Harbor Protocol: The Interchain Stablecoin Protocol Unifying Liquidity in Cosmos DeFi
In this piece, we’ll be providing an overview of Harbor Protocol: an interchain stablecoin protocol that enables the minting of the CMST stablecoin using various interchain assets as collateral.
Our last article explained how bridged stablecoins within the Cosmos ecosystem result in liquidity fragmentation, as they are not interoperable with one another and therefore require their own separate liquidity pools. In contrast, Harbor Protocol’s CMST stablecoin can be backed by these bridged stablecoins, as well as many other assets, unifying liquidity. In the future, liquid staked assets and liquidity provider (LP) tokens will also be eligible as collateral.
Why does this all matter?
For one, Cosmos DeFi growth will be in part dependent upon having a liquid stablecoin that’s interoperable throughout the ecosystem, which Harbor provides. Additionally, protocols benefit by being able to list their tokens as potential collateral on Harbor Protocol, unlocking new utility for their tokens. They’re also able to increase their token’s liquidity through the integration and deployment of liquidity pools cSwap, Comdex’s decentralized exchange.
In this piece we’ll dive into the intricacies of Harbor Protocol, highlighting similarities to MakerDAO. We’ll also highlight differences such as the implementation of the ve(3,3) token economics model first introduced by OlympusDAO, and more recently made famous by Fantom blockchain’s Solidly protocol.
A Quick Overview
Harbor Protocol is a collateralized debt position (CDP) protocol, similar to the widely popular MakerDAO. By depositing one’s cryptocurrency assets into Harbor’s smart contracts, users are able to benefit from any token price appreciation, while unlocking liquidity in the form of the CMST stablecoin.
We recently discussed how Comdex enables the deployment of interchain applications through financial primitives (“modules”) which act as customizable building blocks. Harbor is no different and is comprised of various modules, including:
- Vault module: enables the minting of CMST.
- Locker module: pays interest to those who have deposited CMST into it.
- Collector module: collects fees, and in the context of Harbor may auction them off if collected fees exceed a certain threshold.
An example of certain Comdex modules.
Additionally, the Stable Mint feature allows the 1:1 minting for arbitrageurs on secondary markets. So if another stablecoin is worth $0.99, it could be used to mint CMST which is then sold for $1.00.
The result is that users may deposit a variety of assets and seamlessly mint the CMST stablecoin. This could include depositing axlUSDC and gravUSDC (thereby unifying liquidity), or in the near future using LP tokens or liquid staked assets.
If you think that this sounds a lot like MakerDAO, then you’re correct. However, several key innovations build upon MakerDAO, including taking the best ideas from Curve and OlympusDAO. We’ll discuss them next.
Harbor Protocol and MakerDAO
MakerDAO has a surplus module that collects revenue from various fees, and once these fees surpass a threshold, they’re used to purchase the MKR governance token and burn it. This reduces supply and puts upward pressure on the price.
Harbor Protocol deploys a similar surplus module, referred to as the Collector module. Once the threshold is reached (in the form of CMST tokens), these CMST tokens are sold off for HARBOR tokens via an auction process and burned in order to reduce the supply.
The fees originate via:
- Stability fees: essentially the interest that users pay for their CMST loan.
- Drawdown fees: a small fee collected when CMST is minted.
- Liquidation fees: when CMST loans become bad debt, and are sold off.
That being said, Harbor Protocol moves past MakerDAO by implementing the voting escrowed (3,3), or ve(3,3) model, first introduced by OlympusDAO, and more recently implemented by Andre Cronje and Daniele Sestagalli with Fantom-based Solidly.
This is a token economics model that quickly gets complex, but at a high level distributes emissions based on the circulating supply, so that the token supply remains scarce.
An example makes it more clear.
With Harbor Protocol, tokens are distributed weekly over roughly six years based on the circulating supply. Week 1 emissions begin at 1% of a total of 500M tokens, meaning 5M. The subsequent week would be based upon 545M tokens, and thus the amount distributed is now less than 5M. This continues, but it’s dynamic as it’s also based on how many HARBOR tokens are locked into veHARBOR.
veHARBOR is similar to veCRV, which readers might be familiar with. On Curve Finance, users are able to lock up their CRV in exchange for veCRV, which gives governance rights over key decisions, most important of all being how to allocate CRV token rewards. This has led to the ongoing Curve Wars whereby protocols compete for veCRV tokens in order to allocate rewards to their own protocols, gaining market share as a result through higher APYs.
In the context of Harbor Protocol, holders of HARBOR tokens may lock up their tokens for up to four months in exchange for veHARBOR, which provides increased voting power for determining key protocol parameters such as rewards distribution. That means that as Harbor Protocol’s adoption grows, it’s likely that projects will compete for veHARBOR tokens in order to allocate token emissions to themselves, as dictated by the ve(3,3) model.
This is a key distinction from MakerDAO: while both projects are deflationary through the burning of tokens, Harbor is also part-inflationary through token emissions that will drive demand for veHARBOR, and therefore HARBOR as well.
MakerDAO’s lack of an inherent staking mechanism is a challenge as the burn mechanism isn’t enough to adequately reward users. Harbor Protocol builds upon this by implementing the economic designs of immensely successful protocols OlympusDAO and Curve Finance.
It’s basically MakerDAO on steroids.
The Need for Harbor
During periods of market volatility, stablecoins like CMST may experience depegging below $1.00.
Should the peg drop below $1.00, our “Locker Savings Rate” (LSR) would increase, meaning that those who lock up CMST into the Locker module are rewarded a greater return, incentivizing more to be locked up. This in turn reduces supply and puts upward pressure on prices. Additionally, the stability fee would increase, disincentivizing people from minting more, further decreasing the supply of CMST. Both the LSR and stability fee would decrease during periods when CMST’s price is above $1.00.
However, these effects take time to kick in, and as such have a slow burner effect.
During times of significant volatility, stronger action may be required. If the protocol’s surplus drops below a certain threshold, then HARBOR tokens will be minted and auctioned off in order to buy CMST, helping to repeg it.
Using HARBOR as collateral in minting CMST is therefore not possible because, during periods of volatility, liquidations would require selling HARBOR, causing the price to fall. This, therefore, renders the above strategy of selling HARBOR in order to purchase CMST ineffective.
Conclusion
Harbor Protocol takes the foundational principles of MakerDAO and builds upon them, creating a protocol for minting crypto-collateralized stablecoins while rewarding users via advanced token economics. By implementing Curve Finance’s vote escrowed token model for directing liquidity rewards, as well as OlympusDAO’s ve(3,3) model, it’s likely that protocols will compete for veHARBOR tokens in the future in order to partake in token emissions.
Those that collect veHARBOR earlier on will be especially well-positioned to benefit from future growth, by being able to direct rewards to their own protocols for higher offered APYs. This will directly complement the fact that their own tokens may be used as collateral in minting CMST (boosting their token’s utility), as well as increased token liquidity through deployment into cSwap liquidity pools.
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