jUSD Mechanics
Borrowing
LTV for various assets:
Stablecoins: 80% BTC/ETH: 50-60% Liquid staking tokens: 25-40%
Liquidations
A user’s total collateral value on Jigsaw is the total sum of the current value of all whitelisted assets deposited into the protocol.
It’s also possible for a user to earn non-whitelisted assets, for example as rewards for farming activities or airdrops. Those assets can be managed by the user, e.g. selling or withdrawing, but do not count towards the total value of the user’s collateral.
It’s important to understand how Jigsaw keeps track of collateral and manages liquidation levels.
Jigsaw does not consider the total value of a user’s deposited assets as global collateral for a debt. This is important to understand. Instead, borrowing happens against each collateral with the respective LTV.
Imagine User A has the following assets deposited in Jigsaw:
1,000 USDC
1 ETH, worth $3,000
Total value of the user’s deposits: $4,000
Let’s assume an LTV for both assets of 75%
The user does not borrow 3,000 jUSD against the total collateral of $4,000.
Instead, the user borrows 750 jUSD against the 1,000 USDC deposit and 2,250 jUSD against the $3,000 worth of ETH.
The accounting for liquidations and collateral management is fully isolated.
The reason for this is that the stablecoin collateral is
now always safe and would only be liquidated in extreme cases, like a depegging event. The deposit of the volatile asset does not put the stablecoin deposit at risk.
Therefore, your ETH could be liquidated if it falls below the required collateralization ratio and your USDC would always be safe. This isolating of risk offers a better user experience and creation of risk profiles, without being exposed to unwanted consequences.
When your collateral is swapped into a new collateral asset the protocol updates your current collateral and the newly received asset now is your collateral. The same concept also applies to your debt issued against your collateral, as your debt is now against the newly received collateral asset.
Self-liquidation
I guess all the info about self-liquidation mechanism should go here.
Key changes in self-liquidation compared to the previous version of the protocol are:
Users can now specify how much collateral from strategies they want to use for self-liquidation.
Collateral is automatically swapped to jUSD using a super-duper-cool-fast-efficient algorithm to get the best possible price for the user to perform self-liquidation. We sacrifice our fees to not take more collateral from the user than they have specified when initiating the self-liquidation.
Additionally, users are now able to specify the slippage for the transaction to ensure that the amount of collateral used for self-liquidation is exactly what they wanted to use.
Demand Side Please reference this document for more insight into how Jigsaw will be used across multiple verticals.
https://docs.google.com/document/d/1e_YMyum-kZJcCet9gYxf8mkzi2kW9QwOKxz5pS9HWXM/edit
Risks
Jigsaw is highly innovative. Consequently, there’s always technical smart contract risk. The following will solely focus on design risks associated with jUSD.
jUDS’s collateralization is measured protocol-wide, meaning that jUSD risk is not isolated to every user.
This impacts what protocols Jigsaw can implement and support, as we need to pay attention to associated security risks.
Let’s assume that there are only two users on Jigsaw with the following position.
User A holds $1,000 worth of native ETH as collateral and has an outstanding loan of $500 jUSD
User B holds $1,000 worth of stETH, deposited into a newly launched degen restaking protocol, with an outstanding loan of $800 jUSD
Protocol collateral: $2,000
Protocol outstanding debt: $1,300
Importantly, Jigsaw would never support a new protocol so early. This example is just for illustrative purposes.
Now imagine that the restaking protocol gets exploited and all collateral from User B is lost. Obviously, User A’s collateral is safe and not impacted.
Protocol collateral: $1,000
Protocol outstanding debt: $1,300
As you can see, jUSD is now undercollateralized. User A’s collateral funds are unaffected, as they were not deployed into the restaking protocol. jUSD’s price is expected to decline.
First of all, we’re fully aware of those risks. That’s why we will be careful about integrating new protocols and risky collateral assets.
This also impacts LTV-ratios. In reality, User B would not be able to borrow $800 against only $1,000 of collateral when deploying collateral into such a risky protocol.
Moreover, it is important to note that even such a bad case scenario solely impacts jUSD. The collateral is fully separate from this and never impacted, unless deployed into an affected protocol.
Lastly, it is crucial to understand that debt is fully denominated in jUSD. If User A still holds the jUSD they can simply repay the loan. The initial loan was 500 jUSD and the decline in price did not change the owed amount. User A can simply repay the 500 jUSD.
There might even be a user who sold the jUSD for USDC. In this case, the outstanding jUSD debt acts as a short of jUSD. Such a user can go to the open market and buy back jUSD at a discount to pay back the initial loan – profiting from the difference in price.
In summary, users who use Jigsaw as intended will be exposed to a limited jUSD risk profile. Such risks are most relevant for users who buy jUSD on the open market without having a corresponding open debt position.
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