Introduction ZETA Protocol: Issuance of yVault-based Index/ETF tokens

ZETA protocol is a protocol that can issue stable index/ETF tokens based on yearn.finance’s Vault[1]. Users can operate a variety of investment portfolios depending on the type of ETF.

ZETA V1 features:

-ETF token based on stable coin and mirroring token

-ZUSD is using yVault (yearn.finance)’s DAI,USDT,USDC,TUSD strategy. users can benefit from yield farming and compound interest.

-Index, basket assets arbitrage trading opportunity

-Issue & withdrawal of permissionless index tokens

Motivation

Yield farming has led to explosive growth of DeFi applications that have not existed before in Ethereum history. The background behind the explosive growth is due to various factors such as DEX and landing protocol, but the constant scalability of the asset infrastructure has made DeFi’s TVL (Total Value Locked) reach a phenomenal figure of $10B. TVL, which is the core data value of DeFi, can be thought of as a measure that can simply capture the value of the protocol, but in another sense, it is an index that can check the bandwidth of the protocol. In other words, the bandwidth referred to in this sentence indicates how much spatial growth capacity of the DeFi ecosystem has. In other words, the wider the bandwidth, the more space there is for the entire DeFi ecosystem to grow.

DeFi economy bandwidth(Left: Token Right: Protocol) [2]

DeFi prior to the explosion of Yield Farming was limited to ETH, a native token, due to lack of interoperability with protocols and asset infrastructure. In the current Ethereum DeFi ecosystem, landing protocols, oracles, DEX and etc have the potential to expand bandwidth as interoperability between protocols like “Lego” is created. In other words, this explosive growth was possible because there was a token asset infrastructure in Ethereum. In particular, as stablecoins, bitcoins, and real assets (gold, silver, real estate) are issued on Ethereum, not only ETH but also various token assets are contributing to expanding DeFi’s economic bandwidth like network effects.

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Figure 1: Left: October 19, 2019 Right: September 10, 2020 [3]

Looking at Figure 1, the difference between last year and present is that a lot of outstanding tokens have been issued to Ethereum. This increases capital efficiency by integrating with many applications. As a result, the dependence of ETH, the native token of the DeFi protocol, has been reduced.

Stable coin issued by Ethereum [4]

Bitcoin issued on Ethereum [5]

Currently, as the demand for landing and yield farming for Ethereum DeFi surges, stable coins have been issued for $12B and wrapped bitcoins have been issued for 106K. Ethereum on-chain issuance of stablecoins and bitcoins can be a growth booster for the DeFi ecosystem. In order to constantly issue external assets on Ethereum, the DeFi bandwidth needs to expand more than now. DeFi, which is borderless and without permission, needs to solve the following three problems in order to expand its bandwidth to the next level.

  1. Assets are very fragmented.
  2. Asset understanding is also complicated.
  3. Because each asset has different characteristics, the risk attributes are also different.

In the current token ecosystem, stablecoins and bitcoins are very fragmented. Looking at the stable coins that can be used for DeFi applications, there are more than 10 types such as DAI, USDT, USDC, TUSD, HUSD, BUSD, PAX, and SUSD. In addition, ETH trading pairs such as ETH/DAI, ETH/USDC, ETH/BUSD, and ETH/HUSD are provided to representative CeFi exchanges Coinbase, Binance, and Huobi instead of ETH/USD pairs. The barriers to entering DeFi are very high because users need to understand what characteristics each of these fragmented assets have.

DAI price volatility data [6]

Fragmented stable coins have different liquidity that can be operated for each stablecoin, and liquidity risks exist. For example, if dollar liquidity is urgently needed in markets such as the Black Thursday crisis, stable coins with low liquidity and high utilization are likely to drop out of the pegging price. In particular, for stablecoins, liquidity providers and arbitrage traders play an important role for the dollar pegging. Since there is no liquidity provision temporarily, a liquidity black hole will occur, and the price of stablecoins will temporarily fluctuate.

And each stablecoin has a different issuance mechanism and there are risks. For ordinary users, only one or two stable coins are used. For example, if you have USDT and USDC, the potential risks are as follows.

USDT: If one day USDT is made unavailable due to US regulations or the actual dollar is not supported, the crypto ecosystem using USDT as a value measure and exchange medium will have a very big impact.

USDC: If the US government forces an address with USDC to be blacklisted, the USDC for that address will be permanently unavailable. This example is a very extreme situation, but it is too high to ignore the potential risk.

To summarize the above example, users should be able to easily access crypto assets before accessing the DeFi application. In addition, DeFi assets must be able to hedge potential risks and at the same time have elements that can expand DeFi bandwidth.

