LSDai

In a world of roller-coaster crypto volatility, we turned to Dai for stability. With the emergence of interest generating instruments born through layers of collateralization on crypto-native synthetic assets, we are entering a phase of interest rate volatility. Introducing LSDai, for your escape to a peace of mind: earn Compound interest on your collateral with rDai while providing liquidity for hedges against the variable Compound interest rate. Empirical studies from traditional finance have shown the adverse impact of variability in interest rates (the “price” of money) on the real economy. Accordingly, interest rate swaps, used by non-financial firms in managing the interest rate risk of their debt, are one of the most important fixed-income instruments in the trading and hedging of interest rate risk. Recently we have seen wild swings in Dai's interest rate on Compound, going from 5% to peaking over 16% within a month. With the emergence of the DeFi stack, more synthetic crypto assets composed of native assets are created and then rebundled within Ethereum, enabling new possibilities while introducing complex interdependencies. This is why we decided to build a tokenized interest rate swap on the Dai interest — to fill the void with an essential decentralized stabilizer for the DeFi market. LSDai creates a Eurodollar-style derivative that is a future on the Dai lending rate on Compound over the duration of the contract. By leveraging Market Protocol, LSDai takes the approach of de-coupling the risk of the two sides. It enables three different types of users to gain the kind of exposure to the interest rate fluctuation that fits their profile, while also aligning their incentives: Hedgers: Hedgers are lending out their Dai on Compound and earn interest, but fear that the interest rate — thus, their passive income — will drop. LSDai’s Market Makers mint and sell them Short Dai interest tokens (ShortDi) in exchange for Dai, enabling Hedgers to hedge their interest-earning position. This means they will offset the rate fluctuation through gains in ShortDi: if the interest rate drops, they profit from the short position. If the rate goes up, the extra interest makes up for their loss of value in ShortDi. In essence, hedgers can insure themselves against a loss of income, reaching an altered state of peace. Speculators: These players have no stake in the lending business, they just want to bet on the changes in the interest rate. Speculators expect Dai’s lending interest rate on Compound to either to go up or down, and buy Long or Short Dai interest tokens (LongDi or ShortDi) from the LSDai Market Makers. They gain or lose, depending on where the interest rate goes and how clear their mind was when they made their bet. (feature coming soon) Market Makers: Market Makers enable the whole LSDai flow. They provide the initial capital to seed market liquidity. They also manage the minting and selling of the LongDi and ShortDi tokens to Hedgers and Speculators. In exchange for their role in supplying, Market Makers sell the tokens at a slight premium and earn the spread. They also earn the interest on the whole collateral pool. But sharing is caring: Market Makers can easily set someone else as the beneficiary of that interest (such as a rehabilitation center). (feature coming soon) We took a decentralized approach, adopting Market Protocol in decoupling the interest rate swap positions into margin-embedded long and short position tokens, LongDi and ShortDi. We used Airswap to aid the price discovery of these tokens. Given the importance of liquidity in the model, we programmed a bot to arbitrage the spread across the Market Makers of the token pairs and the Hedgers/Speculators. Lastly, in order to create a virtuous loop to further incentivize the Market Makers, we implemented rDai as the collateral in Market Protocol backing the position token pair. Thus, Market Makers will be able to earn interest from the rDai collateral in addition to earning the spread. During the EthBerlinZwei hackathon we started from scratch and were able to launch LSDai on the Ethereum mainnet. Since we are the first Market Maker in this product, we have decided to donate the interest accrued from rDai in the collateral pool to EthBerlin. (This is not to imply that EthBerlin is a rehab. Okay, well, in some sense it is.)