Exploring The First Money Market For Brazilian Real: In Conversation With BRZ
With the launch of the Transfero Stables pool featuring the BRZ Token, users can now utilize their blue chip assets and supported LP tokens to gain exposure to the Brazilian Real. To educate the community about the unique use cases the pool offers and how they can enable various strategies through the pool, Carlo Mazzaferro — Lead Engineer at Midas Capital, sat down with Pedro Mace — Head of Market Intelligence — Transfero Swiss, for an AMA.
Here are some highlights of the conversation.
Lending Markets And Their Capabilities
Pedro: I believe most users don’t really understand the intricacies of a lending market because they forget to consider that the collateral has to be liquidated in case things go south. And the fact that you guys have several customized and segregated lending pools makes it possible for non-dollar massive liquidity coins to list with Midas Capital and start doing their first DeFi experiment.
Carlo: Yes! Users may be familiar with the big lending and borrowing markets such as Aave and Compound, which are great for borrowing USDC against Bitcoin. However, getting a coin listed on Compound or Aave is particularly hard. Even if you can, you will probably have to go through a very long due diligence and governance process, which is really not fun!
While building Midas Capital with isolated pools, we wanted them to have a look and feel of traditional money markets for a great user experience but with extra flexibility and allow specific communities to leverage the assets they are most interested in. That comes with risks, of course, which we can also discuss. But I hope this clarifies why we built this platform and how we are incredibly different from Aave, Compound, and other major money markets.
Pedro: Yes, Midas Capital is making it possible for us to do the cool stuff we want to do in DeFi. To talk about BRZ, we are a payments institution operating with stablecoins. We process a transaction into our bank account, and that’s considered a purchase of a stablecoin of the same kind. So when someone sends us a bank transaction to one of our accounts, they receive BRZ. That BRZ is then exchangeable throughout the world, and we use it to manage a bunch of different on-ramps and off-ramps for several other cryptocurrency exchanges and gaming websites. To explain in dollars, the BRZ token moved around $1.2 Billion last year, which is a lot for the Brazilian market.
We are focusing on building and providing different opportunities in DeFi for our customers and expanding into it because we see it as the most significant growth opportunity within the myriad of stablecoins. Not only that, but Transfero is moving from country to country in Latin America and other emerging markets on different continents, doing precisely the same. I’m glad to semi-announce, not because it’s still being tested, but we minted the stablecoin for the Argentine Peso last week. We should be implementing its first exchanges, withdrawal, and deposits very soon. So Argentinians can effectively buy the ARZ, the Argentinian Peso token from us, and then operate in the international markets.
There’s one interesting question about the Peso that I want to ask since I am handling DeFi at BRZ. How do I convince someone to invest, hold, and lock a hot potato in DeFi? This is because no one wants to hold Pesos. It’s a question that has been in our minds.
Carlo: A quick point on this — having the Peso as a tokenized asset and having the Midas pools, you can build something on top that is just a way of shorting the specific currency. For example, you hold dollars against it and then short it, even if you don’t want to hold them. So that’s also one of the use cases of the borrow lending pools. To answer your question, maybe they don’t need to hold the Peso but can leverage it to short it and make some money off of it. We are excited about your launch and looking forward to expanding our portfolio support for Forex currencies.
Pedro: I am going to take this opportunity to tell you about something that we launched for Ethereum, but we are launching on other EVMs as well. It’s the instant bank transaction, which is a direct on-ramp in your wallet for operations in DeFi, and it might be exciting to apply to Midas Capital. To explain, let’s say a client would go there, connect their wallets, and if they want to send a bank transaction, you can go to our API, grab a QR code, display it to the client, scan, transfer, and receive the amount.
Carlo: That is amazing. We’ve had a request for such integration from the folks at Jarvis Network. They requested that for direct on-ramps for the Mexican pesos using Mt Pelerin. I’ll be more than happy to discuss the integration of the transfer API to enable that. That makes the experience so much better instead of having to go through centralized exchanges and so forth.
Pedro: It does! This partnership with Jarvis brought to light some interesting things that can be done in DeFi with several different FIAT currencies. What these guys are doing is very interesting because if you stop and think about it for a second, their stablecoins, which are synthetic, are all decollateralizable for dollars without any slippage. Our pool with them, which has the BRZ and jBRL — Brazilian Real, is able to process millions of Reals into BUSD with almost no slippage.
So, we can use this decollateralization of synthetics and stablecoin pools to eventually create a capital efficient market to absorb part of the foreign exchange volume of around 6–10 trillion a day. I have to thank Jarvis for teaching us a lot about how we can get there together.
Carlo: Yes, this ability to trade with zero slippage is genuinely a thing of wonder. Of course, you need reliable chainlink feeds, which we assume that it’s a given that price feeds are reliable. However, we have seen that they are not, unfortunately. As you said, it’s trillions of dollars waiting to be put on chain, and with all the transparency that comes with it and all the openness and centralization, that’s always what we strive for in the end.
