How to simply and elegantly reduce the loan-to-mortgage ratio in the DeFi ecosystem?
Editor's Note: This article comes fromChain News ChainNews (ID: chainnewscom), Written by LeftOfCenter, published with permission.
Editor's Note: This article comes from
Chain News ChainNews (ID: chainnewscom)
, Written by LeftOfCenter, published with permission.
Capital utilization is a bottleneck in DeFi at present, especially for decentralized lending platforms like MakerDAO. The minimum over-collateralization of 150% makes it obvious that the capital utilization is very low and it is impossible to develop a credit market. So how to reduce the loan mortgage rate in the DeFi ecosystem and improve the utilization rate of funds?
Lien is a recent DeFi protocol that tries to solve this problem. By developing a brand-new algorithm and issuing a stable currency, it can solve the problem of inefficient use of funds in decentralized finance. There is no over-collateralization and no cumbersome governance , simple and elegant.
So, what is the implementation principle of Lien? Can it really solve the structural problems of DeFi, and what unique value can it provide? To understand these issues, please continue reading this article.
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What problem does the Lien project want to solve?
Lien wants to create a USD-pegged but decentralized stablecoin. Currently, more than 50 protocols have created more than 50 different stablecoins through different solutions. Among them, the largest MakerDAO has created the most widely used stablecoin DAI. So, what is so special about the stablecoin created by Lien?
Unlike the Maker system, which requires MKR holders to manually intervene to maintain DAI's target anchor, Lien Protocol's goal is to create a stablecoin iDOL that can be anchored through an algorithm without manual intervention, which means "independent dollar" and also That is, the peg to the U.S. dollar can be maintained "independently" without human intervention.
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Implementation principle of Lien
The design of the Lien protocol is to divide encrypted derivatives into two parts: LBT with higher risk and higher return and SBT with stable value. Users with different risk preferences choose what they want. Risk takers who choose to hold LBT (liquid bond tokens with higher volatility risks) bear the risk of price fluctuations while capturing the upside benefits of collateral. They are willing to hold SBT (stable bond tokens) Solid bond tokens) can hedge the risk of price decline to the greatest extent. Essentially, the protocol is to minimize the risk of the other SBT token holders by allowing speculators to take on volatility risk.
In addition, because the value of SBT tokens is stable, a stable currency iDOL can be created with the support of a basket of SBT tokens. Since almost all the risk of price fluctuations of collateral ETH is passed on to LBT, the value of SBT tokens can be maintained. Stable, and ultimately can minimize the risk of a sudden plunge in SBT, so the generated stable currency iDOL does not need to be over-collateralized, which can greatly improve the utilization rate of funds. After the system is launched, the price of the stablecoin iDOL will be automatically maintained near the target level through the power of the free market, and there is no need to manually adjust parameters through the "stability fee" to anchor the stable value. On the other hand, LBT with higher risk of price fluctuation can be separated and sold separately as a liquid speculative asset to investors with higher risk appetite.
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Specific process and operation
In terms of the specific implementation process, the mortgager can deposit Q ETH into Lien's smart contract, and after locking the ETH, generate two different risk derivative tokens whose total value is equal to Q ETH, the stable value of SBT and the volatility Larger LBT, LBT will bear all the price fluctuation risks of Q ETH, while SBT has almost no risk, so it can be assumed to be basically stable.
When the contract is initialized, the mortgager needs to set two parameter values, one is the maturity date M, and the other is the threshold value (guaranteed floor price) of SBT tokens K dollars. On the maturity date M, the collateral ETH will be unlocked, and ETH will be delivered to SBT holders and LBT holders according to the current ETH price P1 at that time.
That is to say, how to deliver the ETH collateral on the maturity date depends on the price of ETH on the delivery day M.
On the day of maturity M, if the current price P1 of ETH falls to the minimum guaranteed price of USD K or even below, SBT token holders can still obtain all ETH collateral, which is equivalent to USD value P1 (at this time, P1 is less than or equal to USD K), At this time, LBT holders will receive 0 ETH. In this case, LBT holders bear the risk of ETH falling and lose all their money.
SBT is essentially a bond derivative that can be redeemed with a guaranteed minimum value of K dollars (converted into ETH) on the maturity date, as long as the value of ETH at that time is greater than or equal to the guaranteed minimum price. That is to say, the guaranteed floor price of USD K represents the strike price, and if the value of ETH on the due date is lower than the strike price (P1
Assuming that the current price of ETH is 250 US dollars, based on this agreement, mortgage 1 ETH to generate 1SBT (worth 100 US dollars) and 1LBT (worth 150 US dollars), where K=100 US dollars, which means that the execution price of 1SBT is 100 US dollars, if On the expiration date, if the price of ETH rises to 400 USD, SBT holders will receive ETH equivalent to 100 USD, which is 0.25 ETH, and LBT holders will receive 0.75 ETH. On the other hand, if the price of ETH drops to $100 on the expiration date, the SBT holders will get the guaranteed value of $100 in ETH, that is, 1 ETH, while the LBT holders will have no income.
