In this article we are going to be doing a deep-dive into Liquid Lend and the submarkets Liquid Lend is targeting - collateralizing LP tokens and the tremendous impact it will have of the field of Decentralized Finance akin YFI’s or Uniswap’s impact on helping shape and moving DeFi forward.
Liquid Lend is Yield Bank’s product for collateralizing LP tokens without (re)moving the underlying liquidity the LP token consist of while keeping the passive income the LP token is generating while its being held in a smart contract as collateral. You can read our full article about Liquid Lend here as well as an article about Secondary Markets in DeFi which we will touch on later in today’s update.
The issue at hand
There is currently a big problem in DeFi that only a few people are talking about and even fewer are trying to solve, yet a significant amount of money is locked away idling because of it, resulting in opportunity cost and potential profit lost with every second that goes by without it being solved.
Currently, a significant percentage of LP tokens are simply idling, i.e. being held in the wallets of both institutional investors and individual retail users.
The biggest protocol for LP tokens, Uniswap, is a great example of this and is one of the main pivot points of Liquid Lend’s real world use case.
However, those who choose to actively leverage their LP tokens or other derivatives and/or synthetic tokens, for example through staking them / yield farming with them, will end up with more exposure to the same submarkets, instead of diversifying into others. Liquid Lend solves all of these problems through allowing liquidity in a pool to be re-used and leveraged elsewhere without removing it from the pool it is in, enabling further incentives as well as allowing users to take out loans in real assets, i.e. ETH, wrapped ETH, wrapped BTC instead of only offering synthetics in return for LP token collateralization. The “hard” asset, i.e. ETH can then be used anywhere in any manner you wish. Your collateralized LP token is still earning passive income which you will receive upon repaying the loan along with the LP token itself.
Billions of dollars untapped
Through Liquid Lend, billions of dollars currently underutilized or straight up idling in user’s wallets will be unlocked to be reused elsewhere in the ecosystem without them leaving the liquidity pool or stopping the liquidity mining profit generation process, allowing for collateralized leverage, further diversification and a build-up of CDO-esque tranches for trading strategies, specifically those focused on the lending & borrowing market.
All of us still have the financial disaster of 2008 in the back of our minds — a crisis which had CDOs (collateralized debt obligations) as the main catalyst of the 2008’s collapse.
Through the transparency of decentralized applications deployed on public blockchains, we can eliminate the downside of using these complex derivatives and be able to leverage debt obligations much more safely.
Liquid Lend is covered against insolvency through a dynamic liquidation point that is set by our formulas in our smart contracts on each loan given out, determining the “fair value” of the LP token and how much of a loan can we give out in return for collateralizing an X amount of a specific Y asset.
Liquid Lend release date
Liquid Lend is set to release on April 2021.
Yield Bank firmly believes risk tranching through Liquid Lend will increase the efficiency of DeFi’s trading strategies on the lending and borrowing submarkets.
Follow us on any of our social media accounts listed below to stay updated.
The article and any other associated content of Yield Bank does not constitute as financial advice. Cryptocurrencies are a high risk investment and may not be suitable for all members of the public and all types of investors. This is an experiment in DeFi yield aggregating to bring longer and steadier yields to its users.
Next article coming up: TBA
Telegram Room: t.me/YieldBank
Telegram Announcement Channel: t.me/YieldBankAnnouncements
Liquidity Episode Round 2 date: Live now!