Potential Use Cases
This is generally applicable to any Uniswap V3 LP token holder. In spirit, Uniswap V3 LP is an interest-bearing token (IBTKN) that is composed of one or two assets as underlying, not so different from Curve’s various LP tokens or Yearn’s y-tokens. And accessing liquidity is a large and sustained demand in the market, for which the success of Abracadabra is the best proof.
For users who mint MIM from Abracadabra by collateralizing their IBTKN, most of them sell the minted MIM into other assets before further actions, where we cut off the middle step and let users access the asset they want directly.
This is mostly applicable to asset pairs that have a relatively stable exchange rate, e.g. stablecoin pairs, ETH/stETH etc., such that users are largely comfortable providing liquidity in an extremely narrow range without worrying about impermanent loss. In the example below, providing liquidity to USDT/USDC pool yields 11.68% APR from the trading fee. Therefore, if the blended borrowing cost of the two assets is below 11.68%, such liquidity provider could use the LP token to borrow more USDT and USDC, dd them to the LP position and boost his farming yield.
One of the key issues for startup crypto projects is the market making of their tokens. The majority of the tokens have very limited utilities that projects usually need to provide large incentives for token holders to stake rather than sell. However, the staked tokens produce no additional value to the projects. At the same time, given the lack of confidence in the new tokens, users rarely add liquidity to the trading pool, resulting in the pool’s liquidity largely provided by the project development team and its investors.
Now that if we were to open a “risky section” that allows the deposit of the new token (”N” token), and also allows borrowing of N token by collateralizing N/USDT LP, then the project team could borrow N from the platform and together with out-of-pocket USDT add them to provide liquidity. Such a product has the following benefits:
- 1.N token’s staking reward is to a large extent subsidized by N/USDT pair trading fee, therefore the project does not need to mint as much N tokens to subsidize the staking of N tokens.
- 2.N token’s liquidity is expanded without increasing the circulating supply of N token.
- 3.Such a loan will never be liquidated when N token price keeps falling, as the LP value falls slower than the borrowed asset value. So this guarantees consistent liquidity even as the price of N token is on the fall.
- 4.If N token appreciates significantly, the loan position will be subject to liquidation. And given the liquidation triggers withdrawal of liquidity and conversion of USDT to N token, the liquidation can potentially result in the insolvency of the N token loan. Therefore, we require projects to deposit a certain number of N tokens into a reserve pool to insure against such a scenario.
Note this use case applies to both Uniswap V3 and Uniswap V2.