Safety Pool

When a massive market events happen, it can cause a flash crash that cause token prices to plummet dramatically in a short period of time, there can be a situation where some vaults need to be liquidated due to low LTV. The protocol is incentvised to defend against bad debt that can compromise the stability of the ecosystem.

In these situations, the regular liquidation process can be hampered because there is insufficient on chain RoeUSD to repay debts.

To address this risk, protocols like Liquity have a stability pool, a pool of LUSD ready to be used to urgently repay some debt. This pool usually gets some additional yield in regular times, and buy discounted collateral when market events happen. Those assets can be sold for USD later when liquidity is back.

Monroe addresses this risk with the opposite approach. Instead of having a vault of USD, Monroe has a pool of LSTs that receive an additional distribution of yield from stakers that have minted to secure the system.

Yield Distribution Example

When stakers mint RoeUSD they give up the right on how the yield is distributed. Monroe assigns additional yield to be given to the safety pool LPs.

When this flash crashes occur, the Safety Pool assets absorbs the debt. As the Safety Pool assets are the same as the collateral assets, the assumption is that its size will be able to increase the LTV of the ecosystem's debt to a level of safety in a comfortable manner. This in effect buys the protocol time where price can appreciate or bounce back to have RoeUSD to repay the debt when the asset price appreciates again.

The advantage of this system is that instead of being yet another pool of USD getting some yield, the safety pools are pools of LST getting additional yield without getting additional risk in the form of price exposure.

With the current base parameters, we estimate a stETH vault could yield depositors 9% without taking on additional price exposure. This is a new DeFi offer that comes as a byproduct of Monroe architecture.