Different investors have different risk preferences, and risk-graded synthetic assets are a new direction worthy of attention in the DeFi field.
Original title: “What kind of money you want to make is available here: Introduction to Lien Protocol and his non-over-collateralized stablecoin and Hakka Finance’s structured fund CSF”
Written by: Williams Lai
“I hope my cryptocurrency will make me earn 10% in a month.”
“Stupid? It’s a bull market now. I won’t be satisfied if I don’t make two or three times the money next month.”
One market, one market, there are still a hundred types of investors. The constant law is that investors in the market want to make a profit, and this is a good business.
With the explosion of liquid mining, DeFi has gradually attracted the attention of people in the blockchain circle. After the explosive growth of popular projects such as Compound and YFI, everyone has gradually reached a consensus: DeFi is a big thing ! So, a soul torture is coming. After the gold craze of liquid mining, is it possible that other decentralized applications can blow the next whirlwind in the future?
Risk-graded synthetic assets may be a new direction worthy of our attention
The concept of DeFi synthetic asset (synthetic asset) started from Synthetix, which is able to generate a combined asset of equal value from any asset. Generally speaking, synthetic asset will combine a variety of derivatives, such as combining stocks, bonds, futures behind currencies, Option and other assets.
Under the concept of synthetic assets, we can more flexibly apply more encrypted assets at hand. At present, in addition to the synthetic assets on Synthetix, I also saw synthetic assets and non-overcollateralized stablecoins proposed by Lien, as well as structured funds (Crypto Structured Fund, CSF) proposed by Hakka Finance, which all use risk classification The concept of using synthetic assets for the DeFi market to maximize the use of funds.
How does Lien generate stablecoins without overcollateralization
Lien is a basic protocol that wants to create a non-overcollateralized stablecoin based on Ether and Option products through the form of synthetic assets. It is worth noting that in the past, DAI like MakerDao minted, in order to maintain its price stability, it must have a 150% mortgage rate, which means that if I need to mint 100 US dollars, I must have a collateral worth 150 US dollars , To ensure that the fluctuation of our collateral will not affect the price stability of DAI.
However, this also means that behind all the minted DAI of more than 200 million U.S. dollars, there are at least more than 300 million U.S. dollars of ETH, USDC, BAT, WBTC and other tokens to be mortgaged (in fact, there are more). The reason for this is because for every user who generates DAI, I must bear the risk of changes in the price of the collateral myself.
However, Lien created two products based on the degree of risk aversion of different people, one is the high-risk and high-profit LBT (Liquid Bond Token) and the relatively stable asset SBT (Solid Bond Token). Then through SBT, a very stable synthetic asset, a stable currency iDOL is generated.
So, if I deposit ETH on Lien’s platform today, I will generate two different types of bonds, one is stable SBT, and the other is LBT with higher risk and higher profit. When these two types of synthetic assets are generated, we must set an expiry date of SBT and a value of k for the price of ETH at this expiry date.
So let’s use a simple example to see what will happen when the expiry date comes: Suppose that today Xiao Ming’s price of ETH is 400 usd, and his 1 ETH will be generated into LBT equivalent to $200 and the equivalent value 200 USD SBT, the maturity date of the SBT is set to one month, and the k value of the expected price is set to 440 usd. When one month later, the price of ETH becomes 500 usd, then, if Zhang San buys SBT, then his SBT will be settled at a price of 440 yuan first, and then his SBT will be able to exchange value back 200 *(440/400) = 220 usd equivalent funds; then Li Si, who bought LBT, can get 500–220 =280 usd.
However, in another situation today, if the ETH price is only 300 usd at the expiry date, then Zhang San’s SBT can also get 200*(440/400)=220 usd at this time. In the end, the four LBTs can only exchange funds equivalent to 80 usd (300-220).
