🛠️Indigo Protocol V3

Indigo Protocol V3 is the most significant upgrade since launch. It expands the protocol's collateral model beyond ADA, improves peg stability with a new Peg Stabilization Module (PSM), restructures interest so it is paid in iAssets rather than ADA, and introduces a migration toward zero INDY emissions.

These changes provide:

• Greater collateral flexibility with CNT-backed loans (e.g., NIGHT, USDM/A, USDCx, xBTC)

• Reliable peg maintenance and improved stablecoin liquidity through the PSM

• Sustainable protocol revenue flows in native iAssets

• A migration toward a zero INDY emissions system

• Improved UX for borrowers, LPs, and stability providers

• Extended runway for DAO POL strategies that include iAsset LP

• A diversified DAO Treasury

• Bi-directional Indigo OrderBook orders against multiple collateral assets

• Integration with Pyth as an oracle provider

Key Features of the Upgrade

1. CNT-Backed Loans (Multi-Collateral Support)

Indigo V3 expands the collateral asset suite to allow users to open loans using Cardano Native Tokens (CNTs) in addition to ADA. Each loan position is single-collateral-type from creation to closure — one loan position is backed by one collateral asset for its entire lifetime.

Product motivation:

• Enables iAssets to expand supply by tapping liquidity across the Cardano ecosystem

• Reduces overreliance on ADA market conditions

• Mirrors multi-collateral loan systems such as MakerDAO

Core user outcomes:

1. Loan position creation: When opening a loan, the user selects the iAsset to mint (e.g., iUSD, iBTC) and the collateral type to use (e.g., ADA, USDCx, NIGHT). Only whitelisted collateral assets appear as available options.

2. Collateralization rules: Each iAsset/collateral pair has its own Liquidation Ratio, Maintenance Ratio, Redemption Ratio, Interest Rate oracle, Price oracle, and Minimum Collateral Amount.

3. Collateral management: Users can add or withdraw collateral, but only of the same asset type the loan position was created with.

4. Interest & liquidations: Interest is assessed using the collateral's own interest model. Liquidation payouts to Stability Pool depositors now include multi-asset rewards in addition to ADA.

5. Governance: The DAO may add or update collateral assets for any iAsset through on-chain proposals. Each iAsset supports a maximum of 8 non-ADA collateral assets.

Supported collateral attributes:

Each collateral type (ADA or CNT) has:

1. Collateral Asset — Policy ID and asset name

2. Collateral Asset Price Oracle — NFT or Pyth feed providing pricing in Collateral/iAsset (e.g., BTC/iUSD or ADA/iUSD)

3. Loan Parameters — LR, MR, and RMR per collateral/iAsset pair

4. Interest Rate Oracle — Algorithmic interest rate per collateral type/iAsset pair

5. Minimum Collateral Amount — Minimum collateral allowed on a loan position after any user operation

New governance proposal types:

1. List a new Collateral Asset for an iAsset

2. Update a Collateral Asset for an iAsset

When listing or updating a collateral asset, proposers provide: the target iAsset, collateral asset, price oracle, LR, MR, RMR, interest rate oracle, and minimum collateral amount.

The following fees remain configured at the iAsset level: Debt Minting Fee, Liquidation Processing Fee, Stability Pool Withdrawal Fee, Redemption Reimbursement Fee, and Redemption Processing Fee.

2. Pyth Oracle Integration

With Pyth on Cardano mainnet, Indigo leverages highly accurate, real-time price feeds to strengthen the protocol and expand its iAsset suite. Indigo is among the first protocols utilizing Pyth Pro on Cardano. As part of the V3 upgrade, all existing oracle infrastructure migrates to Pyth, enabling a more scalable and efficient pull-based oracle architecture across the protocol.

Announcement on X

3. Peg Stabilization Module (PSM)

The PSM introduces a 1:1 swap mechanism between approved iAssets and approved paired collateral assets of stable value relative to the iAsset (e.g., iUSD/USDCx, iUSD/USDA, iBTC/xBTC).

Example flows:

• USDCx → iUSD: Unlimited swaps. User deposits USDCx and receives equivalent iUSD minus an optional minting fee. Slippage-free.

• iUSD → USDCx: User burns iUSD and withdraws matching USDCx (minus optional redemption fee), subject to available PSM liquidity.

The DAO can enable and disable swaps in one specific direction per pair.

