Protocol Overview
Last updated
Last updated
The Hermetica synthetic dollar protocol consists of multiple on-chain and off-chain elements:
A User Interface (UI) where minters, redeemers and users can interact with the runes protocol / smart contracts.
Bitcoin scripts / Smart contracts that facilitate the minting and staking of USDh.
Off-exchange settlement (OES) custody providers that allow the protocol to use BTC as collateral for futures trades while holding the asset off the exchange's balance sheet in a bankruptcy-remote Trust.
Trading systems that facilitate the execution and monitoring of futures trades on derivatives trading venues.
How does the protocol maintain the dollar value?
The protocol maintains the dollar value constant by coupling a spot BTC position with a short perpetual futures position of equal size. This ensures that the BTC in the protocol is fully delta-hedged at all times; changes in BTCUSD price do not change the dollar value of the assets in the protocol.
This allows the protocol to guarantee that every USDh can be redeemed for one dollar worth of BTC.
The balance sheet of the protocol shows BTC and the profit and loss of the futures position on the asset side and USDh on the liability side.
The USDh ecosystem is made up of two assets:
1. USDh: A synthetic dollar consisting of Bitcoin coupled with a short futures position.
2. sUSDh: A Bitcoin native bond that generates up to 25% yield from funding rates.
Where does the yield come from?
The yield for sUSDh comes from the funding rates of the short perpetual futures position. Due to the structural demand for long leverage traders that hold a long futures position, on average, pay a ~12% annualized interest rate to shorts. This can be analogized to the interest paid to borrow BTC for a margin long position.
Since the protocol is short the futures market it accrues the ~12% APY from funding payments.
Our backtests show that this yield fluctuates with the demand for long leverage and can reach peaks of 25% during bull markets and go as low as 3% during bear markets.
Users can access a portion of the yield by staking their USDh and immediately receiving the Liquid Staking Token (LST) sUSDh, which accrues the value from the funding rate payments over time.
How does the protocol reduce counterparty risk?
These OES custodians allow the protocol to hold BTC in institutional-grade custody while simultaneously having the asset be available to trade on CEXs.
The BTC in Copper and Ceffu get mirrored to the major BTC futures exchanges, namely Deribit, Binance, ByBit, Bitget, OKX, Kraken, without ever having to actually be deposited to the exchange. This allows the protocol to open short futures positions without having the protocol's BTC on the balance sheet of the exchanges.
OES custodians allow the protocol to hold futures positions while keeping all funds in institutional-grade custody.
Or in other words, if an exchange goes bankrupt the protocol's BTC are not included into the bankruptcy claims of the exchange's creditors. The BTC are held in a Trust under English law and are therefore even off the balance sheet of the custodian.
The OES custodians automatically settle all unrealized profits & losses on a daily basis. So in the event of a exchange failure and the resulting inability to honor our open positions all the protocol would stand to lose is one day worth of profit.
To reduce counterparty risk to centralized exchanges (CEXs) the protocol uses the off-exchange settlement solutions (OES) of the custodians and .
