As we all know that currently if we provide liquidity to any pool ,then we get lp tokens .But as of now LP tokens are only ownership of liquidity that we provide in v1/v2 pool .Why not we make use these LP tokens as a collateral to buy any erc20/rBTC ?
Hey David, I think this is a great idea. If LP tokens could be used as collateral, then LPs could get leverage on their assets even while they are providing liquidity. Would you envision this being only for AMM LP tokens or also for the lending pool iTokens?
Would be great if this option could be enabled for governance stakers too.
Just playing devils advocate here, do we risk turning everything into a token ponzi-game?
I don’t have a concrete opinion on this yet but wanted to acknowledge the risk and down-side of turning anything into a token.
Trying to think through this. How would the token account for the changing stake value, particular voting power because of the quadratic?
Not all tokenized governance stakes are equal. So day 1 you get 100 tokens for your staked SOV, representing voting power. But a week later that stake isn’t worth as much because of the quadratic formula reduces the voting power value.
I’m glad you asked, David.
It’s fundamentally the same as the current system of depositing collateral, with one difference being that the risk tolerance should be probably stricter because SOV is more volatile.
- Consider only the market value of the voluntarily staked (circulating) SOV as collateral and allow users to borrow + withdraw the borrowed amount.
- Ignore accrued rewards or current voting power.
- Keep max loan-to-value (LTV) low to minimize liquidation/foreclosure risk, maybe around 25-30% max, with forced liq triggering higher to minimize risk. So e.g. if your staked SOV is worth 1 BTC when the loan is taken, you can borrow a max of 0.25-0.3 BTC and your SOV starts getting liquidated if the LTV hits say 40% to automatically pay off just enough of the loan to bring it back below 25%. Or you have the option to deposit more collateral, manually pay off part of the loan, etc, to avoid forced tiered liquidation/foreclosure.
- It’s important that only voluntary stakes should count as collateral because involuntary stakes can’t/shouldn’t be liquidated.
- Since max LTV is low, a tiered liqs system would work well, I think, rather than full liqs, just enough to bring the LTV back below whatever is the max allowed.
- Unstaking penalties would still apply in case of forced/tiered liq, so that’s a risk the borrower needs to factor in and the liquidation levels should be prominently displayed throughout the UI at all times (important).
- Other than the above everything could probably function the same as it does currently. Pls note I haven’t actually borrowed on Sovryn, so some of my assumptions about the mechanisms might be wrong, but I think the overall idea is quite compelling.
I think this feature would have multiple benefits -
- Give stakers a way to capitalize on their locked funds beyond just the staking rewards. One more way to “hyper HODL”, if you will.
- Also benefit lenders by increasing borrowing demand.
- IMO, it’s also a signal sent to the market that the Sovryn platform considers their own token to be worthy collateral.
I’d love for this to be discussed more. AFAIK, @Nakameowdough is also interested in something like this.
Thanks for explanation!
I was thinking you were trying to tokenize the staked SOV, rather than take a loan against it. With a lending model my primary concern is this could create an absolute liquidation bomb that not only cascades the price down but crushes the voting power and opens up the Bitocracy to an attack.
So, this feature is safe as long as not that many people over-leverage and use it. But if not many people use it then why would we build it? Alternatively, if people really like leveraging their SOV then we create a gargantuan leverage and liquidation risk, even if you do partial tiered liquidations. I don’t think the valuation of SOV is stable enough yet to hedge against liquidation risk.
Unfortunately, we just took an almost 90% drop from ATH so even a 25% LTV isn’t that conservative. If liquidations occur and we breach that LTV, it is going to be a cascading effect down. Scary.
In the future we’re also going to have sBTC which I imagine will be secured by $SOV like a tBTC model. Allowing too much liquidation risk against $SOV, which performs the most important utility on the platform (securing the peg) is too risky IMO.
My stance is YES for somehow being able to unlock staked SOV for use, but I have huge reservations around the forced liquidations.
Yes, those risks are always present, but a huge cascade is only possible if all the following happen together -
- A large % of circulating gets staked. (Currently it’s pretty low, around 20%)
- A large % of #1 decide to borrow against their SOV.
- A large % of #2 decide to borrow more than they can handle.
- A large % of #3 are unable to add collateral or pay off the loan in part/full if SOV’s value falls.
The probability of all the above happening together is extremely low, or at least low enough that the benefits significantly outweigh the risk.
Also, aggregate risk mgmt can also be built in to the system, e.g. if over X % of the TOTAL staked circ SOV has been used, additional borrowing is disabled for everyone.
What I’m proposing is essentially no different than say, what Binance/FTX does when it approves multiple low to mid cap tokens to be counted as collateral and then offers much higher leverage. That doesn’t seem to have ever caused any value destruction beyond what the regular market swings do for all coins anyway, despite the much higher leverage those CEX’s offer on low to mid cap collateral
It’s only forAMM i.e specific pool tokens (sov/rbtc) !
LP Tokens are also erc20 tokens so ,we can do whatever we wan’t to those LP tokens .We are creating more yielding oppurtunity for user ,and we may do re-investment of fee that user earned !