Pedro: Exactly! That’s trillions of dollars that move daily with many difficulties. It might be easier in many countries, but Brazilians have a tough time with foreign exchanges. But the hassle is not there if we all move to DeFi.
Carlo: Absolutely! Appreciate all the efforts you are making toward it. I lived in Brazil, and I remember having these issues, especially to send stuff to the United States.
Midas Capital And Security
Pedro: From a DeFi lending markets perspective, what do you think about what’s going on in the cryptocurrency market lately?
Carlo: There are a few interesting lessons from the FTX saga. First of all, leveraging on liquid tokens is one of the things that you should be cautious about. It is a fact that they used a very illiquid token as collateral in a way that was highly non-transparent. They used FTT and leveraged that up to provide margin to a bunch of people, including to other trading partners and so forth. Second, if that were done on the blockchain and all the balance sheets were auditable, we would not have had such a run in the bank because the issues would’ve become much more apparent.
Of course, we’re still talking about systems that sometimes offer under-collateralized loans, which DeFi is still working towards. But DeFi offers that transparency, which would’ve prevented many issues that we’ve seen earlier this year with Voyager and BlockFi. So yes, DeFi offers this possibility of offering a transparent infrastructure, and we have been able to provide this lending experience that is affordable, open, and transparent.
Pedro: Here’s a challenging question for you! Let’s say the same thing happened in DeFi. There is a coin that’s worth $12 billion, and there’s this one entity that has 33% of the coins. That one entity then deposits that one-third of the coins into a lending protocol and gets a bunch of dollars out of that lending protocol. So the difference here would be the people that lent the dollars to that person with the FTT, for example, would get their money back, but the automatic liquidation of such a position, what would be the effect of that?
Carlo: Absolutely! The most important aspect of building these isolated borrowing/lending markets is that, in a way, they are secure. And this has been the story all the time. There’s a very liquid token that is raised in value way too much, which is then used to borrow millions of dollars in collateral. The token then plummets in value, then it is liquidated, and then no liquidity pool can ever liquidate it. That is a classic occurrence, and you need a set of security standards and engineering tools to limit that possibility.
The general idea is that you should never have such an illiquid token. So you need to put supply caps on this specific token so it cannot be supplied above a certain limit. It’s a matter of doing the due diligence before and making sure that there is enough liquidity in the liquidity pool to be able to liquidate it, and making sure that the amount of token that gets deposited can be liquidated at all times.
At Midas Capital, we take various steps to ensure these situations don’t happen. We have off-chain monitors that are monitoring liquidity pools to make sure that they have enough liquidity. We have a way of setting supply caps on these tokens so people cannot supply as much as they like. We have a 24x7 system that tests how well a token can be liquidated. If it cannot be liquidated, we will send alerts and take a look at it to see exactly what happened. We make sure that every single position we have and every single token can be liquidated at any time. We love discussing security at Midas Capital and take some pride in the tooling we have built.
Pedro: Yes, it is exciting. Further, is there a thumb rule for liquidity vs. liquidity for assets? What is the thumb rule that you use, if any?
Carlo: Yes, there are a couple of aspects that we look at. First, there’s another thing that we still need to talk about, which is the security of the price oracle itself. We calculate the cost of an attack on an Oracle, and the cost of raising the price or decreasing the price of a token by 20% is less than the total available liquidity in the pool to be borrowed. The reason for that is that a 20% increase or decrease in the asset’s price will mean that it can be manipulated so that you can borrow more than what you can repay. Security aspect number two for tokens that are a very small cap, we put a supply cap of 20% for all liquidity in the pool.
To explore further partnerships, something we try to do with smaller protocols that want to list on our platform, what we usually ask them is that they provide a large amount of LP tokens for initial liquidity. We want to ensure that they have a stake in the pool, which removes the doubt that they might be interested in rugging themselves or manipulating prices. Therefore, we have discussions with the liquidity providers to ensure the liquidity threshold is met.
Pedro: Extremely nuanced! How do you guys deal with the delta between the liquidation price and the Oracle price?
Carlo: We have a system that monitors oracles and monitors that the price the Oracle returns is not greater than a certain threshold with respect to an external data source. So far, we haven’t had that issue because we use highly liquid assets; usually, the price you get from chainlink is the price you get in a DEX. However, there is a case where if you need to liquidate an asset and the liquidity pool’s extremely unbalanced and subject to manipulation, you might not be able to liquidate it. I know that doesn’t answer your question fully, but we always try to avoid low-liquidity coins and tokens that can be manipulated. Hopefully, arbitrage will make it whole, but it’s something that it’s really hard to prevent.
