EthicHub’s Compensation System (CS)

Purpose of EthicHub's CS

EthicHub’s Compensation System (CS) represents an integral part of the protocol. It was created to minimize the risk associated with investing in smallholder farmers and it operates with Ethix, the utility token designed to generate the crypto incentives to boost proper behavior among all stakeholders to align their interest.

As mentioned earlier, smallholder farmers in emerging economies lack eligible collateral to ask for loans and they have neither tokenizable assets nor the data that would allow them a credit scoring for alternative financing. Consequently, providing loans with a liquid collateral highly increases our unbanked farmers’ chances to be financed because the risk associated with lending them is thereby considerably contained.

The Compensation System (CS) was inspired by the Aaave Protocol Safety Module, with some adjustments for EthicHub's system. The primary mechanism for securing EthicHub's lending projects is the incentivization of Ethix holders to lock tokens into the Smart Contract-based components forming the CS.

Since the Ethix’s main purpose is to provide collateral, 50% of its total supply was staked within the CS and it is continuously fed by a small percentage of every loan that is used to buy Ethix to be deposited in the CS creating buying pressure and a sustainable demand based on the volume of operations on the platform and not on speculation.

Compensation System (CS) Structure

EthicHub’s CS was built to secure the loans of our farmers by providing them with a liquid collateral: Ethix to be sold in secondary markets to compensate the lender’s principal (capital) plus interest in case of default.

Ethix holders are incentivized to stake their tokens into the different pools within the Compensation System (CS) to contribute to the safety of the protocol. In return, they receive a daily yield that is distributed among participants of the pool. This daily yield (Ethix rewarded) can be withdrawn from the CS at any time.

CS has three levels of security, each of them having its own trigger. The image down below shows the three different levels and their respective constituents. The paragraphs below aim to provide a more detailed description of each level.

First Level

When a loan goes defaulted, the first level of security is triggered. This level is a pool composed by the staked Ethix from the Originator (20%), Auditor (20%) and Stakers (60%) so it collaterizes 100% of the lent capital. This collateral can not be withdrawn before the loan is paid back. Only the rewarded (yield) Ethix for Stakers can be withdrawn.

Staked Ethix can not be withdrawn until the loan is fully paid back. Currently these pools offer the highest yield since they are direct backers of the loans and the main affected in case of default.

In case of default, the Originator’s tokens are liquidated to compensate its lenders. If they are not sufficient, then the Auditor’s tokens are liquidated and if they are not enough, then the tokens from the community stakers.

However, if volatility in the Ethix price prevents the 1st level of security from fully covering the defaulted loan, the second level of security will be triggered.

The 60% of collateral place by the community is EthicHub's biggest asset and cornerstone. Together with the other 40% (20% Loan Originators & 20% Auditors), the 60% constitute the crowd-collateral EthicHub often mention.

This crowd-collateral minimize the perceived risk when investing in unbanked smallholder farmers' projects. As such, it enables them to attract more capital investors to their investing projects.

Second Level

The 2nd level of security is the Compensation System Reserve which initially holds 50% of the total Ethix supply. This second level is constantly fed by the small percentage (initially 4%) contributed by every financed loan in the lending platform. 100 Million Ethix were issued, so the Reserve started with 50 Million Ethix.

Third Level

Although the third level does not directly absorb risk from defaults, it is designed to strengthen the CS: it adds buying pressure for the token and at the same time it promotes liquidity providing and Ethix holding; it is composed of multiple staking pools where Liquidity Providers at decentralized exchanges (DEX) are allowed to stake their LPs (tokens received as a reward for providing liquidity in DEXs).

LPs and Ethix staked at this third level receive APY according to their own volume. Ethix staked in the general pool at third level of CS, can be withdrawn after a cooldown period of 10 days (in the future, EthixDAO may adjust this parameter). During the cooling period, the staked tokens are cannot be claimed. Yet the rewards generated from staking Ethix or LPs, in the CS’s third level, can be withdrawn at any time.

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