From a high-level glance, Savvy allows users to earn yield on their deposits while also borrowing from themselves using future backed yield. In return, the user receives a liquid version of the deposited token, and the incoming yield automatically begins to pay off the debt that the user has. To understand how this system works, we must examine Savvy's collateralized debt positions (CDPs).
User Flow (starts top left, ends top right)
The Savvy Protocol offers a streamlined approach for users to delve into the world of DeFi. Its unique capital-efficient design allows users to maintain their existing strategy while participating in various DeFi activities, including lending, staking, and yield farming. With Savvy, there's no need to adjust plans, as its composability allows for seamless integration across multiple DeFi applications. The open finance infrastructure has been described as financial legos. Using this analogy, Savvy is building on top of existing protocols that can generate ways for users to earn yield.
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The mechanics of deposits, debts, yields, and repayments in the Savvy Protocol can be better understood by visualizing the process. Users deposit collateral into Savvy's CDPs for an advance on their future yield. The CDPs then use these funds to employ various external yield strategies, such as decentralized exchanges or automated money markets. As yield is converted to base tokens and repays debt automatically, 10% goes to Savvy's treasury, and 90% goes towards reducing the user's debt. Users can choose to repay the debt with deposited collateral or svTokens. Savvy maintains liquidity pools to help with the correlation between collateral and debt, which helps to generate revenue for the protocol. Idle yields are cycled back into the protocol-owned liquidity pools to help maintain stable swap pools. Using svTokens creates an opportunity to earn yield by providing liquidity to pools of svTokens, whether they are used as a currency or asset.
Detailed Flow of Funds
Savvy currently accepts multiple types of collateral, including USDC, USDT, DAI, AVAX, and BTC, and their yield-bearing tokens. At the launch of Savvy, deposits will be open for three svTokens: svUSD, svAVAX, and svBTC. Borrowing is capped at 50% of the value of the collateral deposited. The debt is denominated in the same unit of account as the base token, issued as svTokens. The lines of credit have a collateralization ratio requirement of at least 200% or a maximum loan-to-value ratio (LTV) of 50%. It is important to keep in mind that the minimum collateralization ratio may be subject to change in the future.
Deposit (Base token)
DAI, DAl.e, USDC, USDC.e, USDT, USDT.e
BTC, BTC.b, wBTC, wBTC.e
The synthetic DeFi primitives called svTokens are issued as our line of credit. The “sv” denotes that the Savvy protocol mints them. Our synths are interchangeable representations of a claim on the deposited collateral, treated as tokenization of the depositor's debt in the same unit of account. The svTokens are paired with correlated tokens in liquidity pools without impermanent loss. For instance, svUSD are synthetic tokens created when users deposit USDC, USDT, and DAI into Savvy. The svTokens play a critical role in the Savvy protocol making it possible to eliminate liquidation.
Debt produced by CDPs like Maker & Liquity is typically backed by the market value of the collateral in a single form of debt (i.e., the US Dollar). These CDPs require liquidation functions when the collateral value falls below the debt value to protect the lender from a risky position.
However, Savvy CDPs are designed differently. There is no cross-collateral, meaning that debt is in the same unit of account as its collateral. As a result, forced liquidations are unnecessary because the Savvy CDP is always overcollateralized. Regardless of any collateral price volatility, the debt ratio stays intact because one unit of svToken is correlated to one unit of the base token.
The earned yield is harvested, and auto-compounded for the same base token and the user’s debt balance is automatically reduced, meaning that the debt balance is automatically repaid. If a user wants to exit their debt position early from the pool, they can manually repay the balance of their debt to withdraw collateral. Savvy always considers 1 svToken as equivalent to 1 base token for repayments.