Banks are Dumb like Smart Contracts Part 3
Be The Revolution — Viva La DeFi
The personal views expressed by the author in the below article should not form the basis for making investment decisions, nor be construed as a recommendation or advice to engage in investment transactions.
If you are new to this series of articles, have a quick read through the previous published content to gain some context (yes it is important)
We kicked off with this banger:
Then followed up with some foundational logic:
Then using some of the logic attained in the above articles, explored the world of DeFi Primitives:
Context of the above articles is key to understanding the scope discussed in this series. The foundational logic of the Creditor and Debtor relationship between Users and Smart Contracts is very important to clearly identify risks attached with interacting with Smart Contracts of DeFi protocols.
Revolution = a forcible overthrow of a government or social order, in favour of a new system
In this article we will look at the User Experience of interacting with some DeFi protocols which burst onto the market after the Primitives led the way.
Lido Finance
Deposits into Lido Finance result in the user receiving stTKNs. Users might want to deposit into Lido Finance should they wish to contribute towards a blockchain networks Proof of Stake (PoS) operation.
Example; Stacy wants to withdraw her 1533 ETH from Maker and contribute her ETH to the Ethereum Beacon Chain Proof of Stake scheme. To do so, she must provide:
(a) minimum of 32 ETH
(b) block her ETH until Beacon Chain goes live
(c) contribute hardware and internet connectivity to be eligible for rewards
Stacy does not wish to conform to the scheme parameters, and decides to use Lido Finance who handles the above parameters on behalf of depositors. Stacy deposits her 1533 ETH into Lido and receives 1533 stETH. At any time Stacy is able to swap her stETH for ETH using a pool on Curve Finance.
The Lido stTKN are composable ERC20 tokens that represent shares of the smart contract you deposited into. The smart contract underlying increases in amounts of token deposited as the rewards accrue in the smart contract.
Users of Lido Finance have had their fair share of public nightmares in this downturn that has impacted ETH price. I wrote a thread on twitter not so long ago:
The stETH price is currently sitting at ~0.942 ETH. Anyone accumulating stETH is able to benefit from a ~5.8% discount against ETH price.
Lido Finance also allows users to deposit SOL, KSM, MATIC, DOT into stTKN smart contracts with a similar model as stETH.
Lido Finance is a protocol that enables its depositors to partake in the Proof of Stake ecosystem without the limitations of providing hardware or locked liquidity.
Lido makes the staked position of its depositors liquid with its stTKN and incentivises liquidity mining programs for stTKN-TKN markets within DeFi.
Maker Protocol accepts stETH deposits into Oasis as collateral as well as leveraged strategies on Oasis Multiply smart contracts using a deposit and repurchase automation involving DAI to leverage debt positions.
Maple Finance
Deposits into Maple Finance with the MPL token result in the user receiving xMPL whilst depositors of WETH or USDC do not receive any token to represent their staked position.
Users might want to deposit WETH or USDC into Maple Finance for exposure to higher interest rates for lending USDC without any security or collateral to financial institutions credit vetted by Maple Finance.
To be clear, Maple Finance gives credit i.e. unsecured lending to financial institutions that Maple Finance have relationships with. Hence the increased rates of return on interest reflect the higher risk.
Example; Bob loans 1m USDC from Compound and Aave in order to deposit into Maple Finance. Bob sees a pool on Maple Finance that loans unsecured USDC to Alameda Research. At the time the pool APY is ~13% and Bob thinks it is worth the risk as Alameda is part of FTX and linked to Sam Bankman-Fried. Bobs thinking funds SAFU.
Bob is not only a creditor of Maple Finance for the USDC he has deposited, but those funds are to be loaned on an unsecured basis to Alameda Research. Bob is also locked for 90 days from withdrawing his funds and does not have an ERC20 token to represent his debt position.
The Maple Finance team create and build strategies to deploy loaned capital to its network of relationships. In effect they are acting as researchist, strategist and underwriter to price, build and execute on deploying capital into what are best described as revolving credit agreements with its network of relationships.
Maple Finance relationships are typically Market Makers and Arbitrage Traders.
