ForTube is about to release V3: risk layering, DAO, security reinforcement, and membership system

This article is from ForTube, authored by Aaron Liu

1. Background

In 2020, DeFi transformed from a niche field into the most dazzling star of the cryptocurrency ecosystem. The total locked value in the market exceeded $60 billion, with over 1 million users.

As an important branch of DeFi, the cryptocurrency lending market is highly competitive. Industry leaders like Aave and Compound have locked assets worth $5 billion, while newcomers like Cream and Venus are catching up.

As an early participant, ForTube adheres to the principle of safety first and continuously provides robust product services to community users. In practice, we have identified the following issues with decentralized lending projects:

Single Pool Problem: Including assets of different risks in a single lending pool makes risk pricing difficult and hinders more funds from joining.

Token Economic Model and Platform Governance Issues: The platform's value has not been transferred to the project tokens, leading to low willingness and participation from token holders in platform governance.

Security Issues: The losses caused by smart contract security and oracle security issues are substantial. According to statistics from The Block Research, 15 DeFi platforms were hacked in 2020, with stolen funds amounting to $120 million.

Community Building Issues: Most projects have weak communities and lack an effective incentive mechanism to bind the interests of platform users, token holders, and developers together.

ForTube V3 aims to improve these issues to some extent.

2. Financial Model

1. Model Optimization

Generally, under the pool lending model, the amount a user can borrow is the sum of the product of the value of each deposit asset and the maximum borrowing ratio, minus the current total debt, expressed as:

∑(V~d~^i^*F~i~) - ∑V~b~^j^

Where,

V~d~^i^: The dollar value of deposit asset i;

F~i~: The maximum borrowing ratio of deposit asset i;

V~b~^j^: The debt value of borrowed asset j.

However, when users pledge stable assets to borrow high-volatility assets, if the latter's price rises quickly, the borrower's motivation to repay decreases, thus increasing the risk of bad debts in the system. To address this issue, we also consider the maximum borrowing ratio of the user's borrowed assets, expressed as:

(∑(V~d~^i^*F~i~) - ∑(V~b~^j^/F~j~))*F~k~

Where,

F~k~: The maximum borrowing ratio of borrowed asset k.

When the value of the user's deposit assets decreases or debt increases, it may trigger liquidation. The health index is a value that indicates the health of the account's debt, triggering liquidation when the health index is 1. In ForTube version 2.0, the health index calculation formula is:

∑(V~d~^i^*F~i~) / ∑V~b~^j^

ForTube V3 distinguishes between the maximum borrowing ratio and the liquidation threshold, with the liquidation threshold being a value slightly larger than the maximum borrowing ratio. Therefore, our health index calculation formula is modified to:

∑(V~d~^i^*L~i~) / ∑(V~b~^j^/L~j~)

Where,

L~j~: The liquidation threshold of asset j.

2. Asset Rating

The Lego-like property of DeFi (i.e., composability) allows the ForTube protocol to connect with other protocols or platforms in the DeFi ecosystem. Therefore, ForTube is inevitably exposed to the risks of financial contagion and may be severely affected by the failure of pledged asset systems and market fluctuations.

To maintain a reasonable level of security, ForTube evaluates assets from three dimensions and categorizes risk levels from low to high into five grades: E (extremely high risk), D (high risk), C (medium risk), B (low risk), A (very low risk). Currencies rated E will not be integrated into the protocol.

Smart Contract Risk: This measures the technical security of the underlying code of the asset, whether it has passed audits by professional security firms, which is an important standard for measuring risk. Additionally, the operational time and transaction volume of the contract are also important indices for assessing security.

Market Risk: This measures the asset's ability to withstand market fluctuations, with liquidity, volatility, and market capitalization being important indicators. If the value of pledged assets decreases, it may face liquidation, and the market needs sufficient liquidity to support timely liquidation.

Counterparty Risk: This measures the degree of decentralization of the asset itself, including the number of holder addresses, governance systems, and the level of trust in the currency itself.