ZETA creates a single ETF token from fragmented tokens such as dollar-based stablecoin and bitcoin. The ETF aims to improve the efficiency of the crypto capital market by combining complex and fragmented assets into one, allowing users to easily access it. We also believe that ETFs have the potential to expand the DeFi bandwidth.

Why ETF?
ETFs are the most innovative products in the financial sector over the past 30 years. ETFs in traditional finance are securities that are issued by a consignment company on the basis of which assets of similar definitions are organized into baskets and then paid to the trustee bank. This year, there was a new capital inflow of $428 billion to the ETF, and the global ETF AUM (Asset Under Management) surpassed $7 trillion for the first time. The following are the characteristics that can be seen in the financial markets why people refer to ETFs as innovative products.

1.Ease of investment

Investors can easily judge the direction of investment in the market even without a deep understanding of individual stocks belonging to the ETF.

2. Long-term profitability due to low transaction costs

General stock-type funds incur a lot of operating costs because the manager operates the fund by buying or selling stocks by receiving cash payments. ETFs have a structure in which investors pay the stocks in the stock basket to the management company, so management fees are low. The ETF fee (0.23–0.66% per year) is cheaper than that of regular funds (2–3% per year). Regarding the low fee effect, it can be seen that a distinct difference is revealed, especially in the case of long-term holding of funds. If it is a long-term investment aiming at the market rate of return, an ETF investment with a lower fee is effective.

3.Investment efficiency according to dispersion effect

Usually, it is difficult for individual investors to form a portfolio that can benefit from diversification if the investment amount is not large. ETFs can easily solve this diversification problem. ETFs that follow the QQQ index are certificates for stock baskets comprising 100 NASDAQ-listed stocks, so buying one ETF can have the same effect as buying 100 NASDAQ-listed stocks. Therefore, ETFs made it possible to diversify investments with small investment funds.

4.Transparency in fund operation

Since ETFs are forced to disclose their asset composition on a daily basis, it can be said to be highly transparent compared to general fund products. Therefore, investors can check the asset composition of the ETF by inquiring the PDF (Portfolio Deposit File) details, which are open portfolios, even if they do not look for the constituent information of the underlying index. Based on this, real-time i-NAV (indicative Net Asset Value) calculation is also possible.

Anyone can participate in the ZETA protocol operator and LP, and can organize ETFs in a democratic way. You can also use ETFs regardless of your status or region. This believes that combining DeFi with traditional financial ETFs could lead to new options in the capital markets.

ZUSD mechanism of the ZETA protocol

ZETA is a protocol that issues a number of profitable fragmentation tokens as one ETF on Ethereum. This part will focus on ZUSD, the first ETF token of ZETA’s mechanism.

Index tokens and ETF tokens on the market must be staked in their own protocol to generate profits. General staking protocols earn tokens by depositing in the landing protocol or by yield farming. The deposit interest of the landing protocol depends on the design of the interest curve, but is fundamentally less than the profit generated by yield farming. In addition, in the protocol that operates the yield farming strategy, when the user deposits liquidity, it is a structure in which a token is obtained in proportion to it. Tokens generated from yield farming can be withdrawn only through contracts. However, as the contract structure complexity increases for each protocol, the Ethereum network fee also increases. This can put a great burden on users. Therefore, users have little motivation to have ETF tokens.

ZUSD is an ETF token composed of DAI, USDC, USDT, and TUSD based on yVault to create a stable and profit-maximizing ETF. yVault is designed to maximize profitability, starting with convenience for users. In addition, in order to make the profits sustainable, the community emphasized security and constructed a stable strategy to reduce the risk to users as much as possible. yVault is already one of the key projects in the mighty YFI ecosystem and is in a unique position in the field of DeFi asset management. ZUSD does not use the yCRV vault and uses DAI, USDT, USDC, TUSD strategies in yVault.

To issue ZUSD, users do not need to deposit all four stable coins. For example, if you only put DAI, you can issue ZUSD at the current price. The detailed issuance formula is as follows.

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ZUSD price formula

Price: Refers to stablecoin price data in Chainlink[7] Oracle.

Weight: Ratio of the corresponding stablecoin to all deposited stablecoins.

The asset characteristics of ZUSD can diversify the potential risk of stablecoins. And because yVault is used, the value of the deposited asset increases by the amount of interest generated. In other words, the price of ZUSD may fluctuate depending on the value of the basket. When the value of ZUSD is devalued or appreciated, the arbitrage strategy also increases.

