Why is there still a premium on the dTokens on DeFiChain?
On April 14, 2022 with block 1,794,240, the first future swap happened. (I have explained some more details about this in my previous post.) In this post, I want to give a summary of what happened before and after this swap block.
Luckily, what happened at the swap block part is easy to summarize: Everything worked very smoothly and exactly as intended! :-)
Using the Future Swaps for arbitrage
Before the block, many community members minted dTokens and sold them for a high premium on the DEX — hereby reducing the DEX price and hence also the premium. Then they bought the tokens back for only 5% premium via the future swaps and closed their loans.
The difference between the high premium at which they sold the dTokens and the lower 5% premium at which they bought them back was their arbitrage gain. Some people had been in this trade since the premium was at around 40% and thus should have made some really nice gains on many of the tokens.
The risks of this trade
The higher the premium is when you mint and sell the token the higher your arbitrage gain. However, this comes at a risk: As soon as you sell the token, you are short and if the (oracle) price goes up, so does the price at which you have to buy it back.
If you sell a token at 10% premium, but then the price of the stock goes up significantly, you can make a loss. For example, let us again assume that the oracle price of the “real” TSLA stock is 1000 USD while dTSLA costs 1100 DUSD. So you can mint and sell it for 1100 DUSD (minus 0.4% DEX fee and some slippage). If the oracle price stays the same until the swap block, you can get it back for 1050 DUSD via the future swap, which would result in about a 40 DUSD gain (after fees and slippage). However, if TSLA (and hence the oracle price) climbs to 1100 USD, the future swap will be executed at 1100 * 1.05 = 1155 DUSD, which is more than what you got for selling it.
This is risk is higher the longer before the swap block you enter this trade. 120 blocks before the swap block, the price is fixed and there is no risk anymore. At this point, it always makes sense to sell any token for more than 5.4% premium. (The extra 0.4% are because of the 0.4% fee for swapping the dToken to DUSD.) Note, however, that in order to sell a token for 5.4% premium, the actual DEX price should be a bit higher still to account for some slippage.
Reducing the premium worked: Before the future swap block the premium went further and further down until in the last few hours (almost) all stock tokens were at around 6% premium, which is what you would expect given the 0.4% fee and some slippage. (The one exception from that rule was GME, which was a bit cheaper on the DEX than via the future swaps.)
The following graph from defichain-analytics nicely shows how the premium went down around the swap block (black box) and then quickly went back up afterwards.
What happened after the swap block?
While every premium above a certain threshold (of about 6%) was quickly arbitraged away in the final hours before the swap block, this immediately stopped at the swap block. With the next future swap block one week away, it is just way too risky to go short on the stocks for such a small premium.
In theory, everyone who wanted to get into dTokens could use the future swaps to buy them for a good price, but not everyone actually did this. In fact, I assume that this was mostly used by people who were short on some dTokens to get out of their arbitrage trades. Also, the feature is not yet available to users of the Light Wallet or Cake customers and not everyone feels comfortable using the command line. So there will always be buyers who buy on the DEX. However, in the days after a future swap block, there are fewer sellers, which lets the price (and the premium) quickly go up until it is again high enough for arbitrageurs to take the risk of going short. With the next swap block coming closer, the arbitrageurs’ threshold is going to come down again.
What should I do if I use the Light Wallet?
If you are using the Light Wallet (or DFX Wallet) and still want to buy the dTokens at a good price, I have two suggestions:
- Use the Desktop Wallet just for the swap. You can send your DUSD from the Light Wallet to your Desktop Wallet, then do the future swap there using the CLI commands I explained here. After the swap, you can send your dTokens back to your Light Wallet. This has the advantage that you can buy huge amounts without any slippage.
- If you do not feel comfortable using the CLI, you should buy the dTokens shortly before the next future swap block rather than right after. Especially in the last few hours before the block, the price will likely be only slightly higher than via the future swap. If you want to swap a huge amount, you should split it up into smaller portions to give the arbitrageurs a chance to bring the price down in between.
If you are comfortable using the CLI, you can get the block height of the next future swap block using the command getfutureswapblock. Otherwise you can also find it in the Block section of the DeFiChain Income Dashboard. The next (second) one is going to be at block 1,814,400.
What’s next?
I assume that over the next weeks, the premium is going to follow a kind of see-saw curve, where the premium slowly drops between future swap blocks and then quickly shoots up again right after each future swap block. Hopefully, the maximal premium between the swap blocks will reduce over time, but I find it hard to predict when and how fast this is likely to happen. New interest and new capital coming into DeFiChain could increase the demand for dTokens and keep the premium up. On the other hand, the possibility to create pure DUSD vaults and hence get some really nice cashflow on stable coins could also increase the liquidity in the pools and make the prices more stable. And I am sure there are many other factors!
I’d be interested to learn what you think about this! Let me know in the comments! Also feel free to leave some feedback if you liked this post or let me know if you have any questions.
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