Hylo: Enhancing Capital Efficiency of LSTs on Solana
What's it?
Hylo, currently in development, is a Defi protocol that supports minting stablecoins by utilizing LSTs on Solana. It won second prize in the payment track on the Solana Radar hackathon, was selected as Colosseum's second accelerator cohort, and, was accepted into the startup launchpad of Helius Labs. It’s developing stage now.
Why matters?
On the surface, liquidity staking is seen as a way to enhance and maintain network security. However, it has a more important purpose: reducing liquidity chips and easing selling pressure. Therefore, LSTs are needed. But how can attract more stakers? How can let stakers continue to stake willingly? Hylo addresses these by providing utility to enhance the capital efficiency of LSTs while bringing more revenue to stakers.
Protocol mechanism
Hylo adapts a dual-token model consisting of hyUSD and xSOL, hyUSD and xSOL will be minted simultaneously in one depositing, maintaining price stability through a specific invariant equation.
hyUSD: The stablecoin minted by depositing LSTs, its peg is maintained by xSOL.
xSOL: The volatile token whose price will be adjusted to maintain hyUSD’s peg.
Invariant equation: The core of maintaining price stability, it’s designed as: Collateral Value = hyUSD Supply × hyUSD Price + xSOL Supply × xSOL Price, when $SOL price changes, the Collateral Value will also change, to maintain hyUSD’s price, xSOL will change accordingly.
Stability Pool: Users can deposit hyUSD into Hylo’s Stability Pool, and they receive staked hyUSD representing their pro-rata share of the pool. These tokens automatically compound yields at the end of each network epoch—no lockups, no additional actions required. However, there is a risk that when users wish to withdraw from the pool during market turbulence, a pro-rata share of the minted xSOL will be returned to them as a replacement.
Protection mechanisms
Hylo implements a multi-tiered risk management approach centered around one key metric: the system collateral ratio (Collateral Valuee / hyUSD Supply * 100%). The CR is a measure of system health, indicating the ready availability of the backing assets behind hyUSD. When CR is over 150%, the system is considered fully healthy.
Fees control: If the CR drops below 150%, the protocol will increase hyUSD minting fee and decrease hyUSD redeeming fees to reduce hyUSD supply, while decreasing xSOL minting fees and increasing xSOL redeeming fees to increase xSOL supply. In this way, hyUSD burning and xSOL minting are encouraged to increase CR.
Stability pool drawdown: If CR drops below 130%, staked hyUSD in the stability Pool will be converted to xSOL, the double positive effect of burning hyUSD and minting xSOL quickly recovers the CR to a healthy level.
Bonuses incentive: If the downward pressure on the CR is sustained or severe enough to exhaust the stability pool’s supply of hyUSD, a special reserve of accumulated treasury revenue is available to provide bonuses to users who mint xSOL or redeem hyUSD in Stability Mode. These bonuses offer an immediate arbitrage opportunity to buy and redeem hyUSD from external liquidity pools.
Recapitalization: Once hyUSD is insufficient to stabilize the protocol, Hylo will utilize the accumulated treasury funds to recapitalize the protocol.
Minting xSOL: Using the accumulated SOL to mint xSOL, directly increases the collateralization ratio.
Buyback & Redemption: Purchasing hyUSD from the market and then redeeming, thus reducing the supply of hyUSD and improving the CR.
Protocol Revenue
Currently, the protocol revenue consists of Minting/Redeeming fees and LST yield. But details of the fees have not yet been released, LST yields a base APY between 8-11%, most of which will be allocated to hyUSD stakers.
Risks
Protocol security: This is the riskiest part, once a security accident occurs, it will deal a fatal blow to the project. As for the Hylo, there are two main security risks.
Stolen collateral: The value of hyUSD and xSOL is built on top of collateral, once collateral is stolen, users can’t redeem their LSTs normally, and the entire protocol will not work properly.
Unlimited issuance: The protocol relies on an invariant equation, once parts are modified maliciously, such as when xSOL’s price becomes a negative number, hyUSD supply can be infinity.
Depeg: Although there are some mechanisms to maintain a stable price of hyUSD, it still has the potential risk of depeging, after all, buying and selling affect the market prices.
Lack of attractiveness: Although the protocol enhances the capital efficiency of LSTs and generates revenue for users, its revenue channels are limited. Competitors like the Reflect protocol integrate with LRT and perp projects to provide users with higher yields. Therefore, if users do not obtain high enough yields, they will choose better.
How to be better
Defi integration: Cooperate with more Defi projects to increase revenue, and then provide more yields for users. For example, adding LP in Perena to earn fees, or earning more income by participating in yield protocols, as the Carrot Protocol does.
Staking hyUSD: Staking hyUSD is equivalent to locking LSTs, which is exactly what the Solana Foundation wants. This may bring official support, so the Hylo protocol can roll out hyUSD stake activity, and users can stake hyUSD to get governance tokens for rewards. In the secondary market, the price of governance tokens should follow the price of SOL as much as possible. This ensures that users have enough motivation to continue staking.
Closing thoughts
The Hylo protocol enhances the capital efficiency of LSTs. It brings what the Solana Foundation wants, brings new possibilities, and has the potential to gain official support. But there are still many risks, it should consider expanding revenue channels and providing users with more yields to enhance attractiveness and core competitiveness.