Conclusion:
The small ball launched by the YFI community has created a new chapter in the DeFi ecosystem. The vision presented by YFI inspired ZETA very much. ZETA plans to build on the YFI ecosystem and issue ZUSD as well as ZAssets (EX:ZBTC) in the future. Our goal is to cooperate with the open community to create a decentralized asset operating organization with a transparent and fully automated mechanism. It will also contribute to DeFi’s economic bandwidth expansion.

References
[1] https://docs.yearn.finance
[2] https://thedefiant.substack.com/p/ether-is-the-best-model-for-money
[3] https://defipulse.com
[4] https://coinmetrics.io
[5] https://www.duneanalytics.com
[6] https://dai.stablecoin.science
[7] https://feeds.chain.link/

The code will be open source soon and will be updated here. We are very honored to contribute to the YFI ecosystem. If you have any questions or feedback about ZETA, please feel free to comment.

2 Likes

Will you be airdropping zeta native tokens to yfi holders?

4 Likes

Bump, also would like to know

What’s the point of a ZETA token? We already have YFI for governance.

1 Like

Does this put assets under Yearn vault management? Or did you just fork the strategies? What is the real benefit to the Yearn ecosystem here? Seems an ETF vault token is something we could accomplish in-house (and effectively already have with yUSD) without a whole new ZETA system.

1 Like

I’m not sure if I see the benefit - we already have yUSD. This looks to be functionally identical, just with z instead of y.

4 Likes

ZUSD is using each DAI,USDT,USDC,TUSD yVaults. yUSD currently only uses yCRV vault. So, if you only have ZUSD, you can freely switch between the revenues of the 4 Vaults and earn money. The more ZUSD is issued, the greater the yearn ecosystem will expand. And YFI’s value fundamentals will also be solid. yearn has already become a fat protocol that can interoperate the entire DeFi ecosystem. Our goal is to make yearn universal to general users by issuing ETF assets that can be combined in the yearn ecosystem to form a more robust fat protocol.

ZETA’s journey is still in the beginning. We need feedback or opinions from the strong yearn community to grow.

3 Likes

That’s not correct. yUSD uses the yCRV vault, but the yCRV vault is full of yDAI, yUSDT, yUSDC, and yTUSD. That’s why when you deposit them on Curve it has the option to deposit wrapped or not.

Those are different ytokens. Those ytokens you can deposit on curve aren’t the ytokens you get after deposing in the vaults but in earn tab (yes, they all have the same name, it’s confusing).

1 Like

Hm, good point. Perhaps we need a rebrand for the earn tab. yeDAI? :thinking:

1 Like

Interesting… so it’s using the earn product instead of the vaults?

Intersted in knowing more details once they become available. Would be cool if you guys are able to bring in new capital into the yearn ecosystem.

1 Like

can I bump your bump? @ZETA can you answer my previous question?

1 Like

I always advocate strongly for a fee based on performance only. I do not believe in fees on AUM because that is one thing that has been so predatory in traditional finance (why people end up with like 50% less in their 401k than they might have in a less active or lower fee fund). I know your fee is low but it is still a flat fee assessed every year and I can’t support that.

ZETA Update:

Hello yearn community, ZUSD V1 mainnet has been launched. ZUSD is an ETF asset issued based on yeran’s each DAI ,TUSD ,USDT ,USDC Vault. ZUSD V1 goal is to create a portfolio of stablecoins that flexibly provide investors with a profit strategy according to market conditions.

This mainnet release includes ZUSD’s smart contract open source and interface.

https://www.zetaportfolio.com/ <- Click here You can start ZUSD Buy/Sell using the interface.

ZUSD features:

  1. ZUSD issuance uses DAI, USDT, USDC, and TUSD.

  2. If you have ZUSD, compound interest can be generated by yVaults of 4 stablecoins. Users can switch freely according to the yVaults revenue situation.

  3. ZUSD is not a stablecoin index for 1:1 dollar pegging. ZUSD is designed on an ETF basis because price volatility exists.

ZUSD issuance mechanism:

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The basic issuance formula refers to price data in Chainlink Oracle. The weight is based on the number of stablecoins in the balance of each DAI, USDT, USDC, and TUSD Vault token, and the price of ZUSD is formed. When you deposit stablecoins, the number of issuance is determined according to the price of ZUSD.

In general, the price of ZUSD is volatile and arbitrage can be realized depending on the price situation. In addition, it is possible to create a hedging portfolio according to the volatility of the stablecoin value.

