πBorrowing Strategies
LP and LST strategies that borrow stablecoins for amplified exposure
Background
Borrowing Strategies are the liquidity takers (or borrowers) within the Integrated Liquidity Market system. These Borrowing Strategies are smart contracts, and typically involve a LST or LP-based strategy. These strategies are engineered for "Real Rewards," focusing on sustainable fee generation derived from underlying protocols, such as capturing trading fees from a DEX.
Fundamentally, Borrowing Strategies resemble vaults and adhere to the ERC-4626 standard. They generate rewards on the assets deposited and represent user ownership through an LP token. Importantly, these Borrowing Strategies also operate to leverage the positions of the underlying assetβthis asset is provided by borrowers, and this collateral is given to the Integrated Liquidity Suppliers. This characteristic turns these vaults into leveraged DeFi strategies, and consequently, they share similar considerations and risks associated with any leveraged position, including: borrow fees, collateral management, and the potential for amplified rewards.
Greater Capital Efficiency
Borrowing Strategies operate through smart contracts, embedding their logic on-chain to ensure transparency and trustlessness. This enables Integrated Liquidity Suppliers to offer undercollateralized loans, even without conventional "punishment" incentives like negative credit score impacts (particularly because the on-chain identity primitives today are highly gameable and nascent). For Borrowing Strategy users, this translates to enhanced capital efficiency in their positions.
Comparatively, attempting to replicate a similar approach through overcollateralized DeFi liquidity markets involves liquidation risks and reduced borrowing value for the same base position, effectively resulting in a position with less than 1x leverage. In contrast, Integrated Liquidity Markets empower Borrowing Strategies to achieve undercollateralized borrowing, targeting leverage of up to 3x - 4x (dependent on specific Borrowing Strategy parameters). This translates to significantly enhanced capital efficiency, possibly yielding multiple times more efficiency for the same collateral position.
Rebalancing Instead of Liquidations
Rather than using standard liquidation approaches, the collateral of Borrowing Strategies undergoes a rebalancing mechanism to enable more flexible position management. When Borrowing Strategies enter a borrowing position, they consolidate their underlying assets, combining collateral (borrowers' assets) with the borrowed liquidity (Liquidity Suppliers' assets). This complete position is wrapped and provided to Liquidity Suppliers' smart contracts.
From the Borrowing Strategies' perspective, this strategy secures an undercollateralized loan while endowing the Liquidity Suppliers' smart contracts with ultimate position management authority. The on-chain transparency of all Integrated Liquidity Market smart contracts enables full trustlessness for both borrowers and suppliers.
Borrowing Strategy positions are overseen through rebalancing, a distinct alternative to traditional overcollateralized positions and liquidations. Rebalancing operates on an ongoing basis, responding to specific parameters and market conditions. Unlike old-fashioned liquidation systems, which entail liquidation thresholds and result in chunky 50-100% liquidations at a time, rebalances can offer more frequent and minor adjustments. Rebalances also are automatic in nature, allowing for potential leverage increases as underlying collateral values rise. If the asset employed in the strategy appreciates and the target leverage hasn't been met, rebalancing automatically adjusts to optimize leverage and ensure efficient collateral utilization.
In essence, rebalances encompass liquidations and more. During extreme market volatility and underlying collateral devaluation, rebalances act akin to liquidations, recalibrating positions until the Liquidity Suppliers' position is settled. Conversely, when market conditions prompt modest shifts or no change at all, rebalances make proportional adjustments (based on target leverage thresholds) or remain unaffected. Rebalances also allow for leverage to increase in the case where underlying collateral value is increasing and target leverage has not been met (standing in stark contrast to traditional Borrowing Platforms where users must manually monitor for these market conditions then manually execute additional borrow transactions).
This nuanced approach illustrates that rebalances offer a comprehensive spectrum of management capabilities. They adapt to varying market dynamics, ensuring efficient utilization of collateral and robust position management within the Integrated Liquidity Markets framework.
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