How Pillar Protocol works
The Pillar Protocol is a dapp on the Zilliqa blockchain. Designed by a disparate group of contributors, including developers within the Pillar Foundation, its outside partners, and other persons and entities, and will be a decentralized finance (DeFi) application.
The Pillar Protocol is managed by people around the world who hold Zilliqa’s governance token, gZIL. Through a system of scientific governance involving Executive Voting and Governance Polling, gZil holders govern the Protocol and the financial risks of Pillar to ensure its stability, transparency, and efficiency. One gZIL token locked in a voting contract equals one vote.
The Pillar Protocol is managed by people around the world who hold Zilliqa’s governance token, gZIL. Through a system of scientific governance involving Executive Voting and Governance Polling, gZil holders govern the Protocol and the financial risks of Pillar to ensure its stability, transparency, and efficiency. One gZIL token locked in a voting contract equals one vote.
The Pillar Stablecoin
The Pillar stablecoin is a decentralized, collateral-backed cryptocurrency soft-pegged to the US Dollar. Pillar is held in cryptocurrency wallets or within platforms, and is supported on the Zilliqa blockchain.
Pillar is easy to generate, access, and use. Users generate Pillar by depositing collateral assets into Pillar Vaults within the Pillar Protocol. This is how Pillar is entered into circulation and how users gain access to liquidity. Others obtain Pillar by buying it from brokers or exchanges, or simply by receiving it as a means of payment.
Once generated, bought, or received, Pillar can be used in the same manner as any other crypto-currency: it can be sent to others, used as payments for goods and services, and in the future, even held as savings through community features built on top of the Pillar Protocol.
Every Pillar in circulation is directly backed by excess collateral, meaning that the value of the collateral is higher than the value of the Pillar debt, and all Pillar transactions are publicly viewable on the Zilliqa blockchain.
Pillar is used to settle debts within the Pillar Protocol (e.g., users use Pillar to pay the interest fee and close their Vaults).
Pillar is easy to generate, access, and use. Users generate Pillar by depositing collateral assets into Pillar Vaults within the Pillar Protocol. This is how Pillar is entered into circulation and how users gain access to liquidity. Others obtain Pillar by buying it from brokers or exchanges, or simply by receiving it as a means of payment.
Once generated, bought, or received, Pillar can be used in the same manner as any other crypto-currency: it can be sent to others, used as payments for goods and services, and in the future, even held as savings through community features built on top of the Pillar Protocol.
Every Pillar in circulation is directly backed by excess collateral, meaning that the value of the collateral is higher than the value of the Pillar debt, and all Pillar transactions are publicly viewable on the Zilliqa blockchain.
Pillar is used to settle debts within the Pillar Protocol (e.g., users use Pillar to pay the interest fee and close their Vaults).
Contract and Key External Actors
Key External Actors
In addition to its smart contract infrastructure, the Pillar Protocol involves groups of external actors to maintain healthy operations: Auction/Liquidation Oracles , Price Oracles, Dexes, and Pillar community members.
AL Oracles take advantage of the economic incentives presented by the Protocol; Oracles are external actors with special permissions in the system assigned to them by gZIL voters and Pillar community members are individuals and organizations that provide services.
AL Oracles take advantage of the economic incentives presented by the Protocol; Oracles are external actors with special permissions in the system assigned to them by gZIL voters and Pillar community members are individuals and organizations that provide services.
Auction/Liquidation Oracle (AL Oracle)
An AL Oracle is an independent (usually automated) actor that is incentivized by market opportunities to provide liquidity in various aspects of the Pillar system. In the Pillar Protocol, AL Oracles are market participants that help Pillar maintain its Target Price ($1), they:
- Sell Pillar when the market price is above the Target Price, and buy Pillar when the market price is below the Target Price.
- They broadcast and partake in the Collateral Auctions when Pillar Vaults are in Liquidation.
- Interface with Price Oracles in order to do the Above.
Collateral Assets
Pillar is generated, backed, and kept stable through collateral assets that are deposited into Pillar Vaults on the Pillar Protocol. A collateral asset is a digital asset that gZIL holders have voted to accept into the Protocol.
To generate Pillar, the Pillar Protocol accepts as collateral any Zilliqa-based asset that has been approved by gZIL holders. gZIL holders must also approve specific, corresponding Risk Parameters for each accepted collateral (e.g., more stable assets might get more lenient Risk Parameters, while more risky assets could get stricter Risk Parameters).