In other words, when the market is good, LBT holders earn more and can achieve the effect of leverage, but when the market is not good, the impact of the currency price drop on LBT is doubled, so it is suitable for high-risk players. SBT is just the opposite, because after the expiration date, he has the priority of liquidation, so the price stability is almost certain.
At this point, we can say that the value of SBT will basically not change much. Lien Protocol uses this feature to generate stablecoin iDOL with SBT without over-collateralization. In other words, any mint doesn’t need to perform the over-collateralization required to generate DAI to deal with the past in Maker The problem of insufficient mortgage value caused by avoiding price fluctuations of the collateral is because these risks have been borne by LBT holders who are willing to take risks in Lien’s system.
iDOL usage scenario source: https://lien.finance/pdf/LienFairSwapWP_v1.pdf
In this way, LBT, SBT, and iDOL have become a tradable market. Therefore, the Lien team has also launched an exclusive exchange FairSwap to allow these synthetic assets and stablecoins to be traded. In trading and token minting In the process, Lien Protocol’s platform currency Lien Token also extracted fees from the coin minting and platform transaction fees to complete the action of value capture.
According to the Lien team, Lien Protocol will charge a 0.2% fee to users who mint iDOL stablecoins, while using FairSwap is a (0.3-variable) fee, while Lien Token holders can enjoy these processes discount.
Lien’s token usage scenario diagram source: https://medium.com/lien-finance/lien-token-metrics-f9e7bae3e407
At present, Lien Protocol is also developed by an anonymous team. The contract has been on the main network and has passed the audit of the Certik team. Lien Token is currently not in circulation except for 10% of PreSale, and Fairswap has not yet been launched before the deadline. In the future, how profitable Lien’s LBT can be in FairSwap and how iDOL is opened on various DeFi applications will determine Lien’s growth space.
The interface of Lien’s synthetic asset trading platform FairSwap
The market for synthetic assets has not yet been opened, but projects that are moving along this path have seen explosive growth this year, such as Synthetix, UMA, and Nest.
CSF: structured fund with risk classification
In the process of understanding Lien, I surprisingly discovered that Hakka Finance from Taiwan also has a very interesting product a few days ago. Crypto Structured Funds (CSF). Users with different tolerance levels can purchase investment products with different risk returns.
This is also the winning work of the Hakka Finance team in the Kyber DeFi Hackathon at the end of 2019. Simply put, a structured fund is a structured asset that combines certain assets such as ETH with interest rates and liquidation order.
The three main elements contained in the structured fund CSF are: “subject”, “contract period” and “interest rate”.
- “Subject” refers to assets used to become structured funds: ERC tokens that can be issued on Ethereum such as ETH, WBTC, MKR, BAT, etc.
- The “contract period” is the duration of the contract, which can be one month, three months, half a year, or even one year.
- “Interest rate” is the predetermined interest rate given by the system to “Preferred Share”.
In accordance with these three elements, investors are given two investment choices in two directions: “Preferred Share” and “Excess Return”.
This is similar to the above-mentioned LBT and SBT, but CSF is a more free form that divides it into more layers of fund products with different interest rates. Preferred Share is funds that can be repaid by preferential interest rates, and Excess Return It is a risk product that uses leverage to obtain excess returns, but may also suffer excess losses.
For example, if our subject matter is YFI today (YFI is only an example, the current team’s test product subject matter is still ETH), then the overall contract period is one month, the predetermined interest rate for Excess Return is 20%, and the overall CSF The operation process is roughly as follows:
Open for purchase period
During this period
A. Preferred Share investors deposit USD 10,000 equivalent of USD stable currency DAI into a structured fund; and generate CSFDAI, an ERC token, as a voucher for future exchange, which is a bit like the concept of Balancer’s BPT.
B. Investors of Excess Return shall deposit YFI equivalent to USD 10,000 into a structured fund. Similarly, CSF will also generate the CSF Token CSFYFI as a credential.
