Trade and earning interest… at the same time?
To grow your capital, you have the choice of placing it in a saving account, life insurance, or investing it in the stock market or real estate. Since money could not be in several places at the same time, we allocate our capital according to our objectives and our risk profile, the common sense telling us to invest the biggest part of in the least risky vehicle. The choice of allocation is critical since the money placed is often blocked, making the investor illiquid and unable to jump on new opportunities.
In decentralized finance, you can choose not to choose. The doors of a Schrödingerian finance open up to a quantum world where your funds can be everywhere at once! They could be in a savings account to generate interest, deposited in a trading account to speculate, used to buy stocks and exchanged for euros to buy a coffee, all at the same time… Say hello to the “superfluidity” of the collateral…
To illustrate this concept, let’s confine ourselves to the specific case of Jarvis, where your funds are both lent to generate interest, and used as collateral to open positions in the markets.
TLDR: You can deposit interest bearing token such as iDAI or cDAI in our platform to trade while earning interest.
💰 DeFi savings accounts
Several protocols allow your idle cryptocurrencies to work and generate income: you can lend them on ETHLend or Compound, or to traders looking for leverage on Fulcrum, DyDx or Nuo.
These protocols have native interfaces to interact with, but several interfaces with the shape of a banking portal have started to offer “savings accounts”, whose interests rates overshadow the one of your legacy bank… Interfaces like Dharma, Linen or Outlet dress these protocols in a simplified interface that invites the user to deposit their funds and immediately generate interest. Your balance then merges with a stopwatch: you literally see your money growing in real time every second and it is… enjoyable.
💡 Tokenization of balance
Tokenization consist of digitizing an asset on a Blockchain, by creating a token that represents it. We can tokenize rental property (see RealT), cryptocurrencies (tokenize Bitcoin on Ethereum), stocks etc.
The Bzx (on which Fulcrum is based) and Compound protocols respectively launched iToken and cToken, which boch tokenize user deposits and accrued interests. Anyone who has cDAI can exchange them at any time for the underlying DAI, at an ever-upward exchange rate: by depositing 100 DAI on Compound, you will receive 100 cDAI, i.e. a DAI/cDAI exchange rate of 1 (in reality, the current rate is 49 cDAI for 1 DAI). Interests being paid in DAI, after one year at 5%, these 100 cDAI no longer represent 100 DAI but 105 DAI, ie an exchange rate of 1.05; so if I have 1 cDAI at the beginning of the year, I can exchange it for 1 DAI immediately, or 1.05 DAI after 12 months.
Fun fact: I reimbursed a friend who paid for me at a restaurant, by sending him ten euros in cDAI, which therefore represented a loan of ten euros from DAI on Compound; by transferring them to him, he automatically became the owner of the DAIs that I lent, and therefore their interests; he has kept them, and earned an additional Dai since then.
💧 Superfluidity in the Margin Protocol
In short: we will use the cDAI and/or iDAI to collateralize a leveraged position; money (the DAI) will therefore be both lent, and generate interest, and deposited as a margin to open a speculative position, at the same time.
The Margin Protocol allows users to trade any financial market: traders trade against the protocol whose liquidity is supplied by a network of liquidity providers.
You can read more on that in our dedicated article:
DAI is the currency used in the protocol; it serves as collateral to open a position and to settle it (pay the compensation to the winer). It could then be lent on Compound and Bzx to be replaced by cDAI or iDAI. Traders would receive interest on their deposits, whether or not they trade, opening up new possibilities for risk management: one can consider one free trade per day, whose risk would be financed by interest from the previous day. Liquidity providers could increase their revenues, which are now limited to trading commissions and therefore to the activity on the platform.
What are the risks?
This superfluidity creates a house of cards mimicking the derivative products at the origin of the subprime crisis: a stack of derivative products, built on other opaque derivative products, and so on until the bottom layer of guaranteed mortgage loans by worthless real estate…
Although the Blockchain solves the problem of opacity, we still have a vertical overlapping of protocols whose respective risks add up: the risk of our own protocol is added to that of Compound, DAI, and therefore the one of MakerDAO, and finally Ether and Ethereum. Although the DAI has withstood an 90% drop in Ether in the past, a defect in one of the links in the chain would be disastrous.
To limit the risk, replacing the DAI with the USDC would remove some protocols and their risks associated, but would add a centralization risk (Center, the issuer of the USDC, can freeze a user’s USDC “at any time”).
Finally, insurance is developing, such as Nexus Mutual, and many innovative products to insure financial risk like Convexity are in development.
Going further…
In our own roadmap, we talk about tokenizing open positions: if a user opens a buy position on Tesla, they could create a pTLSA token representing it; this token having the same value as the position, it could be used as collateral to open a second position on the Forex for example. We would then enter a phase of hyperfluidity.
Going even further…
The tokenization of balances is present in several projects; Stake Capital for example, which offers a delegated stacking service (Stacking As A Service) will tokenize users’ balance, and perhaps even their future payments; tokenization of future payments will also be possible via Sablier, which offers a system for continuous payment of salaries; and why not the tokenization of future rents, with the RealT project which has already tokenized rental property.
Vsevolod.
The possibilities are limitless
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⛔ Risk Warning: Investing in digital financial assets involves a high degree of risk and volatility and is not suitable for all investors; do not risk more money than you can afford to lose. Please consult an independent professional financial or legal advisor to make sure the product is right for you.
⛔ Disclaimer: This article contains text, data, graphics, photographs, illustrations and information (“Information”) connected with Jarvis International and/or other entities part of the Jarvis group ( “Jarvis”). Jarvis attempts to ensure Information is accurate, however, Information is provided “AS IS” and on an “AS AVAILABLE” basis and may not be accurate or up to date. The publication of this article does not represent solicitation by Jarvis of buying the token “Jarvis Reward Token” and is not to be considered as a recommendation by Jarvis as to the suitability of any investment, if any, herein described. No action should be taken or omitted to be taken in reliance upon Information in this document. Jarvis accepts no liability for the results of any action taken on the basis of the Information.