Product motivation:

• Restore and maintain iAsset peg when a liquid on-chain asset matches the iAsset

• Provide exit liquidity for ADA/CNT loan borrowers

• Position Indigo as the stablecoin swap hub of Cardano

Governance controls per stable pair:

• Add/remove stable pairs from the PSM

• Enable/disable minting or redemption

• Adjust minting fee, redemption fee, minimum redemption order amount, minimum minting order amount

• Optional fee manager to control minting and redemption fees

Other considerations:

• PSM integrates with DEX aggregators such as DexHunter and SteelSwap

• One PSM is created per iAsset/stablecoin pair

• PSM pools have minimum order sizes in both directions

PSM article on X

4. Interest Settlement in iAssets Instead of ADA

In Indigo V2.1, borrowers paid interest implicitly in ADA. In V3, interest is minted directly as new iAssets and added to the borrower's debt. Interest is settled at adjustment and can also be settled if it has not been settled within the last 5 days.

Upon V3 launch, outstanding ADA interest in V2.1 for all loans is immediately settled. After that, all loans follow the iAsset interest accrual model.

Benefits:

• Eliminates ADA-denominated interest complexity

• Creates sustainable, non-volatile revenue streams in iAssets

• Simplifies accounting for borrowers

Core user outcomes:

1. Debt display: Borrowers see a single Total Debt number including principal and accrued (unsettled) interest.

2. Real-time updating: Debt increases continuously in the UI. The backend batcher periodically settles interest by minting new iAssets equal to accrued interest and charging them against the loan debt.

3. Distribution of interest revenue (subject to DAO configuration):

   • 40% → Stability Pool depositors

   • 20% → Liquidity Providers

   • 40% → Treasury

4. Liquidation behavior: Upon liquidation, interest is minted into the interest collection script, increasing its principal. The Stability Pool then burns principal debt.

5. Flow of Value Through Indigo

Interest flows through a new Interest Collection Script — a contract that collects funds for later distribution.

Distribution paths:

• Stability Pool: Funds sent to the Stability Pool rewards wallet (Sundae). 15-minute snapshots are created and distributed daily to pool users from day 31–60.

• Liquidity Pool: Direct to the incentivized DEX (e.g., MinSwap).

• Treasury: Direct every 30 days.

A distribution wallet must sign transactions to distribute funds to respective parties. This wallet can be rotated by the DAO-designated multi-sig through Protocol Parameter governance actions.

INDY Staker allocations:

Revenue directed to INDY Stakers can be converted from iAsset(s) in the Treasury to INDY via open market orders for distribution upon DAO determination. After the first 30 days of V3 deployment, the DAO converts assets to INDY and distributes any revenue allocated to Stakers for the following 30 days on a daily schedule, repeated monthly. This ensures distributions are non-inflationary and maximizes value accrual for INDY stakeholders under zero emissions.

Flow of value article on X

6. Protocol Fee Changes

• Debt Minting Fee: Minted together with debt and paid to the Treasury directly. If a user mints 100 iUSD debt, they receive 99.5 iUSD and 0.5 iUSD goes to the Treasury.

• Loan Redemption Processing Fee: Paid to the Treasury in the collateral asset of the loan.

• Loan Redemption Reimbursement Fee: Returns a percentage of collateral back to the loan from the total value returned from redemption.

• Liquidation Processing Fee: A percentage of collateral that would be paid to the Stability Pool is taken and paid to the Treasury. Capped to prevent Stability Pool providers from incurring a net loss (except for ADA network fees).

7. Bi-Directional Indigo OrderBook

Previously, the ROB (now Indigo OrderBook) supported only buy orders: collateral asset → iAsset. V3 introduces sell orders as well: iAsset → collateral asset. Users can deposit iAssets and sell them for collateral assets.

The Indigo OrderBook for selling iAssets can accept more than one collateral asset, with limit prices individually configured for each asset.

Reimbursement fee update:

The reimbursement fee is now applied as a fee on the redeemed amount and credited to the position owner, denominated in the asset supplied by the redeemer.

• Buy order (owner buying iAssets with collateral): Redeemer supplies iAsset. Redeeming 10 iUSD at 1% fee results in 9.9 iUSD matched and 0.1 iUSD credited to the position owner.

• Sell order (owner selling iAssets for collateral): Redeemer supplies collateral. Redeeming 10 ADA at 1% fee results in 9.9 ADA matched and 0.1 ADA credited to the position owner.