Detailed information on Risk Parameters is below. These and other decisions of gZIL holders are made through the Pillar decentralized governance process.
To generate Pillar, the Pillar Protocol accepts as collateral any Zilliqa-based asset that has been approved by gZIL holders. gZIL holders must also approve specific, corresponding Risk Parameters for each accepted collateral (e.g., more stable assets might get more lenient Risk Parameters, while more risky assets could get stricter Risk Parameters).
Detailed information on Risk Parameters is below. These and other decisions of gZIL holders are made through the Pillar decentralized governance process.
Pillar Vaults
All accepted collateral assets can be leveraged to generate Pillar in the Pillar Protocol through smart contracts called Pillar Vaults. Users can access the Pillar Protocol and create Vaults through a number of different user interfaces, such as the core Pillar Vault interface and various interfaces built by the community.
Creating a Vault is not complicated, but generating Pillar does create an obligation to repay the Pillar, along with an Interest Fee, in order to withdraw the collateral leveraged and locked inside a Vault.
Vaults are inherently non-custodial: Users interact with Vaults and the Pillar Protocol directly, and each user has complete and independent control over their deposited collateral as long the value of that collateral doesn’t fall below the required minimum level (the Liquidation Ratio, discussed in detail below).
Creating a Vault is not complicated, but generating Pillar does create an obligation to repay the Pillar, along with an Interest Fee, in order to withdraw the collateral leveraged and locked inside a Vault.
Vaults are inherently non-custodial: Users interact with Vaults and the Pillar Protocol directly, and each user has complete and independent control over their deposited collateral as long the value of that collateral doesn’t fall below the required minimum level (the Liquidation Ratio, discussed in detail below).
Collateralize Vaults & Minting Pillar
Paying Debt + Withdrawing Collateral
Pillar Protocol Auctions & Liquidations
The auction mechanisms of the Pillar Protocol enable the system to liquidate Vaults even when price information for the collateral is unavailable. At the point of liquidation (when the Vaults Collateralization Ratio < Liquidation Ratio) , the Pillar Protocol provides a market incentive for Auction/Liquidation Oracles to pay back the Vault Owner's debts, and thus become the new owner of the Vault's collateral.
If no Auction/Liquidity Oracle step in, and pay the Vault Obligations a the point of liquidation. Then by the time the Vault Obligation value drops below 50% of the Vault value (when the Vaults Collateralization Ratio < (Liquidation Ratio / 2) ).
Then the Auction/Liquidation Oracle of several key members of the community (including the Developers) will step in and pay the off the Pillar Debt for that Vault to act as a “Liquidator of last resort”.
If no Auction/Liquidity Oracle step in, and pay the Vault Obligations a the point of liquidation. Then by the time the Vault Obligation value drops below 50% of the Vault value (when the Vaults Collateralization Ratio < (Liquidation Ratio / 2) ).
Then the Auction/Liquidation Oracle of several key members of the community (including the Developers) will step in and pay the off the Pillar Debt for that Vault to act as a “Liquidator of last resort”.
Liquidation of Risky Pillar Vaults
To ensure there is always enough collateral in the Pillar Protocol to cover the value of all outstanding debt (the amount of Pillar outstanding valued at the Target Price), any Pillar Vault deemed too risky (according to parameters established by Pillar Governance) is liquidated through automated Pillar Protocol auctions.
The Protocol makes the determination after comparing the Liquidation Ratio to the current collateral-to-debt ratio of a Vault. Each Vault Collateral type has its own Liquidation Ratio, and each ratio is determined by gZIL voters based on the risk profile of the particular collateral asset type.
The Protocol makes the determination after comparing the Liquidation Ratio to the current collateral-to-debt ratio of a Vault. Each Vault Collateral type has its own Liquidation Ratio, and each ratio is determined by gZIL voters based on the risk profile of the particular collateral asset type.
Liquidation Ratio (Lr)
The Liquidation Ratio (Lr) is the minimum required collateralization level for each Vault type before it is considered under-collateralized and subject to Liquidation (Put up for Auction / Liquidation).
Pillar Oracles provide the system with pricing data that is used to track Vaults for when their Liquidation Ratio is breached. Once breached, they are available for Liquidation.
For example, a Vault with a 700% Liquidation Ratio will require a minimum $7 of collateral value for every $1 of Pillar generated + Pillar Interest. If the value of the collateral falls to $6.99 it will be Liquidated to cover the generated Pillar + the Pillar Interest + the Liquidation Penalty.
