Liquid Staking Derivatives Meet Self-repaying Loans
Staking rewards will automatically accrue to your stTOKENS position and be used by Nolus to pay off any interest accrued on the loan — self-repaying loans!
Introduction
Since the DeFi summer of 2020, the lending and borrowing industry has boomed. In the last two years, the amount of Total Value Locked (TVL) in money markets has soared as high as $180 billion, a staggering 10,000% increase since June 2020. However, current money markets experience a few inefficiencies that must be overcome before the sector reaches the conflicting point of mass adoption:
- Over-collateralization: Ties up useful collateral to manage counter-party risk.
- High costs: High interest rates for loans with no ownership of the underlying asset.
- High risk of liquidation: Loans with a high Loan-To-Value (LTV) are at increased risk of liquidation, which could lead to a total loss of equity.
To solve these problems, I’d like to welcome you to Nolus — a web3 financial suite that offers an innovative approach to money markets with a novel lease solution.
The DeFi Lease
The Defi Lease defines a money market between lenders looking to earn yield on stablecoins and borrowers looking to borrow against their current equity. When a DeFi lease is opened, the borrower provides a down payment, and the protocol provides the loan. Both the loan and the borrower’s down payment are locked in a smart contract instance such that both act as collateral.
Benefits
The significance of both the down payment and the loan being used as collateral is that Nolus can provide financing of up to 150% on the initial investment. Comparing this to the market average, this reduces the level of collateralization by a factor of 3, providing much greater capital efficiency for participants. Combining this with a fixed interest rate on your loan, Nolus creates an efficient borrowing environment with predictable future cashflows.
Nolus also utilizes the Tendermint Core and Cosmos SDK to inherit two of its most beneficial properties:
- Security — Tendermint and Cosmos SDK are battle-tested and have been running securely for many years.
- Costs — Transactions on Cosmos are both fast and cheap, creating a low-cost infrastructure for money markets to operate within.
To finalize this premier product, Nolus offers 40% lower liquidation rates compared to the market average and executes partial liquidations so that your entire equity is not lost during small market downturns.
The result? A low-cost loan with 200% more capital efficiency, fixed interest for predictable cash flow, and 40% lower liquidation rates than the market average.
Yet, there is a slightly more nuanced improvement that Nolus provides, which opens the door to some very interesting strategies — ownership of the underlying tokens.
The Liquid Staking Derivative Strategy
What is Liquid Staking?
Liquid staking is a fairly new phenomenon in which staked Proof-of-Stake (PoS) assets are issued a liquid derivative that can be traded. This has two main benefits:
Liquid assets: You no longer have to unstake assets and wait for the unbonding period to end before trading. Liquid staked derivatives can always be exchanged for their native token.
Use as collateral: Liquid staked assets can earn staking rewards while also allowing users to borrow against it to leverage their position.
Self-repaying Loans
When taking out loans on Nolus, borrowers have complete ownership of the underlying tokens, both the down payment and the loan provided. This self-custodianship means that, as a user, you can convert all tokens within the DeFi Lease to a liquid staked derivative such as stATOM or stOSMO. Borrowing strategies like these provide the user with up to 2.5x leverage on their initial capital, but the beauty of this strategy is seen within the staking rewards.
Staking Rewards
Since liquid staking derivatives accrue staking rewards, and you have ownership of all tokens within the DeFi Lease, as a borrower, you are entitled to all staking rewards received. These staking rewards will automatically accrue to your stATOM or stOSMO position and be used by Nolus to pay off any interest accrued on the loan — self-repaying loans! If the staking rewards are large enough to cover all interest payments that have to be paid, this strategy can be used to cover some of the initial principal on the loan too.
Price Appreciation
Furthermore, any price appreciation in the native token is translated to the liquid staked derivative too. Nolus will provide a feature to automatically sell some of your borrowed capital as it appreciates in price to cover your principal too. Thus, if timed well, a Nolus DeFi Lease can provide you with a self-repaying loan where interest is covered by staking rewards and token appreciation can be used to pay back the loan. All of this while being exposed to less risk via lower liquidation rates — incredible right?
Auto-compound
Finally, Stride (a liquid staking derivatives protocol) will auto-compound any staking rewards accrued from their liquid-staked assets. Therefore, if a user decides to purchase stATOM, Stride would auto-compound their ATOM staking rewards and so the value of their stATOM would increase relative to native ATOM. This means that if ATOM were to appreciate in price, the value of a user’s stATOM would increase even further and therefore can be used to repay the costs of the loan.
Risks
Naturally, there are a few risks associated with this strategy, as there are with any DeFi strategy. The most obvious risk is your loan being liquidated due to adverse market conditions that reduce the value of your collateral. To mitigate this risk, Nolus provides partial liquidations where only a fraction of your equity is liquidated compared to losing your entire down payment. Nolus will also provide notifications when your loan is 30%, 20% and 10% price depreciation away from being liquidated to give you ample opportunity to pay off the loan or provide more collateral.
The other risk this strategy inherits is the robustness of the liquid staked derivative <> native token peg. Protocols that offer liquid staking derivatives differ in mechanism, however there can be times when the derivative is worth less in underlying tokens compared to when it was initially obtained. In such cases users would receive less native tokens when swapping from the liquid staking derivative. Historically, this peg has been incredibly resilient, but it is worth noting as a possibility to consider when using in this strategy.
Conclusion
Nolus aims to increase financial inclusion and give easy-to-understand, secure access to digital currencies. Through their innovative DeFi Lease solution, they supply the infrastructure for retail users to safely use web3 money markets with as little risk as possible. The team aims to empower people to be more financially independent, delivering low-cost, capital efficient, self-repaying loans in which users maintain full custody of the assets to use as they please. All of this can be done in a much safer environment with lower liquidation risks, low cost transactions, and fixed interest rates. Almost too good to be true!
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