In this article, you will learn more about SnowMan and how it is possible for it to increase your capital efficiency. It empower users to boost DeFi yield or simply borrow with 0 interest and let the loan to repay itself. Sounds impossible? Check it out how it works below.
What is SnowMan?
Snowman is a DeFi protocol that allows the creation of synthetic tokens that represent future yield on deposits. It enables users to retrieve near-instant tokenized value based on temporary deposits of stablecoins. The protocol provides a powerful new DeFi primitive, enabling more applications for users and an exciting new tool for other developers.
How it Works?
The first version of the Snowman protocol will be launched using a synthetic derivative “soUSD” that will be mintable using USDC (other stablecoins on Shimmer to follow). To mint soUSD, users deposit USDC into an Snowman smart contract through our hosted UI, and can then mint soUSD up to 50% of USDC at a 1:1 ratio. Deposited USDC is deployed to eager vaults to earn yield.
Once deposited, funds are dedicated to earning yields, which will eventually automatically repay user debt. However, users have several options for managing their loans:
Option 1: Let their deposits continue to earn yield, allowing them to withdraw loan collateral on a regular basis
Option 2: Prepay the loan using soUSD or DAI, allowing them to withdraw the collateral
Option 3: Liquidate their loan using some of their collateral to repay the loan and allow them to withdraw whatever is left.
What can you do with soUSD?
Like other upcoming tokens on Shimmer EVM layer, soUSD is tradable and will experience price volatility. This presents smart money with a range of opportunities beyond the scope of this article. We will introduce some of the method later in the article.
What is the Transmuter?
Users can send their soUSD to the transmuter which will queue it for conversion back to USDC and other stablecoins. At this point you may be mistaken for believing that the genius of Snowman has indeed conjured a recipe for creating free money. The Transmutation process however does take time, relying on other ecosystem dynamics to determine its speed.
How soUSD is pegged to $1?
There are several governance-minimised pegging mechanisms built into the protocol itself:
Transmutation from soUSD to USDC:
Yearn vault yield is periodically collected and deposited into the transmutation pool. Each time yield is sent to the transmutation pool, it is allocated proportionally to all the soUSD staked in it. When users claim their USDC in the transmutation pool, an equal amount of soUSD will be burned from their staking deposit.
Staking (soUSD) swap LP incentive:
Staking rewards are earned in the form of SNM tokens by providing liquidity in soUSD/USDC/USDT on partner DEX, and then staked in the Snowman protocol. This adds deep liquidity for soUSD, enabling frictionless transfer of value, resulting in minimal price impact on the soUSD token.
Early settlement of user deposits:
Debt can be repaid at any time with USDC and/or soUSD. For example, Bob has 1000 USDC of debt in the system, and he sees that soUSD is cheap at 0.9 USDC. Bob can buy 1000 soUSD off the market at a discount and settle his debt with soUSD, which the protocol always treats as equal value to USDC. Doing so would save Bob money and his act of buying soUSD would help to restore it to its peg. The opposite is also true. If soUSD is over the peg, Bob could sell his soUSD for USDC, allowing him to settle his debt at a discount.
Ecosystem Growth:
The Snowman team plans to release additional dApps that will utilize soUSD and other future so-tokens for their usage. With more dApps utilising these tokens, greater demand and upward price pressure will be projected toward them. This will reduce selling pressure on the so-tokens, and make all of the other pegging mechanisms more effective as a result.
More explaination about the use of over-collateralization:
Let us look closer into this mechanism. It is an over-collateralized system. For example, Bob uses 1000 USDC to borrow 500 soUSD. As long as 1000 USDC has a higher value than 500 soUSD, there will not be liquidation. It is completely different with the “algorithm stablecoins”, in which there is no or not enough of collateral.
How does the loan repays itself?
In the last example, Bob puts 1000 USDC into the Snowman protocol and borrows 500 soUSD. The 1000 USDC will be generating yield in the IOTA DeFi ecosystem in yield, lending or DEX protocols and the return will be used to buy back 500 soUSD to repay the loan itself. Bob can let the loan repay itself. He can spend, invest or exchange to any other asset with the borrowed 500 soUSD.
Follow us to learn more about the power of DeFi on IOTA. Roadmap and Tokenomics will come next.
Website: https://www.snowman.one/
Twitter: https://twitter.com/SnowMan_Finance
