Ratio Finance: An Introduction
The ability to leverage one’s assets to their maximum potential without the interference of middlemen or custodians is one of the core principles of decentralized finance. Users are able to enjoy unrivaled customization and freedom in deciding how to best make their money work for them, without the red tape or restrictions that are found in traditional finance. We have seen an advent in development and growth over the last few years on Ethereum, allowing DeFi to see an explosion of liquidity, use cases, and volume. As this has occurred, scaling has become an issue on Ethereum as network fees and gas costs have skyrocketed as demand meets supply. Fortunately, new ecosystems are emerging on more efficient, faster, and less cost-intensive blockchains such as Solana. However, given that these ecosystems are young, we see massive growth opportunities for the development of DeFi protocols to meet user demand. This is where Ratio Finance comes in.
Ratio Finance allows investors in the Solana ecosystem to extend the capabilities of their liquidity provisioning efforts by minting stable coins (USDr) using their Raydium LP tokens as collateral. Our mission is to unlock the liquidity of Solana assets and minimize the downside risk for liquidity providers on Serum or Raydium.
What is Raydium?
Raydium is an automated market maker (AMM) built on the Solana blockchain which leverages the central order book of the Serum decentralized exchange (DEX) to enable lightning-fast trades, shared liquidity, and new features for earning yield. As with any AMM, liquidity comes from users offering their assets in liquidity pairs (LPs) in order to capture trading fees and earn yield on the underlying collateral. Providing liquidity is one of the foundational layers of decentralized finance, specifically when it comes to AMMs.
How does Ratio Finance fit in?
We recognized that in the Solana ecosystem the options for leveraging liquidity positions were fairly limited. Users can provide liquidity on Raydium to earn Raydium and other tokens, but that’s basically where it ended. We wanted to enable more use cases for these positions, while also creating a stablecoin that was backed with real collateral. We’ve seen the success of Maker DAO’s system in regards to DAI and chose to bring this mechanism to the Solana ecosystem.
Our Solution: USDr
What is USDr? USDr (Ratio USD) is a collateralized stablecoin similar to Maker DAO’s DAI. Users will be able to mint USDr by depositing various LP tokens for selected Raydium pools. This not only incentivizes users to bring liquidity to Solana but also will help to accelerate the growth of the entire ecosystem as we attract more and more liquidity from other chains.
Users will also be able to purchase USDr from liquidity pools created by Ratio Finance — this allows Solana ecosystem participants to trade it freely should they not wish to provide liquidity in order to mint it, but would rather use it as a stablecoin asset. These liquidity pools will also help USDr maintain its peg, as it will create opportunities for arbitrage as price peg fluctuates between minting rates and trading rates.
Our short-term vision is to unlock the liquidity of Solana LPs through the creation of “Collateral Debt Positions” (CDPs) while minimizing downside risk for liquidity providers. We will achieve this by helping liquidity providers visualize their risk, make informed liquidity provision decisions, and gain leverage on their provided liquidity in the form of USDr.
What makes Ratio Finance different?
Minting assets by using underlying collateral is not a novel concept. It is one of the backbones of many major DeFi protocols. While using LP tokens as collateral is an underutilized use case, we have seen other projects go down this route with moderate success. However, as DeFi grows and its use cases evolve, we see an opportunity to allow users to leverage their assets to their full potential without having to worry about managing their individual positions. This leads us to the next logical step, which is to implement features that allow the debt accrued from minting USDr to pay itself off. Taking a page from Alchemix’s playbook, we decided to leverage the yield being generated on platforms such as Raydium, SolFarm, etc., and use it to repay the debt from minting USDr over time.
Users will be able to lock their liquidity into Raydium, Solfarm, etc., use the collateral from their positions to mint USDr, deposit USDr into our vaults, and use the yield generated from those vaults to either pay off their debt over time, lock more liquidity, or even mint more USDr to do whatever they choose with it. Should a user wish to retrieve their collateral, all they need to do is pay back the original loan amount and our contracts will return their collateral to them.
One major aspect of Ratio Finance that separates us from our competitors is the way we assess and manage risk. Our risk assessment protocol is a proprietary algorithm rooted in traditional financial risk assessment. This allows us to implement:
Advanced risk parameterization
- Real-time liquidation prices that vary on the true risk of the underlying liquidity providers
Enhanced liquidation
- No auctions. Risk parameterization ensures that all vaults are liquidated prior to undercapitalization events.
Optimal Yield Efficiency
- LP used as collateral is redeployed into yield-bearing platforms. As the value of your underlying LP grows, you can mint more Ratio USD accordingly.
The Ratio Token
It’s not uncommon to see a platform launch its own token, but the reasoning behind such a move is often confusing. Many platforms launch their own tokens in order to generate revenue for both the protocol and its users. Governance tokens have also become popular, as they allow users to participate in on-chain governance for the project. However, these use cases have become more and more generic and often it seems the only reason to launch a token is to make a quick buck. We wanted to change this.
RATIO is obtained through a number of ways (outside simply purchasing it). Users can obtain RATIO by:
- Providing liquidity/farming
- Governance staking/voting
Once obtained, what is RATIO used for?
- Voting
- Controlling/adjusting collateralization and liquidation levels
- Adjusting the risk analysis and oracles uses to determine liquidation levels
Our Long Term Vision
Our long term vision is to create a suite of permissionless asset management tools and services with a focus on user experience and consumer protection.
Decentralized Finance can be a very confusing space to participate in. Even crypto native users often have trouble understanding the best way to leverage their assets in a way that is profitable while also managing risk. We recognize these barriers to entry, and wanted to create a suite of products and services with the end-user in mind.
A seamless user experience
We recognize that many barriers currently exist that prevent many users from participating in DeFi. Whether it be the ability to read smart contracts (this is amplified on Solana), parse explorer information, understand the profit/loss of their positions, or fully understand and digest impermanent loss, many barriers currently exist in bringing broad adoption of DeFi to the masses. We address these challenges by creating a UX that provides easily digestible material for the end-user. This includes tracking positions, collateral ratios, profit/loss, etc.
In fact, our very first tool received an honorable mention in the most recent Solana Hackathon.
This tool assists liquidity providers in visualizing their risk profile when providing liquidity on Solana.
In Summary
At its core, decentralized finance is about giving access to the financial instruments often used by traditional finance to the end-user without the red tape found in TradFi. Some of the most lucrative, advantageous financial instruments are gatekept by the powers that be and prevent the everyday user from ever seeing anything beyond maybe 1% interest on their assets. Beyond the red tape, DeFi allows users to retain full control over their capital instead of being at the mercy of a custodian that chooses how, when, and where they can spend their money.
Ratio Finance seeks to empower its users by allowing them to earn yield, take out collateralized loans, and unlock the full potential of their capital all while providing a clean and easily accessible, and understandable interface. It is our goal to create an ecosystem on Solana that favors users from every end of the spectrum all while driving liquidity and growth to the ecosystem as a whole.
We’re just getting started. Make sure to follow our social media channels to stay up to date on what we have in store. We have some amazing early supporters and partnerships that we will be discussing soon as we begin this journey in bringing these tools to the Solana ecosystem.
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