Introduction

Stablecoins have faced challenges in issuance, acceptance, and regulation since its development. In March of this year, the collapse of Silicon Valley Bank triggered a bank run, severely impacting the US banking system and even affecting the cryptocurrency ecosystem, leading to the phenomenon of stablecoins breaking their pegs. Overcollateralized stablecoins are currently a more mature method of stablecoin issuance in the market, often categorized as lending projects in DeFi. MakerDAO, as a pioneer, has paved the way for this sub-track.

LSD refers to the liquidity staking derivatives built after Ethereum’s Shapella upgrade. The DeFi protocol built on LSD is called LSDfi, with the goal of providing higher yields for LSD. The development of the LSD track is relatively clear, with good growth momentum. The decentralized liquidity staking track is led by Lido, Rocket, and Frax. Given the popularity of the LSD track, the LSDfi sector has also received a lot of attention. This sector can achieve higher returns by increasing asset utilization. The sub-sectors include lending, stablecoins, and liquid staking index (LSI). AAVE is both a lending platform and an overcollateralized stablecoin. The overall logic of LSDfi stablecoins is no different from traditional stablecoin protocols, with the difference lying in the types of collateral used. Currently, the stablecoin track is highly competitive, with both emerging and established DeFi protocols entering the space. Raft protocol was born in this context and performed well in the initial stages with a continuous increase in Total Value Locked (TVL). However, it recently suffered a high loss due to a contract vulnerability and a hacker attack, and the official website product is currently being rebuilt. This article will focus on Raft and analyze its product logic, tokenomic model, and current development status.

What is Raft?

Raft is created by Tempus Labs. The team was formed in March this year and consists of over twenty members. The founder, David Garai, graduated from the University of Manchester. In May 2021, he established Tempus and in August 2022, he launched the lending protocol Nostra Finance on StarkNet. The team members have extensive experience in lending protocols and deployed the product on the Ethereum mainnet in June. As of now, specific information about the project’s public financing has not been disclosed, but the team has received investments from well-known industry institutions such as Wintermute and GSR.

Raft is a collateralized stablecoin built on Ethereum. Users can mint the official stablecoin R by depositing LSD tokens into Raft. Leveraging the popularity of the LSDfi sector, the project has experienced rapid growth, with TVL surpassing $50 million within a month of its launch.

In October of this year, the protocol issued its native token RAFT and conducted an airdrop. The official also released the token’s economic model. However, on Double 11 (November 11th), the protocol suffered an attack. Hackers minted stablecoin R and sold it, depleting the assets of market makers. They also extracted collateral from Raft, causing a sharp drop in the value of token R. The protocol suffered a loss of $3.3 million due to contract vulnerabilities. Subsequently, the official announced the compensation of victims by taking out 3.96 million DAI from the PSM. Currently, the Raft official website has temporarily suspended the product launch. The team has stated that the current version of Raft will be phased out in the future, and a new and secure version will be introduced.

Product Mechanism

The core of Raft is to mint the stablecoin R by staking LSD tokens (such as stETH, wstETH, and rETH). While ensuring LSD yield, users can borrow a certain proportion of stablecoin R. The lending interest rate is determined by the base rate and the spread, where the spread depends on the LSD asset type. The maximum lending interest rate is 5%.

Unlike other stablecoin protocols, the Raft protocol maintains the overall collateralization ratio of the protocol through repayment, liquidation, and redistribution mechanisms.

When the user mortgages LSD and borrows stablecoin R, they can improve the collateralization ratio and withdraw more collateral through repayment. The user’s minimum debt must not be less than 3,000 R.

In previous versions, the minimum collateralization rate for Raft products was 120%. When the user’s collateralization rate falls below 120%, liquidation will be triggered, and the liquidator will receive a liquidation reward of 100%. This means that the liquidator will receive all the excess collateral.

Redistribution is the final safeguard of the protocol, it is the process of redistributing debts and collateral. When liquidation is not timely and causes the user’s collateral ratio to drop below 100%, liquidators lose motivation, and at this point, anyone can initiate redistribution. The initiator of the transaction bears a certain Gas cost for redistribution. The collateral reward will decrease linearly with the total collateral amount, as shown in the table below:

Price Stability

Raft uses a redemption mechanism and supply-demand interest rate regulation to maintain the price of stablecoin R around $1. The overall logic is as follows: when the price of R is higher than $1, the borrowing interest rate is lowered to increase the circulation of R, increase supply, and reduce the price; when the price of R is lower than $1, the borrowing interest rate is increased to decrease the circulation of R, reduce supply, and increase the price.