ZUSD interest generation mechanism:

Stablecoins deposited in ZUSD are deposited in each DAI, TUSD, USDT, USDC Vault strategy. The management method of each Stablecoins is as follows.

DAI+TUSD: The current strategy of DAI and TUSD is to deposit funds to Curve and sell CRV tokens obtained through liquidity mining to Uniswap. The sold funds are swapped into stablecoins and deposited back into Curve.

USDT+USDC: The strategy of USDT and USDC is to deposit funds in DForce to sell DF tokens obtained liquidity mining to Uniswap. The sold funds are swapped into stablecoins and deposited back into DForce.

For a more detailed explanation, ZUSD’s internal asset management is simpler to understand by looking at the picture below.

Profit realization (Redeem):

ZUSD holders must redeem ZUSD in order to realize profits. When repaid, the balance of the stablecoins varies depending on the situation in which the interest of each stablecoin occurs. So, ZUSD holders can freely switch and realize profits according to each stablecoin vault situation.

Reference :
In the stablecoin redemption (ZUSD burn) operation, a total of 0.52% of yVault fee and ZUSD fee will be incurred. The yVault design is designed so that small investors are not charged 0.5% commission. So, small investors are only charged a 0.02% redemption fee of ZUSD. If you are not a small investor, Uniswap allows you to charge less than the redemption fee.

*The 0.02% fee will be posted in the next post.

ZETA Protocol aims to be a decentralized asset manager based on the YFI ecosystem. We plan to issue ZAssets (ETF) tokens with various strategies in the future, and as the protocol is in the early stages, we need feedback from the community to find a market fit.

*WARNING:
The code is currently unaudited and the frontend is not fully tested. PLEASE DO NOT RISK ANY FUNDS YOU CANNOT AFFORD TO LOSE.

If after this disclaimer you still want to try ZETA, we recommend that you read our contracts carefully before depositing funds. Don’t trust, verify.

ZUSD is just the beginning. We need feedback from the yearn community to grow. We are always grateful to the yearn community for providing feedback.


Source

ZUSD token address: https://etherscan.io/address/0x577e56C834998f8Fa7eaCA666582691AD4Fd9de4

Github: https://github.com/ZETA-Portfolio

Medium:

Thanks for providing the idea. If the yearn community’s wants are the same as ZETA’s goals, let’s start planning.

I’m unclear– what benefits would this provide over using SnowSwap’s iearn pool or the upcoming yVault pool on Curve?

To me, this seems like a weaker version of these pools as the two above have trading fees built in (and swaps to USDC in Curve’s case) while ZUSD is just a collection of the four different yVault tokens.

6 Likes

Thanks for your question. Of course, it is obvious that you may get more profits of Swap Fee + Vault interests for the projects you mentioned more than ZUSD. But ZUSD uses different way of minting and redeeming tokens, so we think there are another possibilities for users to get profits.

In the future, we will expand ZUSD’s liquidity and utility to improve profitability.

Update: ZETA Token


ZETA Protocol aims to be a decentralized asset management based on the yearn ecosystem. ZETA, the native token of ZETA Protocol, is a stake that can participate in the operation of an asset management organization. The main token functions are as follows.

Governance

ZETA token holders can make proposals or vote for all ETF configurations, parameters, insurance, reserve funds, etc. on the protocol. That is, the ZETA token can affect the entire protocol. That is why it must be considered carefully. In order to propose to the protocol, the governance proponent must hold 1% ZETA tokens of the total supply. The voting period is 7 days and a 3% voting quorum is required to pass the vote. Governance parameters are initially set values. Values can be modified at any time by voting in governance in the future. The overall protocol and operation are discussed in off-chain voting (Snapshot, Discord, Forum).

Insurance

The index tokens of stablecoins currently on the market are concentrated in a 1:1 dollar peg. If the corresponding index token loses the peg, the net function of the index token is lost. In addition, even if it is peg, the value of the index token may be problematic if the collateral asset is undercollateralization compared to the index token. This poses two risks to LPs trying to issue index assets.

ZUSD’s design was designed as a dollar ETF product rather than an index for stablecoins. In other words, there is no 1:1 dollar peg factor and the value of ZUSD is a volatility token. Therefore, there is no compulsive risk for pegging. The principle of ZETA is to issue ETF tokens under the premise of high security. The potential risk for ZUSD is that the collateral asset’s net asset value (NAV) is seriously undercollateralization rather than the ETF value.

