into a designated pool.
The lending protocol establishes key parameters, notably the maximum Loan-to-Value (LTV) ratio.
Using these parameters as a guide, users can proceed to borrow another asset.
The amount they can borrow is carefully controlled.
The protocol ensures that the actual LTV of the user's position never surpasses the predetermined maximum LTV.
This mechanism maintains the stability and security of the lending system while allowing users to access liquidity based on their deposited collateral.
Automated Collateral Debt Positions (aCDP)
Our protocol introduces a novel mechanism called aCDP (automated Collateralized Debt Position), which differs from traditional CDPs. In this system, users can buy and sell GIX tokens without directly depositing collateral. Instead, when a user purchases GIX tokens, the ETH they provide at the basefee price automatically serves as collateral. The GIX smart contract becomes the owner of this collateral, effectively holding the CDP. The smart contract then issues tokens to users who contribute to it. This automated process simplifies user interaction while maintaining the core principles of collateralized lending.
The system accommodates separate liquidity providers (LPs) who can contribute additional collateral, enhancing the overall stability. However, due to the volatility of the base fee (also known as gas price), there may be periods when the pool lacks sufficient collateral to cover all circulating GIX tokens at the current market price. Thus, when users decide to sell their GIX tokens, the protocol prioritizes using the collateral owned by the GIX smart contract before drawing from LP-provided collateral. The latter action triggers slippage to protect LP investors.
While significant spikes in gas prices are infrequent, they do occur, with larger spikes being progressively rarer. To maintain economic sustainability, particularly during these uncommon high gas price events, our protocol implements a reward system for LPs and a fee structure for GIX token holders. The subsequent section will explore the specifics of these economic mechanisms, explaining how they contribute to the protocol's long-term viability.
Insurance Interest Rate Model (IIRM)
The IIRM calculates charges for GIX holders and rewards for Liquidity Providers (LPs). We've adopted an insurance model that treats each gas price spike as an event, enabling us to compute a premium for users "insured" against these spikes. Through analysis of historical data, we've developed a parametric insurance model to determine this premium's value. Since individual users don't hold Collateralized Debt Positions (CDPs), the GIX smart contract pays the premium to the main pool (the LPs). The contract uses its collateral to calculate and deposit the payout percentage, benefiting all pool participants.
During significant gas price spikes, when users sell their GIX tokens at the current gas price, we first utilize the GIX contract's collateral. However, as this collateral diminishes due to payouts, we become more likely to need LP collateral. When accessing LP collateral, we apply a slippage mechanism to protect LP assets. This causes the GIX token to automatically depeg from the market gas price by a certain percentage, proportionally reducing potential LP losses. We prioritize depegging over LP losses, with the slippage mechanism designed specifically for LP protection.
It's important to note that LPs serve as temporary volatility absorbers. They may incur losses during market turmoil, but the system is designed for long-term profitability, typically over a year-long period. This approach balances short-term risk with long-term reward for LPs, ensuring the system's overall stability and sustainability. This is no financial advice and users should be aware of the risk of complete loss of capital.
Last updated
