Potential SIP: Create a lending pool for $SOV

Bitocracy
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Hello Sovryns,

in this thread I would like to take up the discussion from the Telegram channels and propose the creation of a $SOV lending pool. In addition, i propose to bootstrap the $SOV lending pool with (enter 6 digit number) $SOV from the adoption fund to ensure liquidity.

Explanation:

One-sided markets do not work. Sovryn has already had to painfully realize this.

Zero was such a one-sided market. There was an imbalance due to insufficient liquidity and bridging opportunities. The ZUSD and later DLLR created could not be exchanged for other stablecoins to a sufficient extent. An offramp was therefore not possible. The only option was to buy rbtc. This attacked the peg and caused massive redemptions in Zero.

There is a second example of a one-sided market: it has long been possible to go leverage long $SOV. However, it is not possible to short $SOV. In the past, there have been various long squeezes with a subsequent price crash of $SOV.

One-sided markets tend to be manipulated. We are currently seeing this in the fiat world, for example in the bond market. Free markets, on the other hand, are much more robust. By creating a SOV lending pool, at least this one-sided $SOV market can be eliminated. Stakers are given the opportunity to hedge their $SOV positions.

Sovryn wants to be permissionless. So we should also allow shorting of $SOV and not manipulate the free market with one-sided measures. Who can ever take us seriously if we prohibit shorting our token? We would be no better than various fiat states.

Arguments:

-By creating a $SOV lending pool, there is potentially more protocol revenue (lending revenue and additional trading revenue).

-Shorting allows to hedge $SOV staking positions, e.g. to hold a $SOV price neutral stake and bet that the staking income will exceed the interest payments for the short.

-There are now many $SOV tokens in circulation. Too many to stake them all and get any kind of significant yield. If you could put your $SOV into the interest paying lending pool, this would create another use-case for SOV, which may have a positive effect on the underlying value and provide higher yields for staked SOV.

Happy to hear your thoughts!

Sacro

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@yago this topic has been aired a few times now and to my awareness youve only once commented, on a community call somewhere. Could you please elaborate your previous thoughts on this topic in writing here so we have them included in this thread?

I would love to be educated more on the challenges and the reasons we dont trust the market to balance itself when the incentives are put in place for such.

Will market maker users providing liquidity via RFQ potentially be able to change scope for the better?

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You got my vote. Free markets are a good look.

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Great idea Sacro! I like your way of thinking.

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A very important difference of SOV compared to other tokens to consider is the price oracle implementation.

Borrowing from a pool is the same as taking a short position and offering shorts means exposure to potential price manipulation attacks because in contrast to RBTC which has an external price oracle, we use the AMM pool oracle for SOV, so one could force liquidations by taking big short positions.

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From my understanding, it is already possible to force long liquidations by selling SOV. The problem - and that is my point- is that it’s a one-sided market.

Any form of leverage position can and probably will get hunted. But we should not prioritise one side of the market over the other.

Long only SOV market is much worse and more risky than a free SOV market in both directions that gets battle-hardened over time instead of being protected by a questionable exception rule that prohibits free trade.

FreeZero
FreeTrade
StaySovryn

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I would argue that the benefits for stakers are greater than the risks. SOV is currently, constantly being dumped. Stakers deserve a way to mitigate the risk of their staked tokens. We stake our tokens for 3 years, what choices do we have to mitigate loss when problems and bad news arise?

What if the talks of Rollups don’t pan out, or half way through development they become “sunset”? What if Zero takes 6 months to be functional again? What if Dapp 2.0 migration is a pipe dream? How do stakers hedge against the constant loss of value on our SOV?

Also, volatile price swings will produce Staking rewards. Shorting is a tool that a lot of traders use. Why would a trader want to use our Dapp if we can’t offer them basic tools such as 2 sided leverage trading?

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It would be nice to see more movement on this. If a SIP is made, please post address for delegation.

It would be interesting to see what devs think about it. Is this difficult to implement?

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You have my support on this one. Good to see you engaging the community. And I would add where do I send my delegate already? I don’t need to think it through, let’s go straight to voting already.

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I support having choice to short $SOV. One side market is not good in long run.

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What is your current take on this Sacro? Is there enough interest to warrant a SIP or do you think it won’t get enough voter turnout?

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Agreed, its doesnt look good that one cannot short $SOV.

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Yeah, would be nice to be able to hedge our SOV against our stakes.

Sucks when you stake at $10 and it drops to $0.20.

If one where to be looking for rewards strictly, you could short leverage at same price you stake and be virtually unaffected when depreciation occurs.

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I’m still in favour of this proposal and some community members seem to be, too. We might present a SIP on this soon. I’d like to get some more feedback though!

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I fully support this. Anything that drives up the protocol revenue, increases the utility of SOV, and opens up new financial positions that can be taken within the system (in this case, price neutral staking) is good for Sovryn; it’s as simple as that.

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Nice to see this getting picked up again.
2 yrs ago GIMP, SatoshiBadger, Matt and others already worked hard to introduce the ability for stakers being able to hedge and protect their investment from tokenomics.

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It is true that you can force liquidations by selling SOV, but this is a very different scenario.

You need to possess a rather large quantity of SOV. Then, you sell them to trigger liquidations. Now, a liquidation cascade happens (as we have seen in the past). Then, you can buy back your SOV at a cheaper price, so you made some profit. However, if the SOV price does not recover from the action, your SOV holdings are less valuable than before, so overall you might economically damage yourself in the process.

If you do not possess SOV, you cannot force liquidations by selling. You would need to buy the SOV first, which is increasing the price, before selling it again, which brings the price more or less back to where it started.

If we introduce shorts, it means that anybody can force liquidations. You do not need to posses SOV to open a short position and you immediately benefit from the price impact of liquidations. Moreover, leveraged positions allow you to do so with lower capital requirements.

I think, this significantly increases the risk for SOV margin traders and those who borrow using SOV as collateral.

Voters need to decide for themselves if the benefits of short positions are worth the risk of price manipulation attacks.

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this also opens a door for short squezzes, and since everything is on the blockchain, traders could try to hunt the shorts, pushing them to liquidation, short squezing them, WallStreetBets style.

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One more comment. If the overall sentiment is to propose this SIP, I would recommend to first take some time to revisit the oracle parameters.

Our AMM pool oracles are returning an exponential moving average of the traded prices. This formula can be configured. Depending on its configuration it takes more or less time until the oracle price fully reacts to price changes.

We introduced the EMA in order to prevent these price manipulation attacks. It means that it is not possible to immediately take any profit resulting from the manipulation. Attackers need to wait for the oracle price to catch up with the market, which gives the market time to correct the price change.

Proper configuration is tricky however, because while a slow adaption to price changes aids against manipulation attacks, it could be fatal during times of extreme one-sided volatility when positions would only become liquidatable when they are no longer profitable to liquidate. So, this increases the risk for lenders.

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That’s a very good point

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