We have two steps to solve the undercollateralization phenomenon. The first step is to deposit a portion of the profits generated by the ZETA protocol into the insurance fund. In the event of small-scale undercollateralization, insurance funds will cover it. If undercollateralization occurs to the extent that the insurance fund cannot be covered, ZETA tokens in the last-stage reserve fund will be used. ZETA tokens in the reserve are sold to the open market (Uniswap), and the collateral assets are purchased as much as the NAV (Net Asset Value) of the ETF matches. And collateraliation is performed so that the NAV of the corresponding ETF matches. Currently, ZETA’s ETF is given a key role by liquidity providers. Therefore, it is the last resort made to avoid loss as much as possible for liquidity providers, and whether insurance works or not is governed by governance.

Staking

ZETA holders have the role of managing the overall protocol. This role could be an LP supplying ETF or a participant in the ZETA community. Different stakeholders need motivation to coexist in the ecosystem. So, 0.02% of the redemption fee incurred by ZUSD tokens will give ZETA staked holders a sustainable motivation. Also, users who stake ZETA can get sZETA. Transferring sZETA to another person is the same as transferring the staked ZETA. The redemption fee will be different for each ETF asset to be issued in the future, and since the ZETA protocol is still in its infancy, we will continue to expand the path to generate profits in the future.

Token distribution:

In order to decentralize the asset management organization, the ZETA token should allow anyone to get a fair share of the network. For fair participation, VC, initial investors, ICO, and free-mining elements have been eliminated. The 4M ZETA of the total token issuance will be distributed as follows.

  • 1.5%(60,000 ZETA)to YFI Inspiredrop
  • 6.4% (255,872 ZETA) to Dev Fund with 4 years vesting
  • 25.4%(1,016,096 ZETA) to Reserve Fund
  • 66.7%(2,668,032 ZETA) to Liquidity Mining

YFI Inspiredrop

The yearn gave ZETA protocol a great inspiration for project design. And since we received a lot of feedback from the yearn community before launch, we will distribute ZETA tokens to YFI holders as a thank you.The detailed token claim method and period will be disclosed in the next post.

Dev Fund

The Dev Fund can give you the opportunity to create a sustainable ZETA. The ZETA development team motivates them to develop and operate full-time as a member of the ZETA ecosystem. In the future, the overall UI/UX will be improved, and the ZETA team will post the ETF structure and contract on the governance forum so that anyone can participate in the discussion whenever a new ETF is developed.

Reserve Fund

The Reserve Fund is a fund that can be used for ZETA ecosystem expansion and protocol insurance. For example, you can use ZETA as an incentive to promote the issuance of ETFs, or you can claim as much as you have contributed to the marketing and operation of ZETA. Another possibility could be a fund manager subsidy that constitutes an ETF asset by operating ZETA Grants and a subsidy given to yearn developers. To use the Reserve Fund, it is decided by a forum discussion with the community and then a governance vote.

Liquidity Mining

Since the ZETA protocol issues ETF assets such as ZUSD, LPs are highly dependent. To facilitate the issuance of ZUSD, LPs will be given ZETA rewards. ZETA’s success is giving early LPs a reward boost to encourage liquidity during the first month because the contribution of LPs is so important. Detailed information on reward distribution is as follows.

Reward per boost block: 0.9 ZETA

Boost quantity: 145,152 ZETA (3.62% of supply)

Reward per block for 4 years after boost: 0.3 ZETA

To get ZETA, you need to deposit Uniswap LP, Single Assets listed below.

Uniswap LP Token

  • ETH-ZETA
  • ZETA-ZUSD
  • ETH-ZUSD
  • ETH-USDT
  • ETH-USDC
  • ETH-DAI

Single Assets

  • ZUSD
  • MKR
  • COMP
  • UNI
  • yYFI (YFI yVault)
  • BAL

UNI-V2 with ZETA,ZUSD gets more ZETA than other pools, but ETH-USDT, ETH-USDC and ETH-DAI pools can get UNI,ZETA tokens. UNI-V2 can get a lot of tokens, but there is a risk of losing money due to IL. Although the amount of ZETA compensation is relatively smaller than that of UNI-V2, we support depositing single assets so that you can get ZETA without risk.

Distribution of ZETA tokens will start at block 11007340 on October 7, 2020 at 7:00 AM(UTC).

Disclaimer:

The code is currently unaudited and the frontend is not fully tested. PLEASE DO NOT RISK ANY FUNDS YOU CANNOT AFFORD TO LOSE.

If after this disclaimer you still want to try ZETA, we recommend that you read our contracts carefully before depositing funds.

Twitter:https://twitter.com/ZETA_Portfolio/status/1313469678493159424?s=20
Website: https://www.zetaportfolio.com/