Stability Fees

Rationale

The Hoenn’s Fees are Risk Parameters designed to address imbalances in supply and demand for the uToken. They alter the incentives for vault owners to mint or burn uTokens and can have a stabilizing effect on the soft-peg.

At the highest level, users borrowing uTokens may incur three types of fees:

• Mint fee

• Stability fee

• Repay fee

Any or all of these fees can be set to zero. Additionally, a liquidation surcharge is collected when liquidators use uTokens to repay vault debt.

These fees generate revenue for the protocol, serving key functions such as:

• Building reserves to mitigate risks from under-collateralized positions

• Supporting the peg of synthetic assets in volatile market conditions by adjusting borrowing incentives

• Accumulating surplus to benefit the Hoenn ecosystem

Users can monitor the applicable fees for each vault type on the protocol dashboard.

Mint Fee

When users open a vault, they deposit collateral and mint uTokens based on the vault’s collateral ratio. At this stage, a mint fee may be applied, increasing the user’s debt.

For example, with a 1% mint fee, minting 100 uETH would result in a total debt of 101 uETH.

This fee is determined by governance and is typically set to 0, though it remains an adjustable parameter.

Stability Fee

The stability fee acts as a compounding interest rate, meaning borrowed assets accumulate interest over time as long as the debt remains open.

Example Calculation

A user borrows 10,000 uETH with a 2% stability fee. After 2 years, their debt grows to:

10,000 \times 1.02^2 = 10,404 uETH

In year 3, if the rate increases to 3%, the debt becomes:

10,000 \times 1.02^2 \times 1.03 = 10,821.18 uETH

Since the stability fee is governed by protocol decisions, it can be adjusted over time or even set to zero when needed.

Repay Fee

The protocol may apply a repay fee when users settle their debt, similar to the mint fee.

For instance, with a 1% repay fee, settling a 110 uETH debt requires 111.1 uETH.

This fee is usually set to 0, but always verify the latest parameters on the protocol dashboard.

Liquidation Surcharge

When a vault is liquidated, a liquidation surcharge is applied. This fee is taken from the synthetic assets liquidators send to settle the vault’s debt.

Putting this all together

In summary, users may incur fees that increase their debt, which must be either repaid or collateralized.

This debt increase can occur at four key (optional) moments:

1. Mint Fee – When minting synthetic assets

2. Stability Fee – Accruing during the vault’s lifetime if assets are borrowed

3. Repay Fee – When repaying synthetic asset debt

4. Liquidation Surcharge – If a liquidation occurs