Muttley’s Week 66: AAVE + DAI of NFTs on Solana? Discover the Midas Protocol
The NFTs space has experienced exponential growth since its initial burst back in 2021. Ethereum (ETH), Bitcoin Ordinals (BTC), and Solana (SOL) have emerged as the most popular chains for hosting NFTs. However, NFTs are known for their volatility, even among established collections. This volatility has hindered their potential as everyday currency, given the significant intraday price fluctuations they can experience. NFT values can rise or fall by as much as 50% in a single day and occasionally surge by hundreds of percent within a month.
To address this challenge and fully unlock the potential of blockchain technology in the NFT space, the Midas (MDS) stablecoin ecosystem emerges as a solution. The MDS stablecoin is a collateral-backed cryptocurrency designed to maintain a stable value relative to the US dollar. With stable digital assets like MDS, the integration of NFTs and Decentralized Finance (DeFi) becomes more feasible.
Article Index:
- What is MIDAS?
- Key Features
- How it works
- The Concept of Liquidation Ratio
- Understand the risks
- Possible Strategies
- Conclusion
What is MIDAS?
Midas is a smart contract platform built on Solana. Its primary objective is to back and stabilize the value of MDS through a dynamic system of Collateralized Debt Positions (CDPs), autonomous feedback mechanisms, and appropriately incentivized external actors. By leveraging these mechanisms, Midas empowers users to utilize their NFT assets (currently limited to whitelisted assets on Solana) to generate or mint MDS tokens on the Midas platform.
Once generated, MDS tokens function similarly to conventional cryptocurrencies. They can be easily transferred to others, utilized as payment for various products and services and you can also use them on Defi applications.
Let’s learn about some key features of the Midas Protocol and the MDS token:
1. 0% interest
Unlike traditional lending or borrowing platforms, the Midas Protocol operates with zero interest rates. This means users can manage their positions without worrying about incurring interest expenses.
2. Risk Management
The Midas ecosystem puts users in control of their risk parameters. By allowing users to define their risk tolerance, the protocol ensures that participants can tailor their positions according to their individual preferences.
3. Collateral Liquidations
In the event of a liquidation, users receive a portion of their collateral back in SOL tokens after deducting fees and debt repayment. This feature provides an added layer of security and mitigates potential losses for participants.
4. No Duration Limitations
Unlike many other platforms that impose stability or upkeep fees based on the duration of a position, the Midas Protocol imposes no such limitations. Users can hold their positions for as long as they desire without incurring any additional fees.
How it works
This step-by-step guide will walk you through the process of interacting with the MDS smart contract on the Midas platform.
First, you will have to have one of the collection NFTs available on the platform. These are the currently available collections:
As Midas progresses, more collections from the Solana ecosystem and beyond will be introduced, allowing users to explore additional avenues for generating MDS tokens.
To generate MDS tokens, you will follow a four-step process that involves creating a vault, depositing collateral, generating MDS, and eventually withdrawing collateral from the vault. Let’s dive into each step:
Step 1: Creating the Vault and Depositing Collateral
Start by selecting the NFT asset(s) you want to use as collateral and determine the percentage of collateral to be taken. Initiate the transaction to create the vault and securely store your asset(s) within it.
Step 2: Generating MDS from the Collaterized Assets
Once the vault is created and the collateral assets are securely stored, you will receive an amount of MDS tokens equivalent to the value of the collateralized assets. It’s important to note that there is a 1% emission/repay fee associated with this step. However, unlike traditional financial systems, there are no penalty fees or stability fees due to the nature of NFTs and the over-collateralization of assets.
Step 3: Paying Down the Debt
When you decide to retrieve your collateral, you must pay down the debt in the vault. The current health of your collateralized debt position (CDP) and the liquidation price of the asset will be indicated. To make the vault debt-free, simply send the required amount of MDS tokens to pay off the debt. It’s worth mentioning that you also have the option to progressively repay the debt if you wish.