3. Asset Segmentation

Currently, almost all DeFi lending protocols adopt a single pool model. As the amount of locked assets and types of assets increase, so does the risk. Each new asset can introduce financial contagion and systemic risk to the entire lending pool.

Therefore, we have eliminated the idea of a single lending pool for the entire system and replaced it with segmented lending pools to achieve layered risk. Currently, we plan to establish two segments based on asset ratings: a stable zone and an innovation zone.

Stable Zone: Includes the highest quality collateral, such as $BTC, $ETH, stablecoins, etc.

Innovation Zone: Includes lower quality collateral and new types of assets.

Layered risk can improve capital efficiency, and combined with ForTube's new governance structure, allows $FOR holders to obtain different yield opportunities based on their risk preferences.

3. ForTube V3 Governance Structure

1. Overall Structure

We have introduced a new governance structure to balance the issues of ForTube's revenue distribution, risk bearing, and governance decision-making. As mentioned in the third section, we divide ForTube into a stable pool and an innovation pool. Each lending pool will be operated and managed by the corresponding fDAO, which is governed by some $FOR holders and bears the risks.

Figure 1 Governance Structure Diagram

Specifically, it includes the following main links:

• $FOR holders can stake their $FOR in a certain fDAO according to their risk preferences and receive corresponding $fDAO tokens;
• fDAO governs its lending pool and bears part of the risk;
• The fee collector will collect and distribute the platform's income.

2. Fee Description

The income of the lending pool mainly comes from lending fees (currently 20% of the borrowing interest) and possibly future flash loan fees. The distribution of income is mainly divided into four parts:

• 60% of all lending pool income will be distributed to $fDAO token holders to incentivize them to participate in governance and bear risks;
• 20% of all lending pool income will be allocated to the system reserve, which is a measure for the platform's ultimate risk coverage. To enhance the platform's safety net, the ForTube Foundation donates 100 million $FOR as risk margin.
• 10% of all lending pool income will be allocated to R&D expenses for system GAS fees, security audit fees, etc.;
• 10% of all lending pool income will be allocated to market operation expenses to incentivize platform users to use and promote ForTube products.

Fee-related addresses will be made public to the community and will accept donations from the community.

3. Joint Curve

We will issue $fDAO tokens on a joint curve, using $FOR as the reserve asset. The joint curve contract is a special type of smart contract that issues $fDAO tokens through buy and sell functions. To purchase $fDAO tokens, buyers send FOR to the Buy function, which calculates the average price of $fDAO tokens in $FOR. The Sell function works oppositely, calculating the current average selling price.

The joint curve proposed for this launch is as follows:

Y = A X + B

Where,

Y: $fDAO token price;

X: $fDAO token supply;

A: Curve slope;

B: Curve intercept.

Normal buying and selling on this curve does not affect the slope of the curve, but the following two situations will change the slope:

Slope Increase: 60% of the platform's income will be converted into $FOR directly as fDAO reserve assets, without generating new $fDAO tokens. Assuming the current number of $fDAO tokens is X~t~, and the amount of $FOR deposited is M, the new slope A~up~ becomes:

A~up~ = 2M/X~t~^2^ + A

Slope Decrease: When there are bad debts or hacker attacks in the system, $FOR needs to be withdrawn from fDAO reserves without destroying $fDAO tokens. Assuming the current number of $fDAO tokens is X~t~, and the amount of $FOR withdrawn is N, the new slope A~down~ becomes:

A~down~ = A - 2N/X~t~^2^

4. Risk Coverage

The capital in the joint curve acts as a safety pool, providing insurance for the fDAO money market, protecting it from the impacts of smart contract and economic risks. In the case of loan defaults or hacker attacks, $FOR in the joint curve is sold to ensure depositors are whole, thereby reducing the price of $fDAO. Specifically, the amount of $FOR available for sale in fDAO is limited to the triangular area shown in the diagram.

