LP Finance

P Finance is a synthetic asset issuance protocol that allows users to lock collateral and

mint synthetic tokens. zSOL is a Solana-pegged synthetic asset which allows users to

leverage liquid staking yields and short-selling.

Accepted collateral for zSOL is as follows.

- mSOL (Marinade Staked SOL)

- stSOL (Lido Staked SOL)

- SOL (Solana)

- UXD (UXD Stablecoin)

- SAMO (Samoyed Coin)

Collaterals should meet the following requirements.

- Should be Solana native (Not bridged)

- Should not be controlled or backed by centralized entity

- $35,000 value swapped to mSOL should have less than 5% price impact

zSOL can be minted/borrowed at 1.5% APY stability fee and this value could change

over time by the DAO’s decision.

LP Finance expects zSOL to be used for leveraged liquid staking (mSOL - zSOL loop) or

short-selling (UXD - zSOL loop). As these strategies are expected to bring high selling

pressure on zSOL, a mechanism to ensure peg-stability is required.

2. Incentivized LPs

Incentivizing liquidity providers is the most straightforward to enhance the peg-stability

and scalability of zSOL. However, incentivizing via liquidity mining might cause future

scalability issues as it might cause huge inflation on the governance token.

For zSOL-{token} LPs are incentivized by the stability fee zSOL borrowers pay.

2.1 LP Token Staking

Multiple LP tokens can be staked on LP staking pool to earn stability fees. Expected LP

pairs are as follows.

- zSOL - mSOL (Enhance leveraged liquid staking experience)

- zSOL - stSOL (Enhance leveraged liquid staking experience)

- zSOL - UXD (Enhance short selling experience)

The protocol used to mint LP tokens could vary. For example, zSOL - mSOL from

Lifinity and Raydium could be both staked.

Every 24h, zSOL borrower’s debt amount is updated (+0.000041%) and corresponding

amount of zSOL is minted and distributed to the LP staking pool.

Estimated APY staked LPs could expect is as follows

𝐿𝑃 𝑆𝑡𝑎𝑘𝑖𝑛𝑔 𝐴𝑃𝑌 =

𝑇𝑜𝑡𝑎𝑙 𝐵𝑜𝑟𝑟𝑜𝑤𝑒𝑑 𝑧𝑆𝑂𝐿 (𝑈𝑆𝐷)

𝑇𝑜𝑡𝑎𝑙 𝑆𝑡𝑎𝑘𝑒𝑑 𝐿𝑃 𝑉𝑎𝑙𝑢𝑒 (𝑈𝑆𝐷) × 1. 5%

For example, if $10M zSOL is borrowed and total $ 1M LPs are staked, the staking APY

would be 15%.

By incentivizing LPs with additional “Real Yields”, zSOL would be able to scale linearly

with the demand.

2.2 Stability Fee Gauges

As mentioned above, multiple LP tokens can be staked to earn zSOL. In this case,

stability fee cannot be distributed equally to all LP tokens. Some pools demand higher

liquidity than others, and this should be properly balanced to enhance zSOL’s scalability.

Once LP token is registered on the staking registry, LPFi token (LP Finance Governance)

is used to vote for the gauge weight for each pool. Top two pools would be selected for

incentives, and the other pools would not earn any stability fees unless it is on the top two

pool on the next voting period.

3. Protocol Debt Vault

Protocol Debt Vault (PDV) is an account owned by LP Finance. PDV operates like all

other accounts on LP Finance, which allows the DAO to deposit, borrow, withdraw, and

repay. However, it has unique configurations.

- Non-liquidatable

- Can borrow up to 100% LTV

- Any user can repay/withdraw or deposit/borrow on PDV

PDV acquires a profitable debt position in order to maximize the protocol’s revenue.

Following is one example of a profitable debt position.

- Collateral: mSOL and stSOL

- Debt: zSOL

Typeless repayment, PSM, and liquidation mechanism allow PDV to acquire debt

positions while providing users easy-to-use services.

3.2 Peg-stability Module

Peg-stability module (PSM) is common for stablecoin issuance protocols. PSM allows

users to swap between the protocol’s stablecoin and other stablecoins at a 1:1 ratio

without price impact.

For example, DAI has a PSM which allows users to swap between USDC and DAI. If

USDC → DAI swap occurs, USDC is now backing DAI at 1:1 ratio. The opposite route,

DAI → USDC can only happen when enough USDC is in the PSM contract. However,

this introduces a centralization risk as a portion of DAI is now backed by USDC.

zSOL is pegged to SOL, therefore does not carry the risk above for PSM. However for

PSM, the swap pair would not be SOL, but mSOL and stSOL. The quantity would be

determined by the oracle price.

zSOL PSM does not exist as a separate program but is integrated into PDV. Here are

examples of PSM swaps.