Lien Protocol eliminates the requirement for overcollateralization by stripping the value of ETH and distributing it to two tokens with different risks, that is, ETH worth $250 can generate two tokens of equal value, SBT and LBT. Among them, the value of SBT is stable, and LBT is essentially a call option. As the price of ETH rises, the amount of ETH received by LBT holders will increase.
It should be noted that SBT has an expiration date, that is to say, the guarantee that SBT anchors the value of K dollars can only be maintained until the expiration date M, and once it expires, SBT must settle the position. This is because the LBT holder in the created contract is only guaranteed to absorb the volatility risk before the expiration date. After the expiration date, if the SBT holder wants to continue to hedge the risk, he must renew the derivative contract or find another counterparty to hedge the risk.
In this regard, a tool for aggregating SBT with different expiration dates can be provided, so that users can purchase new SBT when the old SBT expires to continuously hedge the volatility risk of Ethereum.
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minting stablecoins
It can be said that as long as an appropriate strike price is set with full consideration of the current price and volatility of ETH, it is almost guaranteed that SBT token holders will always receive ETH worth $K (guaranteed floor price), which means that the value of SBT Almost stable.
Based on the stable value of SBT, Lien Protocol allows the system to mint a new type of stable coin iDOL. In fact, the minting of the stable coin iDOL is an important value of the system.
iDOL is backed by SBT tokens. Since the value of SBT is stable, there is no need to worry about the risk of price fluctuations, so there is no need to over-collateralize as collateral.
specific process:
Create iDOL tokens, whose value depends on the value of the SBT tokens stored in the contract. Since the value of these SBT tokens is stable (as long as P0>K/Q is satisfied), the iDOL tokens generated based on SBT will also be anchored to the stable value of the US dollar .
Unlike SBT, iDol has no expiration date, and as long as SBT is provided to the iDOL contract, iDOL holders can ensure that its value is stable.
Anyone can sell (cun) SBT to (ru) iDOL contract to obtain the corresponding amount of iDOL tokens, or use iDOL tokens to buy (shu) into (hui) SBT.
As a stable currency, users can freely use iDOL to trade in the market. Unlike MakerDAO, anyone else can use the minter's collateral asset SBT through installment payment or burning iDOL tokens, which can establish a strong price stability mechanism.
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unique value
The Lien development team believes that in the cryptocurrency economic system, there are two types of users, one is high-risk investors, who are willing to bear the risk of price fluctuations, but also have the opportunity to obtain high returns with high risks, and the other is only Risk hedgers who are willing to use cryptocurrencies only when the price is stable.
Multiple financial products in the Lien protocol and its ecology can meet the needs of different risk appetites.
The Lien protocol provides different contracts, allowing users to customize the minting of SBT and LBT, and then continue to mint the stable value of SBT into the stable currency iDOL. At this time, users can customize and arrange their own investment portfolios according to their own risk preference requirements, which is the unique feature of this system.
The LBT token bears all the risk while also reaping the benefits of ETH's upside. Whether the price of Ethereum rises sharply on the expiration date or falls below the K value (at which point the value of LBT goes to zero), LBT token holders bear all risks.
Unlike leveraged financing through debt financing, holding LBT tokens for leveraged transactions has no collateral, and even if ETH drops sharply, there is no need for a margin call, and there will be no liquidation.
If you are not a high-risk person, you can sell LBT on the decentralized trading platform to obtain iDOL, which can hedge the price fluctuation of ETH, that is to say, on the expiration date, SBT holders can unlock a fixed value of K ETH in US dollars can be said to be stable relative to the US dollar.
No matter which of the above investment portfolio methods, the protocol can realize the use of funds in the system at about twice the fund utilization efficiency of MakerDAO.
profit model
Various operations on the Lien platform will generate certain transaction fees. For example, ETH or iDOL must be used to pay a certain fee for stablecoin casting and asset transactions. As the main revenue model of the platform, as the transaction behavior on the platform gradually increases, The value of this fee will be captured by Lien Token.
Lien Token is a native token issued by the Lien protocol layer. As a utility token, holding this token can obtain part of the income in the platform, and the income in the platform will be distributed to the Lien generation in the form of discount/cashback at the end of each month. currency holders. Early adopters can purchase Lien tokens using Lien FairSwap.
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what's the risk
That is to say, as long as the minimum guarantee price K value is properly set low enough, far below the current ETH price (for example, a safer method is to set the K value to half of the current ETH price), the value of SBT can be basically maintained stable , and based on the stable value of SBT tokens, there is no need for over-collateralization and manual intervention to mint stable coins. It seems that the agreement seems to have created a perfect stable coin generation mechanism, but what are the hidden risks?
In fact, if a black swan event occurs and the price of ETH plummets below the K value, then SBT will be decoupled from the K value, which will eventually lead to the unanchoring of the stable currency. This means that the independent stablecoin that the team claims will always maintain an anchored target value is not perfect, and needs to be supplemented by adding other values, such as a margin mechanism or other reserve pools to deal with sudden plunges.secondary titleDevelopment Team and Roadmap
Lien's development team is completely anonymous, and its core team members include former crypto engineers, crypto traders, crypto researchers and strategists, and traditional industry bankers, analysts, and quantitative analysts.
Lien Protocol plans to launch the main network at the end of August this year.
