The Yield Protocol and yTokens
At its weekly white-paper discussion, Crypto NYC dove into a proposed lending primitive designed by Paradigm’s Dan Robinson. The proposal – there is no team behind it (yet) – builds on the ideas of Maker, Compound and other DeFi projects.
Specifically, the Yield Protocol and the corresponding yTokens, as Robinson coins it, attempts to introduce fixed terms for borrowing and lending without sacrificing liquidity.
Most DeFi lending protocols employ a liquidity pool and floating interest rate model. Borrowers are not matched with a specific lender. Instead, they deposit and borrow from one collective pool, who’s interest rates are determined by an algorithm based on the utilization of assets in the pool.
This model, which is used by dYdX, allows for price discovery and quick redemptions at small scales. Compound employed a similar model for its V1, but added a key innovation for its V2: fungibility.
When users deposit a token in Compound for lending, they receive corresponding cTokens, which represent the users’ tokens locked in Compound’s smart contract and the interest they accrue. These cTokens are redeemable at anytime for the underlying asset in the Compound protocol. They are also freely tradeable and those that simply hodl cTokens will passively earn interest.
Yield Protocol and yTokens: Dan Robinson applies the cToken fungibility model to fixed term loans. Before the team pivoted to UX, the now defunct Dharma protocol matched up individual borrowers and lenders for a fixed amount and fixed time. Robinson is essentially recreating that model but giving the loans fungibility. Robinson writes:
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yTokens differ from each other in four dimensions: target asset (or oracle), collateral asset, expiration time, and collateralization requirement….For example, there would be one yToken for a given USD oracle, backed by ETH, settling at 11:59 PM on December 31, 2019, with a 150% collateralization requirement.
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The floating rate model does not allow borrowers or lenders interest rates. An 8% rate may attract a borrower, but as other investors look to take advantage of the attractive borrowing rate, it the original borrower's interest rate will increase.
The reason why Dharma struggled to get traction is that matching borrowers and lenders is tough! Despite its large size, bond markets are notoriously illiquid in traditional markets. Just as liquidity pool DEX’s have done better than orderbook DEX’s, the flexibility to enter and exit a lending contract without relying on a counterparty is why Dharma is now building on top of Compound.
What if there were no interest rate swaps? Of course, interest rate swaps would allow long-term borrowers and lender to lock in certain rates. They don’t exist yet, but ETHBerlin winner Cherry Swap is working on interest rate swaps for Compound. Robinson’s proposed yTokens obfuscate the need for interest rate swaps by relying on fixed-term loans and side skirts the oracle problem by allowing market pricing of the loans.
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A yToken resembles a secured zero-coupon bond. Upon expiration, it can be redeemed from the yToken contract for its face value. yTokens from different repos in the same token contract are fungible.
After expiration, yTokens can be redeemed for their face value, with the redeemer receiving the appropriate amount of the collateral asset.
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A yToken derives its value from the future ability to redeem the yToken for the underlying collateral after the term has expired.
Even if the price of ETH tanks, the claim on the ETH still persists and since the yToken is fungible and tradable, its market price should simply reflect the future claim on ETH.
If we could just agree on the same thing, all these problems would go away. The loan’s fungibility unlock’s some liquidity, but there still needs to be standardization of terms and durations, as Robinson freely admits. And again, this is a common problem for bonds in traditional financial markets, hence why Robinson understands the Yield Protocol and yTokens may only be used in the back end:
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yTokens are a low-level primitive, and they are not designed to be particularly friendly to end users. However, they could be used to construct interesting products by composing them with other protocols or building human interfaces on top of them.
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If you’re looking to lever up or lend your assets securely, there are now plenty of options to do so on DeFi protocols, the question is which model is most efficient?
Check out the full paper.
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Tweet of the Week: Currency = Capital?
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Gnosis co-founder Martin Koppelmann tweets out the value of the smart contract that powered the Fair Win game. Widely panned as a ponzi scheme, it was popular in Asia. The game's activity had been clogging up the Ethereum network, with the smart contract spending twice as much on gas over past 30 days than its nearest competitor, Tether, according to ETH Gas Station.
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Chart of the Week: Uniswap Fees for liquidity providers
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The ROI on different liquidity pools on Uniswap from Pools, a new project from the Blocklytics team. According to the analysis, Dai deposited in a Uniswap liquidity pool would have achieved a 14% annualized rate, although it does not account for the risk of impermanent loss. These returns could attract those that have assets deposited on lending platforms in search for higher return.
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Listen of the week: Parasitic Oracles
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Augur co-founder and Pantera CIO, Joey Krug, sits down on the WyreTalks to discuss oracles, how he would have done Pantera's ICO fund better and what DeFi needs to get mass adoption.
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- Tezos founder unveils new stablecoin design, Checker Link
- 30 Days of ETH - September 2019 Link
- Visualizing bonding curves on Uniswap Link
- DeFi connector, InstaDApp raises $2.4m from prominent crypto investors Link
- Maker launches new decentralized exchange platform, Oasis Trade Link
- Vitalik Buterin in China Link
- Coinbase now offering 1.25% for USDC held with Coinbase Link
- [NYC Event] DeFi NYC with MakerDAO, Uniswap, & UMA Link
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Thoughts and Prognostications
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- Understanding Ethereum gas, blocks and the fee market [Eric Conner]
- Black swans, trusted assets and multi-collateral DAI [Nexus Mutual]
- Aggregators [Ash Egan]
- BitDEX: Building a Decentralized BitMEX with priceless financial contracts [UMA]
- Compound GC's take on SEC's EOS and Sia rulings [Jake Chervinsky]
- Interoperability and composability within Ethereum [Linda Xie]
- NFToken: the non-fungible ERC20 standard [Ben Hauser]
- The threat to capital flows to China and pending impeachment conflict [Ray Dalio]
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Long read of the week: KYC/ArtML?
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The IMF published an interesting article on the prevalence of money laundering in the art world. While there is no direct crypto or DeFi relationship, the discussion on anti-money laws (AML) and the industry's resistance are awfully familiar to those that the crypto industry is having.
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