The lower limit of the stablecoin R price is the redemption price, and the upper limit is determined by the minimum collateralization ratio of the excess collateralization rate. When the R price is below $1, users can redeem the stablecoin R for LSD tokens. The redemption fee is calculated as the base interest rate plus the redemption price difference plus the oracle price deviation. The base interest rate depends on the redemption frequency, with a half-life of 12 hours. If no redemption events occur within 12 hours, the base interest rate is halved.

Formula source: https://docs.raft.fi/v/chinese/gong-zuo-yuan-li/ji-zhun-li-lv

The base interest rate can regulate borrowing and redemption capabilities. When R is discounted, redemptions occur in the market, causing the base interest rate to rise and suppressing new borrowing, reducing the circulation of R in the market, and thus maintaining prices.

Flash Mint

The Raft protocol provides a feature called “Flash Mint,” similar to flash loans, which allows users to borrow assets from existing liquidity pools within the protocol and repay them in the same transaction. Flash Mint can be used for liquidation, one-step leverage opening, closing positions, and rebalancing operations. Taking liquidation through Flash Mint as an example, in a single transaction, the liquidator first mints a quantity of stablecoin R equal to the borrower’s total debt, triggering the liquidation contract and submitting the borrower’s total debt. After receiving the corresponding collateral and liquidation reward, the liquidator converts the collateral back to stablecoin R and burns the borrowed R.

Tokenomics

The native token of the Raft protocol is called RAFT, with a total supply of 2.5 billion tokens. Its main functions are governance and staking. The official token issuance took place on October 10th this year, with a distribution of 37.5 million RAFT tokens (1.5% of the total supply) through an airdrop.

RAFT token holders can provide liquidity to the Balancer fund pool, and staking Balancer liquidity pool tokens allows them to obtain veRAFT tokens. veRAFT holders can vote on protocol decisions and also receive RAFT token rewards.

The total supply of RAFT tokens is 2.5 billion, and the official allocation plan is as follows:

• 25.91% allocated to investors
• 21.43% for the ecosystem and incentive mechanisms
• 19.16% allocated to the team and advisors
• 16% allocated to the community
• 15% allocated to the treasury
• 2.5% allocated for CEX market-making funds

Image source: https://docs.raft.fi/governance/raft-token/tokenomics

Official unlocking schedule is as follows:

Image source: https://docs.raft.fi/governance/raft-token/tokenomics

Current Development Status

After the Raft product was launched on the Ethereum mainnet in June of this year, it benefited from the popularity of the LSD track and achieved a TVL of over $50 million within a month. However, recently, due to contract vulnerabilities, it fell victim to a hacker attack. The attacker minted the stablecoin R and sold it, depleting the liquidity of market makers, while also extracting collateral from Raft. This caused a sharp drop in the price of R, resulting in a loss of $3.3 million. The team immediately paused the contract and issued a compensation plan, using 3.96 million DAI from the PSM to compensate the victims and allowing all the creators of stablecoin R to fully redeem their collateral. Currently, the team has temporarily taken the product offline and is dedicated to improving and fixing it. A new version will be released soon.

Image source: https://defillama.com/protocol/raft

Conclusion

Raft is a stablecoin protocol deployed on Ethereum that utilizes the LSDfi over-collateralization mechanism. It allows for the minting of stablecoin R by collateralizing LSD tokens such as wstETH and rETH. The overall logic of the protocol is no different from other over-collateralized stablecoin protocols. Thanks to the popularity of the LSD sector, the project’s liquidity has experienced rapid growth.

In terms of the product itself, the use cases for the stablecoin R are currently limited, making it difficult to break through and gain market traction. In terms of the competitive landscape, in the highly competitive LSDfi space, there is a significant degree of homogeneity with projects like Lybra and Gravita. However, well-established DeFi protocols have an advantage in terms of security, whereas Raft currently lacks a clear advantage.

Due to recent vulnerabilities in the contract, Raft has incurred a significant loss as a result of a hacker attack. The team is currently focused on repairing the damage and will also be launching new products in the future.