Keep Your Share — Tapping into Lombard Loans in DeFi with MYSO
Exploring the ins-and-outs of Lombard loans and how DeFi users can leverage MYSO’s ZLLs to uphold liquidity needs
In the world of traditional finance, there are a plethora of ways to structure loans — secured, unsecured, uncollateralized, margin — the list is long and ever-growing as banks and other financial institutions package complex products and exchange risk between themselves and retail customers.
One particular type of loan that has been a popular banking product for centuries is known as a Lombard loan — this specialized form of personal lending takes its name from the Lombard region of northern Italy, where prominent Italian banking houses first established many of the conventions we see in banking today.
A Lombard loan is a type of loan that is secured by collateral provided by a borrower. In essence, it is typically backed by liquid assets from an investment portfolio and acts as a cost-effective and flexible financing solution. Banks typically allow liquid securities like stocks and bonds to be put up as collateral for Lombard loans, but other investments, such as life insurance policies, are also available as a form of collateral.
However — what is the rationale behind taking out a Lombard loan as opposed to, for example, an unsecured loan? The answer lies on both sides of the credit aisle — there are benefits for both borrowers and lenders, depending on what each of their needs are.
- Because of the typically-liquid collateral that is put up for a Lombard loan, risk is particularly limited for a lender — if a borrower defaults, the bank or other private lender simply obtains and sells the collateral. This means that lenders are able to offer lower interest rates on these loans than on traditional unsecured loan offerings, meaning borrowers can tap into a significantly lower-cost loan!
- Lombard loans allow borrowers access to immediate liquidity and additional portfolio diversification without the need to sell personal holdings. If a borrower needs short-term funding quickly, this form of loan is accessible without the delay associated with lengthy credit checks and loan approvals. While the process for procuring an unsecured loan can be arduous due to extensive credit evaluations, the collateral provided in a Lombard loan makes the process much simpler and leaner.
- For many investors, short-term liquidity needs may force the liquidation of certain assets that were otherwise meant to be held for a long period of time. However, Lombard loans allow for the retention of long-term assets while also tapping into short-term funding at lower interest costs — this means borrowers can simply put these assets up as collateral to maintain their potential upside while now having access to liquidity for covering immediate needs.
Lombard loans have been a valuable tool in traditional credit markets for centuries, especially for high-net-worth individuals as well as investors that are particularly interested in retaining their portfolio securities for an extended period of time.
Tapping into Lombard loans in DeFi
The overarching idea behind a Lombard loan (a secured loan that involves pledging collateral) is one that has become almost native to the decentralized financial space. Almost all DeFi lending protocols operate on a system of overcollateralization — that is, pledging more collateral than the value of the loan — due to the lack of widespread on-chain, KYC-based credit evaluations and the overall ethos of anonymity within the space.
Conventional DeFi lending protocols such as Aave and Compound have pioneered the notion of overcollateralized crypto loans and LTV-based liquidation systems to mitigate the risks of bad debt for both the protocol and liquidity providers.
However, while these protocols are efficient at facilitating overcollateralized loans for a governance-decreed, highly-selective list of tokens, a few drawbacks are present in this setup:
- Enforcing a liquidation-based system for crypto borrowers that pledge assets they intend to hold for a long period of time may not be efficient as their assets will be liquidated once some LTV threshold is breached. What if the scenario arises (and has many times before) where the asset they pledge as collateral, which is intended as a long-term hold, gets liquidated after a sharp price drop but then rebounds significantly a short time after?
- Rapid interest rate fluctuations in a shared-pool approach (which protocols like Aave and Compound follow) makes defining costs difficult, especially for those that need some immediate short-term liquidity. In addition, these fluctuations create additional operational overhead for borrowers having to monitor LTVs and health factors
- Most conventional lending protocols do not support long-tail assets and have a very narrow range of different offerings which certainly don’t allow for flexible management of all loan parameters
This is where MYSO comes in and is able to support a variety of Lombard loan-based markets for tokens that are not readily-available on standard markets. This is especially useful for both users who have an interest in long-term cryptoasset retention and protocols that want to easily and efficiently create a market for their native token(s)!
Supporting Lombard lending with MYSO
Lombard loans are especially useful for individuals that have assets they intend to hold over a long period of time — typically, this may include bonds, “value stocks”, and products like ETFs and other index funds.
One interesting protocol that offers such products, meant for more longer-term investment, is Index Coop. Index offers a wide array of structured products as well as yield-generating products, some of which act as an index of different specialized crypto tokens.
For example, one of the core products offered on Index Coop is the DeFi Index Pulse (DPI). This token acts as is a capitalization-weighted index that tracks the performance of an assortment of DeFi-centric tokens, which currently includes the native tokens of Uniswap, Aave, Synthetix, Maker, Looping, Yearn, Compound, Balancer, Sushi, as well as wETH.
Typically, investors purchase ETFs and index funds in traditional equities as investments to hold for the long-term. This ideal should be no different to on-chain index products, such as DPI — thus, facilitating Lombard loans for products like DPI can come in handy for users that need immediate liquidity or want to extend yield while not being forced to liquidate assets intended for a long-term hold.
With MYSO’s Zero-Liquidation Loans, holders of DPI, as well as other Index Coop products like the Metaverse Index (MVI) and Interest Compounding ETH Index (icETH), are able to tap into an on-chain Lombard loan structure that would both spare them from liquidations given strong market movements as well as provide an avenue for them to access immediate liquidity. In the case of MVI and DPI, borrowers will be able to borrow against a basket of assets as opposed to putting up a single constituent collateral asset —tapping into a unique non-liquidatable borrowing strategy not seen before in DeFi.
For lenders on the other side, this strategy comes with a diversified risk profile — because you are lending stables against a basket of assets rather than a single collateral asset, risk is spread out between the constituents of each index. This becomes a unique opportunity for a lender, like the Index Coop treasury, to tap into a diversified yield source while also promoting long-term asset retention for their users. A bespoke Index Coop-centered pool on MYSO creates additional utility for Index products by creating a unique opportunity for borrowers to retain their holdings while putting borrowed stables to use for further DeFi strategies, including levering up on DPI/MVI/icETH exposure 👀
It’s a win-win for borrowers and lenders! In addition, making use of Index Coop treasury stables for a bespoke Zero-Liquidation Loan market would create additional utility for any Index product, allow the treasury to earn yield on lent stables, while at the same time participating in synthetic token buybacks given a downturn that leads to loan defaults!
Keep your Share
Lombard loans have been a valuable tool in traditional credit markets for centuries, and their overarching principles have become almost native to the DeFi lending space. By utilizing Lombard loans in both traditional and crypto markets, investors can retain their portfolio securities while accessing liquidity for covering immediate needs.
While traditional lending protocols have pioneered the notion of liquidation-based overcollateralized crypto loans, some salient drawbacks are present in their setup. To combat these shortcomings, MYSO is able to offer a flexible Lombard loan solution to both users interested in long-term cryptoasset retention and protocols that want to efficiently create a market for their native token(s). By offering non-liquidatable loans, users are can access hassle-free borrowing while creating a unique risk structure for lenders for capturing yield.
For protocols like Index Coop, which offer distinctive index-based products, a MYSO ZLL pool can come in handy for both users looking to hold on to their tokens for the long-term while also granting them the ability to access immediate liquidity, as well as lenders looking to tap into a loan structure that diversifies risk across a basket of assets.
MYSO’s Zero-Liquidation pools are open for any protocol/DAO to tap into — if you want to create a ZLL market for your native token, reach out to the team on Discord and keep your eyes out for new product announcements!