Figure 2 Risk Coverage Diagram

The maximum amount covered by fDAO is:

1/2*A*X^2^

When the slope A~down~ approaches 0, we will no longer withdraw $FOR from fDAO but will begin to use the system risk reserve, which contains 100 million $FOR and funds donated by the community.

Assuming A is 0.00005 and B is 50. We simulate the relationship between the issuance of $fDAO and the reserve asset $FOR, as well as the quantity and proportion of covered assets $FOR. As shown in the table, the more system reserve assets, the higher the quantity and proportion of covered assets, making the lending pool safer.

Table 1 Risk Coverage Simulation Data

5. Governance Voting

ForTube aims to establish a long-term DAO governance framework, relying on systematic incentives and multi-level governance to stimulate the long-term growth and optimization of the protocol.

Each $fDAO token holder has corresponding key decision-making power over each lending pool, exercising governance power through voting on FIPs (ForTube Improvement Proposals), such as changes, improvements, and decisions regarding core system elements, including risk control factors, underlying assets, and interest rate models.

Governance voting process:

• The governance forum initiates discussions, gradually refining them into formal FIPs;
• Submit to Snapshot for voting approval;
• Voting results take effect and are executed.

4. Security

1. Financial Risk Control

ForTube's financial risk control will draw on years of accumulated experience and models from the existing financial risk control industry, formulating risk control models and rules suitable for ForTube's business characteristics based on the characteristics of blockchain financial applications. The ForTube financial risk control system will strengthen the platform's financial security from two major aspects: system level and individual level.

The system level mainly refers to financial risks and corresponding handling that occur at the contract and backend levels. For global risks such as unauthorized use of contract management accounts and multi-signature systems, abnormal oracle price sources and feeding nodes, large-scale inflows and outflows, significant declines in batch position health, or entering liquidation, the platform has established a rigorous and rapid monitoring and disposal system to effectively prevent these high-risk financial anomalies.

The individual level mainly refers to financial risks and corresponding handling that occur at the user or currency level. For example, abnormal opening positions, large inflows and outflows, frequent small transactions, high-frequency trading, multiple users operating in the same direction, abnormal jumps in user health, multiple liquidations, related liquidations, low credit addresses, etc.

The risk control system will quickly locate risky users or currencies, sending alerts to management via email and SMS, while instructing contracts to prohibit specific users' operations or close trading of designated currencies.

ForTube V3 will gradually build a risk control rules engine, upgrading the risk control model, ensuring that all business processes of ForTube are within a complete risk control closed loop. ForTube will also conduct data collection and research to identify and automate the handling of risk sources such as abnormal transactions, and assist in the formulation and execution of risk control strategies in the long term.

ForTube will collaborate with more professionally qualified risk assessment agencies and project audit institutions to jointly complete the iterative upgrade of the risk control system.

2. Smart Contract Security

The security of ForTube platform's smart contracts is comprehensively guaranteed by the following three aspects:

Experienced Contract Developers: The smart contract developers of the ForTube platform are all engineers with years of development experience in the industry, very familiar with various disclosed contract vulnerabilities. In technical collaborations with other teams, they have repeatedly discovered various security vulnerabilities, and their technical development capabilities and security research strength are trustworthy.

Scientific and Rigorous Multi-Audit Mechanism: The smart contracts of the ForTube platform will undergo comprehensive audits by at least one well-known security agency in the industry before officially launching, and internal cross-audits will be conducted for different modules responsible by individuals. Various forms such as internal review meetings and simulated security offense and defense will repeatedly test the security of the launched code, eliminating potential security risks and logical vulnerabilities.

Tightly Coordinated Review and Monitoring System: The ForTube platform has a multi-faceted review and monitoring system, including GEL global emergency lock, CALM collaborative automatic lock mechanism, and MAK multi-signature administrator keys, adopting financial-grade risk control standards, using independent high-availability master-slave hot backup clusters, operating 24/7.

