The Zero Protocol

3 min readFeb 21, 2023

Overview:

The ZeroLiquid protocol enables users to get self-repaying, 0% interest, non-liquidation loans against LSD (Liquid Staking Derivate) tokens.

In the start, the protocol will work with LSD tokens but in order for the protocol to be scalable and universal, it is being built in a way that it’ll have the ability to use any yield-bearing asset to issue loans against it.

How does it work?

From a user’s point of view, the protocol is simple.

Taking out loans:

Users can deposit either an LSD token (eg. stETH, rETH) or ETH (which will be swapped for an LSD token).
The user chooses how much they want to borrow.
The protocol mints synthetic tokens and gives them to the user. These tokens can be traded freely on the market.
Users can also choose to receive the loan at a different address (This is an important use-case, more on this in the next article).
The user can now spend this money today whilst safe in the knowledge that the loan is being paid off by itself over time.

Loan Management

Once deposited, the user’s assets are immediately re-paying the loan. However, users have several ways in which they can choose to manage the loan.

Simply withdraw the deposited asset after the loan has re-paid itself.
Repay the loan early using synthetic assets/ETH/LSD Tokens.
Liquidate the loan and withdraw the remaining assets.

How zlETH maintains its peg?

Staking incentives:

A chunk of the fees generated through the protocol will be used towards creating deep liquidity for zlETH/stETH.

Although it is clear that there will be rewards for providing liquidity, the one thing that we are still weighing up is which DEX to use for liquidity.
Here are the options that we are exploring at the moment.

Using pools in Curve.
Using liquidity pools of Uniswap v3 and then using a manager such as Defiedge, Unipilot or Gamma to manage it.
Using pools in Velodrome and creating bribes for our pool.

All of the above protocols are viable options for creating deep liquidity. We will create a detailed report on the pros and cons of each and create a healthy discussion in the community which they can vote on later.

Early settlement of user debt

Taking advantage of arbitrage, debt can be paid at any time with zlETH/stETH/ETH.

For example, suppose that Alex has a debt of 10 stETH within the system and notices that zlETH is trading at a discounted rate in the market. In this case, Alex could take advantage of the opportunity and purchase 10 zlETH from the market at a lower price to use in settling his debt, which the protocol always considers to have an equal value.

This approach would save Alex some money, and his purchase of zlETH would contribute to restoring it to its peg.

Conversely, if zlETH is trading above the peg, Alex could sell his zlETH for stETH/ETH, allowing him to pay off his debt at a lower cost.