Pillar Oracles provide the system with pricing data that is used to track Vaults for when their Liquidation Ratio is breached. Once breached, they are available for Liquidation.
For example, a Vault with a 700% Liquidation Ratio will require a minimum $7 of collateral value for every $1 of Pillar generated + Pillar Interest. If the value of the collateral falls to $6.99 it will be Liquidated to cover the generated Pillar + the Pillar Interest + the Liquidation Penalty.
What is Liquidation Price (Lp)?
The Liquidation Price (Lp) is the price at which your vault becomes vulnerable to Liquidation. The Lp is unique to each user’s Vault and moves up slowly as the Interest Fee Accrues
The way to calculate the Liquidation Price is:
The way to calculate the Liquidation Price is:
(Generated Pillar * Liquidation Ratio) / (Amount of Collateral) = Liquidation Price
For example, let’s take the following values below:
Generated pillar
1000
Liquidation Ratio
750%
Amount of Collateral
1,000,000 ZIL
The calculation will be:
(1000*750%) / 1,000,000 = 0.0075
If we use ZIL as an example, it would need to fall to 7500 USD before the Vault is considered under-collateralized by the system.
If a user’s is close to the Liquidation Price, they may either add more collateral or pay Pillar back into the Vault. The most efficient way a user can lower their Liquidation Price is to repay Pillar. This also has the added benefit of reducing the Interest Fees that accrue for the owner of the Vault.
If a user’s is close to the Liquidation Price, they may either add more collateral or pay Pillar back into the Vault. The most efficient way a user can lower their Liquidation Price is to repay Pillar. This also has the added benefit of reducing the Interest Fees that accrue for the owner of the Vault.
What is Liquidation Penalty?
The Liquidation Penalty is a percentage (starting off with 10%) of the Vault's contents when their Vaults are Liquidated that is distributed to the gZIL holders and the Pillar developers (For 4 years).
When a Liquidation occurs:
When a Liquidation occurs:
30% of the Liquidation penalty is sent to the Developer Address.
70% of the Liquidation penalty is use immediately to purchase gZIL from the open DEX markets, whereafter the gZil is burned.
Calculating Vault Collateralization Ratio
The Collateralization Ratio is usually shown on the front-ends of Vault interfaces. Though can be manually calculated by using the following simplified formula:
(Collateral Amount x Collateral Price) ÷ Outstanding Pillar × 100
= Collateralization Ratio
= Collateralization Ratio
For example, let’s take the following values below:
Collateral Amount
1,000,000 ZIL
Collateral Price
0.02 USD
Outstanding Pillar (Generated + Interest)
1005 PILLAR
The calculation will be:
(1,000,000*0.02) / 1005 * 100 = 1990%
Calculating Vault Collateralization Ratio
The Pillar Protocol requires real-time information about the market price of the collateral assets in Pillar Vaults in order to know when to trigger Liquidations and Collateral Auctions.
The Protocol derives its internal collateral prices from a decentralized Oracle infrastructure that consists of a broad set of individual price oracles. gZIL voters choose a set of trusted Feeds to deliver price information to the system through Zilliqa transactions. They also control how many Feeds are in the set.
To protect the system from an attacker attempting to gain control of a majority of the Oracles, the Pillar Protocol receives price inputs through the Oracle Security Module (OSM), not from the Oracles directly. The OSM, which is a layer of defense between the Oracles and the Protocol, delays a price for one hour, allowing Emergency Oracles or a Pillar Governance vote to freeze an Oracle if it is compromised. Decisions regarding Emergency Oracles and the price delay duration are made by gZIL holders.
The Protocol derives its internal collateral prices from a decentralized Oracle infrastructure that consists of a broad set of individual price oracles. gZIL voters choose a set of trusted Feeds to deliver price information to the system through Zilliqa transactions. They also control how many Feeds are in the set.
To protect the system from an attacker attempting to gain control of a majority of the Oracles, the Pillar Protocol receives price inputs through the Oracle Security Module (OSM), not from the Oracles directly. The OSM, which is a layer of defense between the Oracles and the Protocol, delays a price for one hour, allowing Emergency Oracles or a Pillar Governance vote to freeze an Oracle if it is compromised. Decisions regarding Emergency Oracles and the price delay duration are made by gZIL holders.