Step 4: Withdrawing Collateral and Closing the Vault
Upon paying off the debt, the withdrawal of collateral and closing of the vault occur simultaneously. Your assets will be returned to the same wallet that was used to initiate the creation of the vault and mint MDS tokens. This ensures a seamless process for managing your collateral and participating in the MDS ecosystem.
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By following these steps, you can leverage your NFT assets to generate MDS tokens on the Midas platform.
The Concept of Liquidation Ratio
Before delving into the possible strategies, it is important to understand the concept of the Liquidation Ratio, which plays a crucial role in the Midas ecosystem.
The Liquidation Ratio is the ratio between the value of the collateral and the amount of debt taken out of that collateral at which an NFT asset would be liquidated. Currently, Midas employs a liquidation ratio of 200% to over-collateralize MDS and safeguard its peg to the US dollar.
To illustrate this further, let’s consider an example. If someone decides to take out only 17.5% of their collateral’s value as debt, their collateral would have to undergo a drop of 65% in price to trigger a liquidation.
This demonstrates the emphasis on over-collateralization within Midas to protect the stability of MDS against potential market fluctuations.
The maximum values supported by Midas at present are as follows:
- A maximum of 35% of the value of the collateral can be taken out as debt.
- If 35% is taken out on the collateral, a decrease in the value of the collateral by 30% would trigger the liquidation of the asset.
If you want to know more about price stability mechanisms, read this document: https://docs.hadeswap.com/midas/price-stability-mechanisms
Understand the risks
It is necessary to understand that as in any financial application, Midas also has risks. As I explained in the previous topic, you should always be aware of liquidation risk.
When an asset’s liquidation threshold is reached, a liquidation process is initiated following the guidelines provided by FRAKT. You can find detailed information about this process here: https://docs.frakt.xyz/frakt/loans/liquidations
The liquidation process involves recovering the debt taken on the collateral, applying a penalty fee of 10%, and a FRAKT handling fee of 2.5%. However, what sets Midas apart is its unique approach to liquidations.
After recovering the debt and deducting the associated fees, the remaining value, denominated in SOL, is returned to the user whose asset(s) were liquidated.
This feature is called the Collateral Cashback and ensures fairness towards the users of the MDS platform. By returning the remaining value to the affected user, Midas substantially decreases the risk associated with liquidations, thereby enhancing the overall security and reliability of the platform.
To illustrate how this works, let’s consider a concrete example.
User A possesses an asset worth 100 SOL and decides to maximize the loan-to-value (LTV) ratio by borrowing the equivalent of 35 SOL in $MDS.
If the price of the asset drops to 70 SOL, reaching its liquidation ratio of 200%, the liquidation mechanism is triggered.
The liquidation process involves the following steps:
FRAKT auctions the asset at 10% below the floor price, resulting in a value of 63 SOL.
35 SOL is recovered to cover the debt with the MDS protocol (converted into MDS).
The remaining 28 SOL is divided as follows:
10% (Penalty fee) = 2.8 SOL (converted to $HADES and sent to the veinHades Insurance Pool).
2.5% (FRAKT handling fee) = 0.7 SOL (sent to FRAKT).
4. After all deductions, the user receives the Collateral Cashback, which amounts to 24.5 SOL. This value is returned to the user who experienced the liquidation event.
By implementing this comprehensive liquidation process, Midas not only ensures the stability of the MDS protocol but also prioritizes the interests of its users. The Collateral Cashback mechanism mitigates risk and provides a safety net for participants in the ecosystem.
Possible Strategies
Now that you understand the main concepts of this protocol, let’s explore some possible strategies that you can carry out using $MDS.
Remember that this article is intended to be educational, nothing here is an indication of investment. If you are going to use the protocol, be sure of what you are doing.
Strategy 1 — Take $MDS and provide Liquidity
After you borrow $MDS you can use this token to create liquidity pools.
You can choose to create a more conservative or riskier pool.