Abracadabra Money
Deposits into Abracadabra Money cauldrons (like Maker vaults) result in the user being able to loan MIM stable coins. Users might want to deposit into cauldrons on Abracadabra Money should they wish to speculate further on cryptocurrencies by using MIM to accumulate digital assets. Users can leverage their collateral by depositing and repurchasing Abracadabra cryptocurrency collateral types. Abracadabra Money is a Collateralized Debt Position Protocol (CDP). Abracadabra Money uses Yearn Finance yvTKNs as collateral types.
Example; Stacy has $0.52m of DAI in Yearn Finance in the form of yvDAI. Stacy deposits her $0.52m of yvDAI into Abracadabra Money and takes a 0.5m MIM loan. Stacy swaps the 0.5m MIM for 0.5m DAI and repays the DAI debt against her ETH staked in Maker Protocol.
If yvDAI price drops to $0.96, Stacy’s vault will be liquidated but she retains the MIM loaned. The yvDAI vault on Yearn Finance accrues 3% APY whilst the Abracadabra Money cauldron accrues 1% APR in interest.
Stacy is a Creditor to the Abracadabra Money cauldron smart contract where she supplied yvDAI. Stacy is also a Debtor to the Abracadabra Money cauldron for the MIM she borrowed, her creditor/debtor account balance is shown on the Abracadabra Money dApp (along with other factors such as health factors of collateral against liquidation).
Abracadabra Money cauldrons are isolated debt positions used in the lending of MIM stable coins. Whatever amount of approved collateral types are supplied to the Abracadabra Money cauldron, any risk associated with lending MIM against that cauldron’s value is isolated from the overall ecosystem.
New collateral types cannot be added to Maker Abracadabra Money cauldrons in a permission-less manner, this is governed by Treasury Managers of Abracadabra Money DAO using the SPELL token to vote on such proposals. The treasury of the DAO also acts as a liquidity backstop to liquidations in the event that there is insufficient collateral in the ecosystem to back MIM in circulation. Often resulting in losses to the treasury.
Opening Abracadabra Money collateral types; “to a permission-less environment”; could lead to liquidity being maliciously exploited. A systematic risk for any CDP protocol like Abracadabra Money is failure or black swan event of a collateral asset type as detailed in the thread below when Abracadabra Money listed TIME (Wonderland Money) as collateral type for MIM loans:
Abracadabra Money charges fees in the form of interest, advance fees and liquidation fees which are subject to change by Abracadabra Money Governance. Fees accrue in MIM in the Abracadabra Money treasury and are used to market purchase SPELL tokens of which 70% are distributed to those who staked their SPELL tokens on Abracadabra Money dApp.
TronDAO
Remember the LUNA-UST debacle?
OK, so Justin Sun (founder of TRON & crypto whale) decided to emulate the Terraform Ecosystem (LUNA-UST collective) using TRX (as substitute for LUNA) and a new stable coin called USDD (instead of UST). They use a money market called JustLend to do the job that Anchor performed for LUNA-UST.
TronDAO capital reserves are used to back the circulating supply of USDD. TronDAO is an example of a CDP protocol similar to Maker and Abracadabra.
At this point, i’m not going to go into the usual description of Creditors and Debtors. I think you get the point!
Frax Finance and TribeDAO (Formerly FEI Protocol)
Frax and FEI are both stable coins based on CDP structures built by 2 different teams in the DeFi space.
Both these teams and DAOs manage the treasury and collateral types backing the distribution of their respective stable coins.
Again, I think you guys get the point on how Creditor and Debtor relationships would work, whilst understanding what is backing the stable coins being distributed.
We especially salute those of TribeDAO who brought forth the ERC4626 standard. In the next articles to come, I will start exploring the imminent product releases of Yaggr and Blackmagic Money whilst adopting the ERC4626 standard in our development endeavours.
DeFi Perspective
We have been exploring the concept of DeFi since 2018 when we initially wrote the Enreach white paper, with the slogan “Reach Enrichment” such that Enreach would represent insuring bad debt in trade credit scenarios and advancing cash against invoices.
Alongside our DeFi hobby we have been building FinTech in regulated environments working within regulatory frameworks delivering regulated payment services.
In the next series of content, we will explore how the legos we are building can be used to interact within aforementioned regulated environments.
#DeFiKingMakers
#BuildsBuild
