Ahead of our mainnet beta launch on May 19th, we want to introduce you to Hedge. This post will walk you through the core concepts of how Hedge works and how you can use it.
What is Hedge?
Hedge is a lending protocol built on the Solana blockchain that allows you to take out 0% interest collateralized loans.
Simply put, Hedge allows you to borrow our stablecoin USH using SOL as collateral. As long as you maintain enough collateral, your SOL is stored safely in a Hedge vault and you can use USH for whatever you need. Also, because a Hedge loan has no interest, it costs the same to repay no matter how long you keep it open.
What is USH?
USH is a stablecoin soft-pegged to the US dollar. It is minted when users take out loans and fully backed by collateral. It is burned when a user repays their loan or the Stability Pool liquidates a vault.
To maintain the peg, USH is always redeemable for $1 worth of collateral on Hedge.
Why Use Hedge?
Taking out a Hedge loan allows you to access funds without having to sell your SOL. Selling means you’ll miss out on gains and also lowers the price for everyone else.
Instead, Hedge lets you keep your upside in SOL and defer selling. When you deposit SOL in a Hedge vault, you can hold it while still having access to liquid funds. (In the future, look out for other types of collateral as well!)
Let’s say you want to buy an NFT worth $4500. You have more than enough SOL, but you don’t want to sell any of it. No problem, this is a perfect scenario for a Hedge loan!
Let’s assume SOL is currently $100/SOL. You create a Hedge vault and deposit 75 SOL (worth $7500). Against that collateral, you can take out a loan of 4500 USH. You then use that USH to buy the NFT.
Now you own the NFT, while your SOL is held safely in your Hedge vault. If SOL then rises to $200, not only do you have the NFT, but you also have $15000 worth of SOL in the vault.
If you hadn’t used Hedge and just sold your SOL, you would only have the NFT, and you would have missed out on $7500 in gains.
In addition, Hedge gives out our revshare token HDG as a reward for supporting the protocol.
What Can I Do With Hedge?
The main function of Hedge is offering 0% interest collateralized loans. It’s easy to get a loan and only takes a few clicks.
To get a loan:
- Create a vault
- Back it with a SOL deposit
- Take out our stablecoin USH as a loan
On Hedge, loans need to maintain a collateral ratio of 110%. Collateral ratio is the ratio between the value of your SOL collateral and the value of the USH loan taken out. That means if you deposit $110 worth of SOL, you’ll be able to take out up to 100 USH.
Note: though you can set your collateral ratio as low as 110%, we recommend maintaining a ratio above 150% to be safe (see Recovery Mode in our docs). If your collateral ratio does drop below 110%, the vault could be liquidated (see Liquidation Section for more details!)
Paying Back Your Loan
You can repay the loan at any time to access your SOL, and since there’s zero interest, there’s no additional cost to holding it as long as you want. Partial repayments are also possible.
When taking out a loan, there’s an initiation fee of 0.5%. This is added to the loan payback amount, so a loan for 100 USH will need to be paid back at 100.5 USH.
For more details on setting up and managing vaults, see our docs.
USH Stability Pool
If you hold USH, you can deposit it in our Stability Pool to passively earn SOL & HDG rewards. This pool is used to liquidate risky positions and allows for lower overall collateral requirements for vaults.
When a vault is liquidated, the Stability Pool repays the vault’s debt by burning USH from the pool and distributing the vault’s SOL to depositors. Essentially, by staking in the Stability Pool, you are paying USH to buy SOL below the market rate.
Deposits in the Stability Pool also earn HDG rewards over time.
Liquidations and Redemptions
You can also profit by taking a more active role in protocol health. These actions are more complicated and may only make sense when conditions are right.
If a vault’s collateral rate drops below the minimum threshold of 110%, that vault can be liquidated using USH from the Stability Pool. Liquidation protects Hedge from risky, undercollateralized loans. To make liquidation easier, the app maintains a list of vaults that can be liquidated: https://www.hedge.so/liquidate.
For instance, (assuming 1 SOL = $100) a 10000 USH loan against 105 SOL only has a 105% collateral ratio. This is below the 110% minimum threshold, so this vault can be liquidated.
If you initiate liquidation, you earn a fee for helping keep Hedge healthy. More details on the rewards for liquidation can be found in our docs.
Protecting Your Vaults From Liquidation
As a vault user, keep in mind that any vault with a collateral ratio under 110% is at risk of liquidation. Although Hedge won’t let you directly take an action that lowers your vault’s collateral ratio below the minimum, if the price of SOL drops, your vault could end up undercollateralized. Maintaining a buffer between your collateral ratio and the minimum threshold will reduce the chance of liquidation.
As a helpful tip, Hedge loans have 0% interest, so your debt never changes and you can calculate the maximum SOL price at which your vault could ever be liquidated.
In the event your vault does get liquidated, it’s not a complete loss. Your vault loses its SOL, but you still get to keep the USH you took out.
To establish a floor price for USH and keep it close to its $1 peg, redemption allows users to redeem USH for SOL. Redemptions have a system of fees built in such that it will only be profitable if the price is below $1 and they will not occur too frequently. For more information on redemption fees, refer to our docs.
This SOL will be taken from the vault with the lowest collateral ratio on the platform, and the USH is used to repay that vault owner’s debt.
If your vault is redeemed against, you are not taking a loss, but it does reduce your exposure to SOL. You end up with a better collateral ratio which leaves your vault in a healthier state and you get to keep the USH you borrowed. To avoid being redeemed against, maintain a high collateral ratio compared to other vaults on Hedge.
How Can I Earn HDG Tokens?
Whether you currently need a loan or not, you can earn HDG by supporting Hedge’s health. This is easy to do and enables you to earn passively.
HDG token incentives will be larger at the start of the protocol and will decrease over time.
USH Stability Pool
As mentioned above, depositing USH in the Stability Pool will generate HDG rewards in addition to the SOL distributions from liquidations.
If you hold HDG, Hedge’s governance token, you can stake it to earn a portion of the protocol’s fees.
To enable trading between USH, HDG, and other tokens, Hedge also rewards users who provide liquidity on a decentralized exchange.
Currently, there are two pools for liquidity pairs: USH/USDC and HDG/USDC. To earn rewards:
- Provide liquidity in these pools on Orca.so
- Your staked tokens will earn you HDG over time which you can claim from the pool.