Through Meteora, you will be able to interact with some liquidity pools that contain the $MDS token
Taking the more conservative route, you can choose to provide liquidity to liquidity pools with a stablecoin, such as:
MDS-USDC or MDS-USDT
If you want something riskier, with the possibility of an Impermanent Loss occurring, you can opt for the following pools:
HADES-MDS or SOL-MDS
If you don’t understand the concept of Impermanent loss, read the thread we talked about this subject: https://twitter.com/DivineDogsNFT/status/1657110584700162058
If you still have questions, visit our discord to clear your doubts.
The pool that currently offers the highest APY is the SOL-MDS pool with 9.71% APY.
Strategy 2- Take $MDS and provide liquidity in Marinade Finance
You can use this strategy if you want to be exposed to $MSOL, Marinade Finance liquid staking token on Solana.
You can read our article about Marinade Finance here.
Step by step:
- Take $MDS
- Convert to $SOL
- Stake $SOL at Marinade Finance
- Get $MSOL
- Use $MSOL in Defi protocols or just keep it on hold.
The risks with this strategy involve:
By swapping $MDS for $SOL you are exposed to price variations of $SOL, which is a volatile asset. If the price of $SOL drops after you make this swap, when you return those tokens to $MDS, you will have a smaller amount. If the price of $SOL goes up you would have more $MDS tokens when you swap again.
You are also exposed to two protocols, in this case, Midas and Marinade Finance. If you provide liquidity with $MSOL on Defi protocols, you are also running the risk of suffering a possible Impermanent Loss.
If you want to reduce this, the MSOL-SOL pool is a good option. You can find MSOL pools through the protocols below:
So you’ll earn the APY from Marinade Finance + APY from the pool.
Strategy 3— Take $MDS and use NFT Lending platforms
This strategy is more advanced and you can follow some paths to accomplish it.
The first way would be:
1- Take $MDS
2- Convert to $SOL
3- Use $SOL in NFT Lending protocols
The risks of going this way involve:
By swapping $MDS for $SOL you are exposed to price variations of $SOL, which is a volatile asset. If the price of $SOL drops after you make this swap, when you return those tokens to $MDS, you will have a smaller amount. If the price of $SOL goes up you would have more $MDS tokens when you swap again. (Same risk as strategy 2)
Remember that there will always be a risk of having defaulted loans, so if you want to follow this strategy more conservatively, focus on lending with a maximum of 70% LTV.
The second way would be:
1- Take $MDS
2- Swap to $USDC
3- Provide this $USDC to a lending protocol such as Marginfi or Solend
4- Borrow $SOL
5- Use $SOL in NFT Lending protocols
This path may be theoretically safer than the previous one, but it also requires attention. Here you will be exposed to two protocols, Midas and the loan protocol you have chosen.
Another very important factor is that you have the risk of being liquidated under this lending protocol if your borrowing limit exceeds the Liquidation threshold. In this case, as you provided USDC and borrowed SOL, if the SOL price goes up a lot you will have to provide more USDC to increase your limit and not get liquidated. Study the liquidation process for the lending protocol you are going to use. This path is for more experienced users.
Conclusion
The Midas (MDS) Ecosystem is a stablecoin ecosystem that aims to leverage NFT assets to generate a collateral-backed cryptocurrency.
MDS offers stability against the US Dollar and enables multiple use cases in NFTs and DeFi.
The Midas platform in Solana uses secured debt positions and incentivized mechanisms to stabilize the value of the MDS. Users can freely use MDS like any other cryptocurrency and benefit from features such as 0% interest, user-managed risk, and guaranteed refunds. By integrating stablecoins into the NFT space, Midas opens up new possibilities for decentralized finance and the wider adoption of NFT use cases.
Key Features of Midas Protocol and MDS Token
- 0% Interest
- No duration
- Collateral cashback
- 1% one-time minting fee in $MDS
- Adjustable risk by YOU
- Progressive & partial payment to reduce exposure on your position
Links:
Protocol: https://mds.hadeswap.com/
Docs: https://docs.hadeswap.com/
None of the projects presented in our newsletters are financial advice. Our mission is to present and analyze protocols that are present in our ecosystem. DYOR always.
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Written by: @Kaleve_
