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[Strategy Paper] Ruler Protocol Fixed Rate Lending + Mining

We have earlier covered Ruler Protocol, a fixed rate lending platform by the Cover Protocol team. A month has since lapsed and the yields from this platform is now stable, as the price of RULER, the platform token has stabilised. The platform has also offered a variety of products, and innovation has never stopped taking place. The community is mature and involved, one of them proposed a product variation and has been accepted by the team.

Ruler Protocol makes it possible for investors to lend DAI for a fixed rate one-month loan. Let’s revisit the mechanism of Ruler again:

  1. You still need to collateralise. Putting down 1 ETH will allow you to borrow 750 DAI.
  2. There’s no liquidation mechanism. If ETH falls below 750 (in this case, by end of March), you can walk away with the DAI you borrowed and forfeit the ETH.
  3. You are given a pair of tokens (if you borrow 750 DAI), 750 rc tokens and 750 rr tokens. Each rc tokens can redeem 1 DAI after end of March, or redeem the collateral. So there’s a market price for rc token, e.g. 95 cents of DAI. This is the amount you can borrow — the moment you sell the rc tokens, its price x 750 is the amount you effectively borrowed.
  4. You can repay the debt and get back your 1 ETH any time before end of March, by paying Ruler Protocol 750 Dai and 750 rr token (or partially).

From a stablecoin investor’s perspective, one buys rc tokens at a discount to 1 DAI, and claims 1 DAI at the end of the loan period.

For the case above, one can purchase WETH-collateral rc tokens at the rate of 1,000 DAI for 1,011.42 rc tokens. Rc tokens can be used to redeem 1 DAI each after 30 April. This gives an absolute interest of 1.25% for the period, or 26.05% APY.

The risk of this investment is that in the event the price of ETH declined below a certain threshold, in this case $900, we will expect borrowers of DAI will not redeem their collateralized ETH with DAI. Under that circumstance, 900 DAI (and 900 rr tokens from step 3 above) will be used to redeem 1 ETH. Rational investors will choose not to redeem but keep their borrowed DAI. Therefore, lenders of DAI (those who used DAI to purchase rc tokens) will only be able to collect the collateral ETH, and are subject to a loss. The amount of loss is $900 less market price of ETH on or after 30 April, for every $900 of DAI investment.

As such, the lending rate of each pool is a combined result of the volatility of the collateral and their pre-determined default price. From the list below, we see a range from 14% to 80%.

Each pool is a short-term loan of no more than 30 days (starting from 30 days and counting down). We generally do not expect the market price to drop that much within a period of a day, e.g. in the case of ETH, from now $2100 to $900 within a day. In the event of a drastic drop, we can also sell rc tokens in the market for DAI immediately, without waiting for ETH to decline below $900. We might lose some expected interests earnings, but the principal will be safe. In the worst case, we can further short ETH to protect the principal.

In addition to the lending rate income, Ruler Protocol provides a market for each rc token. The pool is based on Curve’s Pool Factory (in essence a DIY version of 3pool meta pool). This allows users to trade rc tokens with DAI, USDC or USDT.

As rc tokens are 1 DAI discounted at one-month effective interest, the discount is usually only a few percent. So rc tokens usually trade at 90 over cents, and approaching 1 DAI when the loan approaches expiry. As such, the impermanent loss is very small (if the pool is balance with at least 50% of DAI, USDC and USDT, or a big Amplification Coefficient), usually less than 1%.

Its then a good idea to provide liquidity for this pool, as rc tokens are always near the value of 1 DAI. Ruler Protocol offers attractive yield for providing liquidity for such pools. Yields range from 40% to 130%.

Whilst it’s possible to provide liquidity directly to the pools, we believe it’s beneficial to covert DAI into rc tokens with the Lend function to earn the lending interests as well. This is justifiable, as we are in any case, exposed to rc token volatility in the pool.

For 1 DAI, the effective yield is then: 50% of the lending rate of pool X + 100% of the pool x farming yield. For instance, for 3CRV-WETH, it is 50% x 26.05% + 71.46% = 84.49%; you can check out on other pools as well.

We have included this as a strategy (although it does not mean we will invest in this immediately), under Stablecoin Exotics, aloneside with Mirror Protocol and Cover Protocol. We will continue to monitor Ruler Protocol and update when necessary.

(Serenity Team, 12 April 2021, Twitter:

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Zero market risk and stable return - risk neutralised cryptocurrency fund.