Building on Element: Product Ideas for Developers to Explore
DeFi is powering a new generation of yield markets, and Element is at the forefront.
With the experimental Element SDK, developers can use new primitives for fixed-income, capital efficiency, and novel yield markets to build exciting new products.
The range of possible products spans from task automation to highly complex structured products.
In this post, we’ll cover a handful of our favorite product ideas, how they work, and how developers can monetize them for profit.
In the future, we’ll share ideas for much more sophisticated structured products, but we believe these are a good starting point for the ecosystem.
Let’s dive in!
The products discussed in this post are not built by Element Finance, Inc.. Element only offers an open source protocol that enables third parties to build on top of it and explore their own products. The suggestions in this post do not reflect products that Element will build.
One-Click Automations
A key value proposition of Element is unlocking capital efficiency on funds deposited into a yield generation position, like a Yearn vault. Element automatically separates the principal deposited and its accumulated yield in two tradable tokens; Principal Tokens (PT) and Yield Tokens (YT).
Often, depositors will sell their PT through an Element Pool, thus freeing up their otherwise locked principal and repurpose it elsewhere while retaining their APY.
For example, their principal could be repurposed to:
- Mint and Provide Liquidity for Element Pools
- Purchase and Provide Liquidity for Element Pools
- Mint, Provide Liquidity for Yield Tokens and sell Principal Tokens for capital efficiency
Let’s examine the friction involved when a user decides to Mint and Provide Liquidity, as shown below.
A user must manually perform the following multiple steps to achieve one recursive layer:
- Manually mint
- Provide liquidity
- Withdraw from AMM at maturity
- Redeem
- Re-deposit
- Re-mint
Likewise, for a user who would want to Buy and Provide Liquidity, the steps they would have to perform are shown below.
Again, the user is required to manually perform multiple actions that could be automated
- Provide Liquidity for purchased asset
- Withdraw LP tokens from AMM at maturity
- Redeem matured principal tokens on Element
- Re-purchase discounted assets of a new term
- Add those assets into the AMM to provide liquidity
These processes could be batched and automated to provide a better overall user experience for those seeking simplicity in having their asset deposited, minted, and LP’d in one transaction. The unwinding process could also be batched and allow for the recursive process to be done in one transaction.
Yield Token Compounder
Yield Token Compounding allows users to achieve leveraged exposure to yield by selling their principal and re-minting for even more exposure. This process can be done recursively, but currently, it must be done manually each cycle.
Ideally, users could select how many cycles of YTC they want, click a button, and presto!
Let’s look more closely at the manual process below.
In this example, Jonny is required to:
- Make a Deposit
- Mint Principal and Yield Tokens
- Sell the Principal Tokens
- Make another Deposit
- Mint the second Deposit
Notably, this process can be facilitated via flash loans and allow Jonny to achieve his desired leverage through multiple cycles batched together as a single transaction.
In the diagram above, Jonny ends up with 9 eP:yETH and 19 eY:yETH, but with a flash loan, Jonny would only need 1 ETH to gain 19 eY:yETH.
De-Collateralize
It’s common practice in DeFi to take on a variable interest loan to speculate on the price of an asset while earning yield with another. Currently, users who want to maintain exposure to ETH would deposit their ETH into a lending protocol, borrow up to 50% of their deposited ETH’s value in USDC, and then deposit their USDC into a yield generating protocol.
In this example, the user wants to maintain exposure to $ETH and does so by supplying their assets to a lending protocol and borrows USDC to earn yield.
Putting up collateral for a loan comes with clear disadvantages:
- The user must put up collateral worth much more than what they borrow
- The user receives only yield exposure on a fraction of their collateral’s value
- The user risks liquidation in times of volatility unless they add more collateral
De-collateralize can eliminate all three drawbacks and simplify the user experience.
From the user’s perspective, they make a deposit, receive full yield exposure on their asset’s value, and are not required to pay an interest rate for borrowing assets. The only cost to the user is paying the market discount for the asset earning the yield.
This process applies to any asset with a liquid market and does not require the assets to be accepted as collateral on a lending platform.
Asset purchases could be made with DEX aggregators to provide the best rates.
Behind the scenes, the whole process could be batched into a single transaction.
Automating this process would allow users to hold any asset and earn yield on another asset without any liquidation risk.
Yield Ladders
Principal tokens offer a fixed yield over a specific term. At the end of the term, the user can redeem their PT for its fixed yield. PTs may offer multiple terms per asset and leave users unsure which PT is right for them.
Imagine a user does not have a strong conviction about which term is best so they decide to dollar-cost average their PT, meaning split up their assets equally across two or more terms. They decide to split their 100 ETH equally across PTs with 3, 6, 9, and 12-month terms. Now they essentially earn an average fixed rate of yield for every term.
Not only does this strategy mitigate risk, but it also provides them with better liquidity than if they had just chosen to put all of their money into the longest term, for example. When the 3-month PT reaches maturity, they will redeem their 25 ETH + yield and compound their earnings into another 3-month tranche and so on for each PT as they each hit maturity.
A yield ladder automatically redeems and recycles these funds back into the next term. So from the user’s perspective, rather than selecting an individual PT with a term and APY, they choose a ladder independent of a term with an APY averaged across multiple terms.
The diagram below illustrates how a yield ladder on Element would work.
With Element, there is another possible style of yield ladder that goes a step further. Rather than merely recycling funds back into the next term, the PTs are also used to provide liquidity over their term to earn trading fees on top of their normal fixed APY.
The diagram below illustrates how a yield ladder with liquidity provisioning may work.
Arbitrage Bots
The price of yield tokens and the discount of principal tokens are closely related. In an efficient market, the premium of a yield token should never exceed the discount for its principal token. An opportunity for arbitrage arises when the sum of the PT and YT exceeds one. To perform this arbitrage, you mint new PTs and YTs and then immediately sell them for a profit.
Developers could create a product that scans for the current discount rate for PTs and premium rate for YTs, and if the total is > 1, the arbitrage would be automatically executed.
Conclusion
Element provides developers with a rich space to experiment with primitives and build new products. Those who venture to build these early products will undoubtedly have quite an impact on Element’s ecosystem.
On monetization, popular products like Metamask and Defisaver fund their development by charging convenience fees for improving the DeFi experience. We believe those who build the products discussed in this post could sustain their development with similar fee models.
Get started!
- The Element SDK for building
- The Element Documentation Portal for learning
- The Element Discord for asking questions
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