Transfero And The Crypto Landscape Of Brazil
Pedro: So Carlo, what are your curiosities about crypto in emerging markets and Transfero Operations?
Carlo: I feel sad for not keeping in touch with the development of the crypto market in LATAM in general because I’ve been mainly in Europe. I’d like to pose a question: how widespread is the culture of cryptocurrency and decentralization, and how do initiatives such as PIX conflict with blockchain-based solutions?
Pedro: The PIX solution is a bank transaction, where you’re sending from one bank account to another bank account using your social security number as your bank account. Let’s say all banks are now connected to the central bank, and all banks can directly intercommunicate instantly using the PIX system.
Within Brazil, cryptocurrency and stablecoins in terms of utility and payments are not the best solutions for Brazilians because PIX is very good. But for anyone from abroad coming into Brazil and vice versa, BRZ has become the stronger solution, especially now that we are implementing these credit card payment machines so people can pay with cryptocurrency.
One exciting thing about Brazil is that even though people are not that rich, they are very fast adopters of everything. Brazil is the third country that uses the most DeFi in terms of user counts and the second country with the most players in NFT games. Some time ago, I also indulged in conversation with some people behind FTX, and they told me that Brazil was the third-largest country in terms of user count on the exchange and the 12th-largest country in terms of volume.
The only two markets that work in Brazil are Agro (farming) and the financial market. I believe that while we drive crazy adoption, money moves slowly into crypto, primarily due to the inflation we had some time ago. The market is vast, and there are many builders and enthusiasts, and we are also witnessing institutions adopt crypto. That’s a general overview of the situation down here.
Carlo: What about the builder ecosystem? How easy is it to find engineers and projects from Brazil working in the ecosystem? Have you had interactions with teams in either Brazil or LATAM?
Pedro: It’s hard, but it is getting better. It is such an issue to find good Web3 engineers in Brazil that we have launched a school within Transfero. Through the academy, we let users across Brazil sign up, and then they tell us what they’re up to and why they want to learn programming for Web3. We choose around 20 participants from over 1000 applicants, and they do six months of classes in our old office in Rio De Janeiro. Moreover, with the ease of receiving higher wages from companies worldwide, most of these engineers work for non-Brazilian firms. Therefore, Brazilian firms must increase their payments to recruit local talent. But it is getting better and more people are joining the ecosystem.
Understanding The Risks Involved
Carlo: Yes, things are changing, and we hope for the best. I would also like to talk about the LP tokens on Midas. Users can utilize them in Midas Capital to collateralize their position while they earn rewards elsewhere. Interestingly, the LP token, which certifies that you have deposited some capital somewhere, is a token itself. I like to call this hyper-financialization, which makes DeFi more efficient. It’s a great way to earn yield but also great to borrow against it and level up in the DeFi ecosystem.
Of course, we don’t want users to think they can get free money or a 300% return on their investments by reusing the same capital across DeFi.There are inherent risks involved as well such as liquidation risks and smart contract risks.
Pedro: Yes, of course. The price of 3BRL, for example, can depeg from 1 Real in extreme situations. In terms of contract risk, no one here is going to lie but let me give you a list of protocols involved: Wormhole, Jarvis, Midas, Ellipsis, Dot Dot Finance, and Beefy. So, it’s a big list; if any of these go wrong, things can go wrong. However, they are very solid!
Carlo: On that note, to clarify to our users what risk they are taking, we have implemented a risk score for all the ERC-4626 strategies on Midas that are composed of different protocols. For example, collateralizing the 2BRL in which you get yield is enabled by a specific strategy, which is code that we write. It integrates with other protocols that have stacked risk on top. So we have created this system that assigns a score to the risk level associated with the strategy. We need to make it clear to the users what the risks are and what they are getting into.
The Transfero Stables pool with the BRZ token is the first money market featuring a Brazilian Real. We have high hopes for the pool, and this will be an excellent avenue for the Brazilian community to enter into DeFi without relying on USD-based stablecoins.
About Transfero
Specializing in offering financial solutions using Blockchain technology, Transfero was created with the aim of facilitating the entry of investors into this new global financial system. In addition to offering resource management services, purchase/sale of cryptos, and payment processing, among others, Transfero also contributes to the popularization of crypto assets through a free online financial education platform. The platform has a global presence, with specialized partnerships to transform the crypto market in Latin America.
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About Midas Capital
Midas Capital is bringing isolated and customizable money markets to EVM-compatible blockchains. Enabling users, DAOs, and protocols to create customized and isolated pools for lending and borrowing any asset, Midas is building a cross-chain ecosystem that democratizes money markets. Pool creators have the flexibility to modify pool parameters (interest rate curves, oracles, collateral factors, pool fee, etc.) according to their risk appetite. With isolated pools, Midas offers stellar features for large-scale institutions, protocols, and traditional investors.
