This article explains the Savvy DeFi mechanism that maintains the price correlation between base token and svToken. If you are unfamiliar with Savvy, please read this introduction.
As a reminder, if you borrow against a base token (e.g. ETH), your loan is against a svToken (svETH). Savvy treats svTokens interchangeably with the base token. You can always repay your loan with either svETH or ETH to withdraw your deposit.
It is important for Savvy to maintain a tight correlation between the base token and the svToken so that users can exchange these tokens at any time. Savvy achieves this correlation through three mechanisms: incentive liquidity pools, Savvy Swap, and protocol native liquidity.
Incentive Liquidity Pools
Savvy will incentivize BaseToken/svToken pools hosted on 3rd party DEXs. Initially, the liquidity pools will reside on Trader Joe, but Savvy plans to make them available on other DEXs over time. Liquidity providers deposit base tokens and svTokens into liquidity pools to earn trading fees and SVY incentives. 37.5% of the total supply of SVY is reserved for liquidity incentives. Allocation of liquidity incentives is controlled by voting DAO members via veSVY.
When the svToken is trading at a discount to the base token, users with open lines of credit have the opportunity to purchase svToken to repay their loan at a discount. Demand for svToken from this opportunity would help bring svToken’s price correlation back into line.
Smart swap
The Savvy Swap is a mechanism that uses the yield generated by the Savvy Position Manager to ensure non-instant Base Token/SvToken swaps. When the svToken is trading at a discount to the base token, users can buy the svToken and lock it in the Savvy Swap contract. Over time, the bound svToken will be burned and the same amount of base token will be paid out to the user. Alternatively, if the price doesn’t match, anyone can buy the cheaper token and arbitrate the price difference via Savvy Swap.
Protocol native liquidity
Finally, as mentioned in the Savvy Overview and Flow of Funds blog post, 90% of the return generated by user deposits becomes Protocol Owned Liquidity (POL). Inspired by the battle-tested Alchemix Elixir contract, the Savvy Sage contract acts as an Algorithmic Market Operation (AMO) and uses the POL to deposit or withdraw liquidity from base token/svToken liquidity pools to keep the pools in balance . For example, if the svToken is trading at a discount to the base token, the AMO would unilaterally deposit the base token from the POL into the liquidity pool to rebalance the pool and thus improve price correlation.
The Savvy Sage also algorithmically determines how long it takes for svTokens tied in the Savvy Swap contract to convert to base tokens. Additionally, when base tokens are not needed to maintain price correlation with svTokens, the smart sage uses the base token to strategize to increase the POL over time.
Here is a visualization of how the price correlation mechanisms affect the rest of the protocol:
We invite you to browse our white paper if you are interested in the finer details of how the protocol works.
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