Collateral in Sovryn: Types and Uses
One of the powerful features of Sovryn is the ability to borrow against your (crypto)assets.
This allows users to gain liquidity without ever having to sell - which means you can hold your assets long term, benefit from long term HODLing, and still pay rent, trade and go on a well deserved vacation. This also has the benefit of being extremely tax efficient. If you don’t sell, there are no capital gains taxes to pay off. In many jurisdictions, debt repayments can be a tax write off.
Assets which can be used as collateral in the Sovryn system, also provide another benefit. They can be used as collateral for margin trading. So, for example, if you are bullish on both SOV and BTC - you could acquire and HODL SOV, and then use it to go long on BTC - increasing your position on both.
What’s the potential downside of adding a new asset as an available collateral type to Sovryn? It creates potential risk for lenders. If the asset loses value very rapidly, it might be difficult to liquidate positions, or to keep lenders fully collateralized.
SOV as Collateral?
Currently the assets allowable as collateral in Sovryn are:
- BTC - the King of Collateral
- Bpro - a leveraged play on BTC
- DoC - a Bitcoin-backed stablecoin
- USDT - The largest of centralized stablecoins, soon to be added to Coinbase
These are strong forms of collateral? Do we feel that SOV can and should join this list?
Let’s start with reasons against:
- SOV is a new asset that has only a short trading history. It has no long term volatility track record
- SOV is currently only traded on one venue, potentially making it more vulnerable to manipulation
Ok, so what are the reasons in favor?
- SOV is held by an extremely distributed set of holders. There are no large addresses (whales) with liquid funds - making manipulation unlikely
- SOV trading over the last 2 weeks has been extremely robust, with low volatility, relatively high volumes and the ability to maintain and grow its value even in the face of general declines in the rest of the market.
- SOV is not a speculative “cryptocurrency”. If staked or bonded, it has very clear business case and revenue stream - to which DCF analysis can be applied
- For the SovrynBTC peg, SOV will be the collateral asset. It would be beneficial to start experimenting with its use as such before the peg is deployed.
Very interested in the community’s thoughts and feedback. If there seems to be a strong desire to add SOV as collateral, I’d be happy to prepare a SIP.