⏩Surge Finance Litepaper

Surge Finance is an upfront yield built on Solana and powered by Surge USD, a Solana-native stablecoin that is over-collateralized by Liquid Staking Tokens (LSTs).

Background

The Solana ecosystem has had somewhat of a revival in recent months, with renewed interest in the chain and strong TVL growth, from $215m at the end of 2022 to $2.6bn at the time of writing (early 2024), according to DefiLlama.

However, Solana’s DeFi ecosystem is still nascent compared to Ethereum’s, which has a greater variety of DeFi tools and as a result much higher TVL ($40bn, down from a peak of almost $140bn in 2021).

Introducing Surge Finance

Considering this gap in the market, we are excited to introduce Surge Finance. Surge Finance is an upfront yield protocol built on the Solana network and powered by Solana LSTs and Surge Finance's USDS stablecoin. Users deposit their SOL as collateral and can then receive up to 10 years' worth of their Solana staking yield upfront. This upfront yield allows the user to benefit from the time value of money principle, which states that money today is worth more than money tomorrow due to its investment potential in the interim and the impact of inflation over time. The upfront yield that a user accesses is also self repaying, as yield earned by the user's Solana LST collateral automatically repays the position over time.

Instant Upfront Rewards

When a user deposits SOL as collateral, it is converted to a SOL Liquid Staking Token (LST) such as mSOL or jitoSOL in order to earn Solana's proof-of-stake rewards. A user can then obtain upfront yield in the form of USDS at up to 83% of the value of their collateral, equivalent to at least 10 years' worth of staking rewards. Meanwhile, their collateral is productive, earning staking rewards which repays the USDS over time.

Liquid Staking Tokens (LSTs)

Liquid Staking Tokens (LSTs) are tokens that represent a user's staked SOL. They enable holders of LSTs to earn staking rewards while maintaining liquidity (the ability to use or easily sell those tokens).

At the time of writing, ~67% of the SOL circulating supply is staked, amounting to $40bn, a large addressable market for Surge Finance. The Surge Finance protocol enables users to continue holding Solana and earning staking rewards while also accessing money today.

Surge Finance USDS

Surge Finance USD (USDS) is a Solana-native stablecoin over-collateralized by SOL Liquid Staked Tokens (LSTs). Due to the minimum collateralization ratio of 120% (ie. an LTV of up to 83%), every dollar of USDS is backed by at least $1.20 of SOL.

The peg of USDS to USD is maintained by a combination of the aforementioned over-collateralization alongside arbitrage opportunities, liquidation mechanisms and the stability pool. Therefore, the Surge Finance protocol is inherently designed to ensure the peg of USD peg is maintained.

Arbitrage opportunities

Yield Redemptions The Solana staking rewards earned by users' LST collateral accrues to the yield vault. Here, it can be acquired by arbitrageurs using Surge Finance USD (USDS) at a ratio of 1 USDS to $1 of yield. This means that anytime USDS is worth less than $1, arbitrageurs can acquire USDS to buy yield from the vault at a discount in order to make a profit. The USDS that is used for this arbitrage is then burned (permanently removed from supply) and the debt of all borrowers is reduced proportional to their share of collateral. This mechanism helps to maintain the peg by driving demand for USDS whenever its value falls below $1. It is also what makes a Surge Finance loan self repaying.

Rigid Redemptions Rigid redemptions serve the same purpose as the aforementioned yield redemptions - creating the demand for USDS which helps to maintain its peg to the USD. However, rather than buying yield, rigid redemptions involve acquiring users' collateral at a discount. Anytime USDS is worth less than $1, arbitrageurs can acquire USDS to buy collateral at a discount in order to make a profit. There is a fee (0.5% base + dynamic fee) when making rigid redemptions. This is paid by the redeemer and goes to the user(s) whose collateral was redeemed. When redemptions take place, positions with the lowest collaterallization ratio (highest LTV) are redeemed against first. The best way to protect your position from being redeemed against is to maintain a high collateralization ratio relative to the protocol average. However, if your position is redeemed against, you are not suffering a net loss. When a user redeems your collateral, your debt is reduced by the value of the redemption, leading to a healthier LTV.

Liquidation Mechanisms

Due to the minimum collateralization ratio of 120%, every dollar of USDS is backed by at least $1.20 of SOL. To ensure that there is always adequate collateral backing for all issuedUSDS, positions that fall below the minimum collateralization ratio of 120% are eligible for liquidation. A liquidation involves the debt of a position being repaid using funds from Surge Finance's Stability Pool (more on this below), while the collateral of the liquidated position is then distributed proportionally to the users in the Stability Pool.

A user who is liquidated keeps the full amount of USDS that they owe but may incur a loss of up to 20% in dollar value. Thus, it is imperative for borrowers to maintain their collateral ratio above the minimum threshold of 120%.

Stability Pool

The stability pool acts as a key safeguard for the protocol. It ensures solvency by providing the necessary liquidity to cover debt from liquidated positions, thereby maintaining sufficient collateralization of the USDS supply.

When a position is liquidated, an equivalent amount of USDS is burned (permanently removed from supply) from the stability pool to settle the debt, while the collateral from this liquidated position is distributed proportionally to user's in the Stability Pool.

Protocol Parameters

The following are the initial parameters for Surge Finance. Note they could be changed over time subject to a governance vote by $SURGE token holders.

Parameter	Purpose & initial value
USDS minting	No fee
Individual Collateral Ratio (ICR)	120% (Liquidations can occur below this)
Global Total Collateralization Ratio (GTCR)	150% (Recovery Mode activated below this) Recovery Mode: When the Surge Protocol's GTCR falls below 150%, any user with an ICR below 125% may be fully liquidated.
Rigid Redemption	0.5% base rate + dynamic fee Formula = (0.5% + dynamic fee) * CollateralDrawn
Liquidation (penalty)	=100 - MCR(Minimum Collateralization Ratio) 20% is the max liquidation penalty
Protocol Fee	No interest on collateral. 10% of the yield generated via staking rewards earned by LST collateral goes to the protocol's treasury.