Before we get started, we’d like to thank the people that supported us and joined us to brainstorm solutions and approaches: Hugh from Nexus Mutual; Vadim, Evgeny and Alex from the Zerion team; Gustav and Nikolaj from MakerDAO.
“The first priority for 2020 is to increase efficiency by driving down overcollateralization margins.”
Haseeb Qureshi, Coindesk, December 2019
The DeFi space bloomed in 2019, and will clearly continue to evolve in 2020. As the ecosystem evolves, we observe a clear bifurcation into crypto-native models and improvements over legacy approaches. A reduction of the current over-collateralization margins is an important priority in the DeFi ecosystem and has been one of the focal points of our approach.
All existing DeFi products offer over-collateralized lending that attracts only specific users — either traders who want more leverage for trading or holders who believe in asset growth but need stablecoins to pay for current expenses. Our primary goal has been to create a distributed alternative to a failing legacy pension system by designing a resilient framework to help people to save and grow — without any dependency on geography or legacy systems. Right now, several teams in the space, including us, are working in this direction — with different approaches and solutions:
1. Identity Proxy: similarly to the traditional banking system, KYC links a pseudo-anonymous wallet with a real person and his credit history, estimate his solvency and lend money based on this information. (Transwiz.cash, Enable.credit, MetaCartel’s LAO model).
Akropolis’ approach to undercollateralized lending
The currently available tooling lacks a decentralized on-chain KYC solution (some question its viability), and the cashflow approaches do not add any incentives for fund pooling/aggregation. Therefore the web-of-trust approach is the most suitable approach to undercollateralized loans, and the one Akropolis is using.
Our use case requires these conditions to be satisfied:
- radical improvement on legacy solutions
- benefits of pooling
- provision of differentiated yield
Our model provides fully secured loans while the borrower provides only half of the collateral (the other half if provided by the DAO members). The system is stable and fraud risk is reduced because each member acts as a risk assessor. In order to address internal liquidity and incentives around it, we introduced a continuous token model which removes such a problem — anyone can join and leave at any time with no funds locked, apart from when funds are locked as collateral.
Below we will briefly cover a technical description of the current solution and will expand on the product in a dedicated product update.
How does it work?
Anybody can join the pool by simply depositing DAI, which is the current preferred medium of exchange (“MoE”), but it can be replaced with any other ERC-20 that meets the MoE criteria. DAI will be automatically converted to an internal pTokens (PTK) at a rate determined by the bonding curve. A PTK is fully abstracted in the UX, user only interacts with a preferred medium of exchange token, which in our instance is DAI. AKRO token is used for system governance and regulation of specific parameters, e.g. interest rate, collateralization ratio, adjustment of risk management criteria, etc.
The key steps are:
1. The Borrower’s pledge or collateral is entered in a chosen medium of exchange and converted internally into UX-abstracted pTokens (“PTK”), with collateralization ratio set to remain above 200% at all times, i.e. the deposit should be no less than 50% of the loan amount, or, in other words, the user will not be able to take a loan more than 200% relative to the of her pledge.
2. The pool members who consider the user to be a good borrower vouch for him and lock their PTK as collateral. Thus, risks are distributed among the pool participants and everyone is interested in voting for a good borrower since they risked their own funds. If the sum of PTK locked (both borrower and pool members) equals to the size of the loan than the borrower receives a loan in DAI.
3. When repaying a loan in DAI, the borrower also pays the interest on his loan. 50% of the interest remains in the pool, while the remaining 50% is equally distributed in the form of pTokens between the users who vouched for the borrower, depending on their stake.
4. In the event of default, all staked PTK are burnt. What happens to the pledged DAI?
Such a mechanism allows the issuance of 100% secured loans, whereas the guarantors have incentives to correctly assess risks since their income and fund safety depends on this.
Another advantage of this model is that anyone can leave the pool without the risk of funds getting locked. The pool design assumes that the amount of liquid funds in the pool is always equal to the volume of liquid PTK, so anyone can sell them at any time and leave the pool (however if he vouched for someone when granting a loan, his stake will be locked until the loan is repaid).
Our interactive Ethereum and Substrate roadmap is here: interactive version of the roadmap. You can use it to track our progress inside each card and find links to key repositories and deployments. Hit us up in Telegram or Riot with any questions or feedback!
Smart-contracts are deployed on the Rinkeby testnet. A stable testnet version is scheduled for release Q1 2020.
- [completed] Implemented continuous token model to join and exit the DAO without voting and funds lock.
- [completed] Implemented community staking mechanics that allow pool members to vouch (stake funds) for borrowers.
- [completed] Implemented interest accrual mechanics, according to which interest is distributed among the pool members who have vouched (stake funds) for the borrower.
- [completed] Implemented collateral liquidation mechanics in case of loan default.
- [completed] Alpha developers release
- [ongoing] Testing smart contracts, frontend development ongoing.
This July we introduced the Interoperable DeFi concept to our roadmap, which is now widely acknowledged as the most promising Ethereum use case with interoperability initiatives undertaken by a number of other protocols and cross-protocol teams. We have since shipped two products in line with our vision:
1.[completed] AkropolisOS is a developer-focused DAO management framework: it is a series of modules built over Substrate that allow users to create and manage simple financial/revenue-generation. Next Steps:
- Enable exposure to composable ERC-20 instruments
- Syracuse v0.3 testnet in January: Investment and asset management tools with DAI, wETH, Chai, rDAI
- Sparta v0.5 testnet in February
- Security audit.
2. [pre-audit version completed] We designed and shipped a two-way bridge between the Substrate-based chain and Ethereum in collaboration with the MakerDAO team. Next steps are:
- AkropolisOS Chain integration — it will be carried out as part of the Syracuse work schedule;
- Smart Contracts module: to be carried out after the Substrate audit has been completed (external dependency).
Open Source Development
During the course of our development, in the absence of developer-friendly tooling, it became apparent that some of our code and solutions can be productized. We open-source them as our contribution to the ecosystem. Below, are the products that the web3 developer community might find useful:
- [pre-audit version completed] PolkaDAI bridge, which we described above [testnet]. Awaits audit — but you can use it already.
- [completed] Staking Portal for Polkadot and Substrate-based chains [testnet] is ready to use. More to following upcoming updates.
- [in progress] We are also working on Web3 Wallet Kit for unified frontend integration with private-key vaults as Metamask, Portis, Fortmatic, Wallet Connect.
- [in progress] grant from Web3 and started to work on PolkaHub, a Platform-as-a-Service for launching Substrate nodes. If you would like to learn more about Polkahub — read here.
Upcoming Goals (Q1 2020)
- [Ethereum roadmap] Stable version of the Undercollateralized Saving and Lending pool on testnet. The first iteration (smart contracts deployment) is already launched on the Rinkeby and developers can start testing it. The work on the stable version of testnet is ongoing: testing smart-contracts, parameter adjustment for continuous token model, linking product frontend to the smart contracts, etc. The platform audit is scheduled for January. After this, we will start preparing for our product’s mainnet launch.
- [Polkadot/Substrate roadmap] Launching the Syracuse testnet in January and start the integration of AkropolisOS Chain and PolkaDAI bridge.
- [Product] Product-market fit and customer acquisition. We’re working on different approaches and strategies: incentives for crypto-native users, possible use-cases and marketing strategies for them, DeFi integration with such projects as DeFiZap, MetaMoneyMarket, etc.