Introducing Leverage Interest Rate to Incentivize pSOL Stability

The Party Parrot
3 min readApr 15, 2022

The Parrot protocol has been using the “Leverage Interest Rate” on PAI vaults to help stabilize the price peg of PAI. Since its deployment, we’ve seen that the PAI price peg has been restored, and price volatility decreased over-time:

PAI leverage rate was introduced in November 2021

Looking at pSOL’s on-chain data, we have identified yPRT as a popular leverage pathway that impacts pSOL’s liquidity:

  • Start with 1.00 SOL
  • Stake 1.00 SOL in the yPRT staking pool to earn SOL yield
  • Deposit 1.00 worth of yPRT to mint 0.98 pSOL
  • Trade 0.98 pSOL for SOL, stake
  • Now there is 1.98 prSOL earning yield. Repeat.
pSOL vaults by collateral types (%)

Next, the same mechanic will be adopted by pSOL vaults to introduce a leverage interest rate based on usage, and use this to incentivize stability. A quick recap of how this will work:

  • A stability pool will be created to provide SOL liquidity for pSOL
  • pSOL interest rate to rise to incentivize the SOL:pSOL stability pool
  • The pSOL interest rate will be determined by the imbalance ratio of pSOL:SOL in the stable swap markets
  • A pSOL stable vault may have liquidation events if accrued interest dips the collateral ratio below 100.5%
  • The leverage interest rate will start on April 22, 2022

The formula to determine the leverage interest rate:

MAX(leverageCoefficient * (pSOLReserve — SOLReserve) / pSOLReserve, 0)

The leverageCoefficient will be initialized to 2, and may be adjusted as necessary.

The pSOLReserve and SOLReserve will be taken into consideration of the ask/bid imbalances in the following DEXes:

  • Saber pSOL:SOL
  • Mercurial pSOL:SOL
  • Serum pSOL:SOL

Since SERUM is an orderbook, we need to consider how the ask/bid orders are placed when accounting for SOLReserve and pSOLReserve:

  • pSOL ask orders <= 0.995 SOL (selling 1 pSOL for 0.995 SOL) will be considered in pSOLReserve
  • pSOL bid orders <= 1.005 SOL (selling 1 SOL for 1.005 pSOL) will be considered in SOLReserve

Serum Market (pSOL:SOL)

Mercurial StablePool (pSOL:SOL)

NOTA BENE: Use Serum if you are a large pSOL holder

The current price for pSOL is below 1, and the existing pSOL liquidity on the stable swaps thin. Instead of dumping your pSOL into stable swap pools in SBR or MER, consider placing your pSOL on the Serum orderbook at your desired ask price.

As long as your ask price is below (or equal) to 0.995 SOL, it will influence the leverage interest rate.

As the pSOL leverage unwinds, you will be able to enter the stable pools at more favourable prices.