Redemption period
After the purchase is over, CSF’s smart contract will send the product to the decentralized exchange (DEX) to replace DAI with YFI. According to the CSF white paper, in order to avoid large exchanges, it is like DEX based on AMM mechanism. A sliding frame is generated, so the entire exchange period may be longer. For example, the case of the white paper lasts for two weeks. The algorithm is used to exchange a small number of times to extend the period.
The stable currency price is fully exchanged.
During lockout
Neither of these funds will be used in any way before the contract period arrives.
Redemption period
After a one-month lock-up period, there will be a two-week redemption period, and the smart contract will automatically go to the decentralized exchange to exchange the current YFI into DAI in batches until it meets the requirements for choosing Preferred Share during the purchase period. 120% of the DAI quantity will be exchanged until the end of the exchange.
Payment period
After the DAI is exchanged, users who choose Preferred Share can get 120% of the profit, and the remaining YFI will continue to be obtained by those who choose Excess Return. If the real situation is established, the price of YFI a month ago is roughly 4000 usd, you can get 2.5 DAI with the equivalent value of 10,000 US dollars. The current price of YFI is about 30,000 usd…
Well, if you are particularly optimistic about a certain ERC 20 currency, CSF will be a good choice, which is equivalent to forcing other people who do not understand or are not optimistic about this currency to buy coins for you with his money, and he It can also have stable income.
But if the price of your target item plummets after the lock-up period ends, then your loss is also magnified.
This is just a simple example, but in fact, structured funds can be divided into many layers. This can also be used as a leverage game for different investors who are optimistic about a project. For example, suppose I am optimistic that YFI can rise by 20%, Alice is optimistic that he can rise by 100%, and Bob believes that he can rise by 150%, then we can form a multi-level structured fund.
Hakka Finance also gave a chart to explain the profitability of investors with different interest rates for different multi-level structured funds at different price movements:
Source: Hakka Finance
As far as we know, Hakka Finance has not yet deployed CSF structured funds on the Ethereum mainnet. The main force in the near future is the development of Black Hole Swap , and DEMO products can be found here. At present, at the level of value capture, a small amount of handling fee may be drawn during the exchange process. As for the form of handling fee collection, it is still unknown and it is worth noting.
Here are how you want to profit
Generally speaking, DeFi is currently experiencing an unprecedented crazy period. However, whether it is Lien or Hakka’s CSF, the purpose is to make the funds the most suitable for different investors through the difference in the risk tolerance of all players in the market. . This will maximize the use of funds and give everyone greater flexibility in the choice of financial products.
Thinking more deeply, such synthetic asset commodities, if they do not consider product operations, theoretically have a modular effect. Anyone can have the opportunity to use their own subject matter and their favorite interest rate to generate The LBT/SBT or structured fund you want. So that everyone can make their own business based on a system, then this platform must be a big business, because how big the cake can be depends on how the cake is divided.
Another interesting feature is that in the past, Marker’s stable currency DAI began to be converted to multi-collateral DAI at the end of last year, but it has not yet accepted synthetic assets. How much is the iDOL token generated from extremely stable synthetic assets? Acceptance is also an aspect of the market that deserves attention.
This is also an important route to continue the promotion of DeFi’s Lego. At present, several of Lien’s products have not yet been launched, and CSF is also in the early stages of the project. It is still unknown which CSF purchase platform will choose in the future, and can be suitable for In the DeFi field, you who want to continue to explore continue to pay attention.
This article is an introduction to DeFi potential projects, but does not constitute investment advice for Lien or Hakka mentioned in the article. Both of these projects are at a very early stage. If there are errors or needs to be strengthened, corrections and exchanges of opinions are welcome. The time cost of writing articles in the bull market is high. If it helps after reading it, please like to encourage me.
More references:
Lien white paper:
[1] Lien Protocol :iDOL whitepaper
[2] FairSwap
[3]Lien ParameterTuning
CSF structured funds:
[1] CSF Whitepaper
[2] Talk about “Structured Fund CSF” from the Animal Crossing
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