Regularly checking contract status, strictly accounting and reconciling all financial assets within the contract. Once potential risks are detected in the assets, a global emergency lock will be automatically triggered, prohibiting all interfaces related to asset inflows and outflows, minimizing asset losses.

3. Oracle Security

To provide users with a better experience, the ForTube platform supports over 40 available currencies, far exceeding other lending platforms, thus presenting a significant challenge for the oracle system.

ForTube V3 will further upgrade and optimize the oracle system, adopting a combination of decentralized oracles and self-feeding price mechanisms. Mainstream currencies will use decentralized oracles for pricing, including partnerships with well-known oracles like ChainLink and Band.

For other currencies not quoted by decentralized oracles, a multi-node cluster will self-feed prices, applying various algorithms to reduce pricing deviations from data sources, accurately identifying and excluding any abnormal quotes, ensuring the accuracy and timeliness of price feeds. We will upgrade the price feed contract, introducing price balancing protection mechanisms to comprehensively identify and verify quotes across various dimensions.

Self-feeding price nodes will adopt the concept of decentralized oracle platform node clusters, forming physically isolated distributed decentralized node clusters. Different nodes will be completely isolated and maintained by different personnel, with management permissions not interconnected, effectively enhancing the decentralization and security of the node cluster, achieving an organic unity of scalability and security in the oracle system.

5. Community Building

A strong community builds good products, thereby attracting more high-quality community members and creating network effects. Developers, $FOR holders, and platform users are the backbone of the ForTube community's development.

The core development team undertakes and supervises the technical and ecological project construction of the ForTube community, defining and maintaining the technical framework of the ForTube technical community; under the framework of community autonomy, approving, adjusting, deleting, or constructing projects, and maintaining their sustainable development. 10% of all lending pool income will be allocated to R&D expenses for system GAS fees, security audit fees, etc.

In addition, the ForTube community is open to all technical personnel and third-party cybersecurity experts, continuing to maintain a Bug Bounty program, encouraging bounty hunters to identify and report bugs in the protocol, with rewards issued based on the severity of the bugs.

The progress and success of DeFi protocols largely depend on the scale and quality of the user base managing them. ForTube V3 has launched a new risk control system and economic model, completing the risk grading of the innovation zone and stable zone funding pools.

The joint curve model provides $FOR holders with more combinations of risk and return, aligning users' interests with the ForTube protocol. 60% of all lending pool income will be distributed to $fDAO token holders to incentivize them to participate in governance and bear risks.

At the same time, 10% of all lending pool income will be allocated to market operation expenses to incentivize users who contribute to the ForTube protocol. Eligible users will receive a series of incentives, including mining for deposits and loans, regular airdrops, fee reductions, and invitation rewards.

ForTube will launch a new membership system, where the daily interest generated by each deposit and loan user will be converted into a dollar value based on a certain coefficient and accumulated as star points. The top 10% of users in the star points ranking will be classified as "Black Gold Members," the next 10%-40% as "Gold Members," and the remaining 60% as "Star Members."

At the beginning of each month, ForTube will airdrop a certain proportion of the previous month's lending pool income in the form of $FOR tokens to members. Additionally, inviting new users to deposit and borrow will also earn $FOR airdrop rewards.

ForTube will transfer the value of NFT assets to the corresponding NFT synthetic tokens, based on the characteristics of NFT assets combined with the design concept of DeFi products. During the Christmas event in 2020, ForTube launched its first candy NFT and commemorative NFT. In the future, ForTube will introduce more NFT gameplay to provide users with better product creativity and experiences.

The upcoming versions of ForTube will also include a dedicated area designed for novice users. This area will comprehensively introduce various aspects of the DeFi ecosystem: stablecoins, lending, DEX, liquidation, NFTs, etc., along with corresponding risk management, to help users familiarize themselves with ForTube products and understand industry knowledge to the greatest extent.