OrderBook article on X

8. Updated Interest Calculation

With the Indigo OrderBook and privatization of loan redemptions, the redeemables-linked discount mechanism has been updated. Redeemable Assets (RA) are now defined as the quantity of iAssets effectively redeemable through in-range OrderBook liquidity (collateral-to-iAsset buy orders within the active price range), rather than redeemable loan positions.

This preserves incentive alignment between peg health and borrowing costs: higher available OrderBook liquidity leads to greater interest discounts; reduced liquidity results in higher effective interest rates.

Variable Interest Rate:

$$\text{Variable Interest Rate} = \max\left[0, \frac{(\text{ITCR} - \text{NTCR})}{(\text{CTCR} - \text{NTCR})} \times (\text{Upper Limit Int} - \text{base Int})\right]$$

Final Interest Rate:

$$\text{Final Interest Rate} = \text{base Int} + (\text{Discount Rate} \times \text{Variable Int})$$

Discount Rate:

$$\text{Discount Rate} = \left(1 - \min\left[100\%, \frac{\text{RA}}{\text{Buffer rate} \times \text{TMS}}\right]\right)$$

Where:

• Base Interest (BaseInt): Minimum interest charged

• NTCR: Neutral iAsset Total Collateral Ratio (healthy baseline)

• ITCR: Current iAsset Total Collateral Ratio

• CTCR: Maximum capped Total Collateral Ratio

• Upper Limit Int: Highest possible interest (if ITCR ≥ CTCR)

• RA: Redeemable iAssets liquidity available via Indigo OrderBook

• TMS: Total Minted Supply

• Buffer rate: % of TMS deemed healthy to be within the redeemable zone

9. Protocol Owned Liquidity

When the protocol acts as the liquidity provider:

• The POL position earns trading fees from swaps in the pool

• It may earn additional rewards from yield farming (e.g., boosted incentives on MinSwap)

• The protocol captures 100% of these revenues directly into its Treasury

Revenue can be reinvested to deepen liquidity, used for INDY buybacks/burns, distributed to INDY holders/stakers via governance, or allocated to other Treasury initiatives.

10. Electorate & INDY Burn

The V2.1 electorate calculation used by AQB is now a static value modifiable through Protocol Parameters.

V3 Launch Electorate and INDY Token Max Supply: 25,000,000 INDY

An estimated 11.4M INDY will remain undistributed from the Rewards allocation. 10M INDY is reserved for a potential future burn upon DAO approval. The difference is redirected to the DAO Treasury.

See AQB & Minimum Quorum for details on the electorate change.

11. Stability Pool Fee Changes

A Stability Pool account adjustment cooldown period ensures an account cannot continuously perform actions against the Stability Pool. This replaces the account adjustment fee, which is removed.

12. Optional Redeemer Signer for Loan Redemptions

A protocol-configurable signer (through Protocol Parameters) can be required specifically for loan redemptions. If unused, redemptions behave as in V2.1.

When a signer is applied, the partial loan redemption fee is removed. At V3 launch, the Indigo Foundation controls loan redemptions.

13. Upgrade to Plutus V3 & Latest Aiken

• Lower transaction fees

• Higher throughput

• More flexible script design

• Improved opcode support for numerical operations

This upgrade is transparent to users and does not alter visible functionality.

14. Indigo Limitless

Indigo Limitless encompasses the launch of new iAssets, collaterals, and PSMs in three tranches shortly after V3 launch.

Indigo Limitless article on X

Tranche 1:

• NIGHT as collateral for iUSD

• iUSD/USDCx PSM Pool

• iJPY as an iAsset with ADA collateral market

• iEUR as an iAsset with ADA collateral market

Tranche 2:

• NIGHT and USDCx collateral markets for iJPY

• NIGHT and USDCx collateral markets for iEUR

• iUSD/USDM PSM Pool

• iUSD/USDA PSM Pool

Tranche 3:

• NIGHT and USDCx collateral markets for iBTC

• NIGHT and USDCx collateral markets for iETH

Expected parameters for these new markets are documented in the Indigo v3 iAsset Parameters specification.

Implementation Strategy

The Indigo Foundation and core contributors from 3EL monitor the launch of these markets and will introduce future iAssets, collateral markets, and PSM pool proposals through DAO governance. V3 represents the most comprehensive upgrade to Indigo Protocol to date, signaling a new era for the system.