Sweep is a Liquidity Layer for the tokenized economy

Andy Singleton
Sweepr
Published in
7 min readNov 6, 2023

Sweep is a liquidity layer for the tokenized economy. It puts cash in the right place at the right time.

Have cash? Grab a SWEEP token from a local AMM and unload the “cash drag” that stablecoin vendors are extracting. Sweep moves the cash across blockchains and delivers it to a diversified set of safe-tranche borrowers. Need your cash back? Sweep has a deep stack of assets that can deliver the cash now, in the next block, and at massive scale over the next seven days.

By “you”, we mean machines. If “you” are a protocol, collateral pool, or smart wallet, WE HAVE YOUR BACK.

By safe-tranche borrowers, we mean TOKEN buyers. Sweep intends to be the primary funding source for tokenized RWA money markets. Tokenization improves innovation, access, and automation. We do more than support it. We drive it.

This article gives you an exploded view of the cash machine, with help from Dall-e

The centralized money club

You can get cash management from JP Morgan. They want to give you a “tokenized deposit”, and suck it into the black hole of their balance sheet. If you are a member of the right club, the US Federal Reserve will help you with reserve accounts and reverse repos. It’s big business. About $4T in cash is sitting in collateral accounts and bank reserves to guarantee payments and agreements in the eurodollar system. Those eurodollars are not with the US Fed. They are an addressable market for DeFi.

At this stage in the business cycle it is not difficult to run a centralized cash management system. There is only one borrower. The US government is out-bidding everyone else on a risk adjusted basis. Money comes in, and you lend it out to the US government through reverse repo and T-bill purchases. If a lot of people want redemptions at the same time, then you work late on trading, pulling the money back. Many yield-bearing stablecoins are designed around this structure.

The DeFi response

DeFi savers might ask for some improvement in this structure.

  • Transparency: Transparency is a DeFi superpower, and DeFi users want to see where their money is.
  • Accessibility: Get service for software agents in real time, on any chain, in any jurisdiction.
  • Diversification: They might want operations that fit the global nature of the blockchain, with participants from many jurisdictions.
  • Mission: Build the tokenized economy, where assets are visible and accessible and driving the growth of crypto.
  • Adaptability: They might want to prepare for a more complex environment when the US government is no longer the best bidder. Already, DeFi yields are on a different trajectory.
  • Representation: If they have committed to embed cash management in their systems, they might want some influence on governance.

DeFi can do it. We can restore the competitiveness of DeFi by swapping out $10B of zero-interest collateral for interest bearing versions. We can grow DeFi TVL from $50B back to $200B. Then we can use automation and innovation to fill the $4T demand for eurodollar collateral.

We will need to push the boundaries of scale and decentralization. Sweep is an experiment in exposing the internal mechanisms of a bank-style sweep account so that they are transparent, open source, and open to contributors.

Sweep provides software to move cash between savers, assets, and blockchains. People have to operate the software. We can create a DeFi machine that uses incentives to engage smart people to do the work. We can even engage them to use some of their own money as working capital and first loss protection.

Intelligence Inside

Market pricing to maximize volume

Market pricing drives DeFi participants. Inside a centralized cash management system are various costs. In theory, if we use market pricing for these costs, we can get the highest volume of flow. To see how that works, consider the interest rate.

The interest rate affects the supply of savings, and the demand for borrowing.

We get the highest volume of savings and borrowing at the interest rate where the curves cross. Sweep uses market signals to move a rate toward that point. If rates are too low, then we will have less saving. If rates are too high, we have less borrowing.

There are cases where these curves don’t cross. The demand for savings can be zero at the rates that safe borrowers are willing to pay. In that case, the protocol will end up with zero assets. It can wait until it has a useful role. That’s a superpower that DeFi gets from low fixed costs.

MakerDAO and Aave GHO set interest rates by governance. This may be a mistake. It causes arguments at MakerDAO. GHO is depegged, indicating that their rate is too low. We believe that allowing market pricing has the dual benefits of reducing governance complexity, and increasing volume.

Money delivery

Sweep also finds market pricing for the service of moving money around. Marketmakers will deliver SWEEP by moving it between chains and AMMs, if they can earn a small price spread.

Asset origination

Sweep can upgrade its asset base by accepting proposals from expert wholesale borrowers. Their compensation is an exclusive franchise for the assets and strategies that they deliver.

Credit allocation by the DAO

The most important thing that the DAO does is allocate credit. Someone has to analyze risks, balancing yield with the need for truly safe and redeemable assets. This responsibility goes to the DAO governance.

The DAO can pull a couple of levers to get the best deal on treasuries, and extract a uniform risk/return profile from assets that may be more interesting than just US treasuries.

Capital requirement: The borrower needs to put in enough capital to cover the “value at risk” from possible price declines in the asset. This is the classic collateral ratio that goes with DeFi and TradFi margin borrowing. It varies with asset volatility. Short duration money market instruments are an interesting case, because they are designed to have low volatility and are not known to gap down more than about 0.5%.

Fees: The DAO still takes some risks. It should get paid for that. The DAO also makes money from a maturity transformation. It is selling and redeeming in real time, and allowing up to 7 days to settle securities trades. The DAO does work to manage cash buffers during this gap. The DAO will get higher fees if it funds less liquid assets that require a longer maturity transformation.

Call priority: The DAO can call loans to satisfy redemption demand. It can include more scalable and lower risk assets by giving them longer call delays and putting them later in the list of assets that receive calls.

Investment decisions by independent wholesale borrowers

Money from SWEEP purchases by savers is available on an open market. Qualified borrowers figure out how to place it. Sweep will develop better tooling for this process. Borrowers need to understand their transactions costs, and get big enough allocations to cover those costs.

Equity protection

Borrowers put in first loss capital. This fills the role of equity on the balance sheet of a centralized bank.

Providing cash liquidity for redemptions

Sweep can provide liquidity with a deep stack:

  • AMM discounts, which bring in arb money when cash is needed
  • DeFi strategies that can absorb and return money in one block
  • Tokenized versions of off-chain reverse repo placements that have one or two day settlement times, and won’t get jammed up if there is a dislocation in the securities market.
  • Tokenized versions of off-chain securities that put money to work in big, useful, short duration money markets, and require 3–5 day settlement times

The stablecoins in the AMM create cash drag — assets that are not earning interest. Sweep minimizes this cost by seeking the most capital-efficient LP mechanism, and getting fast and reliable redemption from the other bins. In the future, we can use an order book to outsource more of the cash supply, and eliminate the fees and MEV that afflict an AMM. Users will attach USDx to specific buy orders. An order router can keep AMM pricing accurate by routing some funds between the AMM, the Sweep Marketmaker, and the order book.

This system will work smoothly if we can get the right balance of assets. Initially, we can force it by using credit allocations and calls.

The challenge of coordination cost

This machine is complicated. It has coordination costs — all of the little spreads that motivate the different parts of the machine. At smaller scales, it might not be worth operating. At smaller scales, Coase is right. Centralized management reduces coordination costs. At larger scales, DeFi will rule. In future articles, we’ll show the roadmap for getting to scale.

Participate

Join our Discord or follow us on Twitter to participate as a saver, asset provider, developer, wholesale borrower, or advisor.

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Andy Singleton
Sweepr

Software entrepreneur/engineer. Building DeFi banking at Maxos — https://maxos.finance . Previously started Assembla, PowerSteering Software, SNL Financial.