Borrowing against sushi LPs to increase capital efficiency & reduce IL

Summary

add sushi LPs as potential collateral on kashi (or a separate bento app) where you can then borrow either of the LP assets against the other asset

Abstract

Sushi LPs are essentially 2-asset, automagically rebalancing indices. This means you get some of the upside from each asset, but not all of it as the index rebalances leading to impermanent loss (IL). One way to potentially mitigate or remove IL, and increase capital efficiency at the same time, could be to use the LP as collateral to borrow more of the asset you’re worried about appreciating over time against the asset you’re worried about depreciating (relatively speaking). An example: you fund USDC-ETH, but are worried about eth going up a lot against usdc in the near term. So you borrow usdc with usdc-eth as collateral & then immediately swap it to eth (thru sushi, naturally). Depending on how much you borrow/swap, you are now providing usdc-eth swap liquidity and may actually be in a levered eth long position. The loan can be overcollateralized & charge interest, some of which can go to xSushi holders etc etc. (aside: In theory at any given exchange rate I think there is an ~exact amount of loaned asset that would perfectly eliminate IL (assuming you’re directionally correct about the divergence), but ofc it changes as the exchange rate changes & so gas fees probably make it impossible to track dynamically on-chain. Perhaps possible to ~closely track w pooled funds via yearn or pickle or something)

Motivation

Increase capital efficiency & potentially reduce IL for LPs. UniV3 breaks LP homogeneity, sushi should be leaning into its LP homogeneity. One way is to create collateral pools from LP positions for lending.

Specification

Feel like I covered this well enough (for now) in the abstract

For

add kashi pools (or a separate bento app) which take LP positions as collateral for borrowing 1 of the LP assets & immediately swapping to long the other.

Against

do nothing

Poll

  • for - increase capital efficiency of LP positions & reduce IL!
  • against - i h8 capital efficiency &/ something’s busted with this idea

0 voters

Cream has implemented similar functionality on BSC.
As long as we’d be able to harvest rewards from LPs that are used as collateral - it’s a win.

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As part of the Kashi delivery I have provided Sushi with a sample oracle for SLP tokens using Chainlink as the underlying oracle. It should be simple to manually add the most popular SLP pairs. To make it more generic would be more work. But I think just adding the main pairs with high liquidity should be enough.

FYI: There may be nobody ready to liquidate these positions though…

3 Likes

that is a good point – I have minimal knowledge / experience around rolling out features so don’t know what kind of community awareness it would be important to generate first

separately came across impermax.finance last night which appears to offer something similar (though they phrase/market it almost in reverse as I think about it) for uniswap v2 LPs. Maybe could be worth partnering with them to go after SLPs instead? esp now that uniV3 ~breaks the idea. I am still not sure how to think about partnering with existing platforms vs developing/expanding bentobox apps

Unit protocol do this. It would be great to do this natively with sushi.

Did we ever get anywhere with the sushi dollar idea? If so it could be exclusively for that purpose.

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I like the proposal very much, though I would favour a more generalist solution where you can borrow against you LPs for any purpose (Unit protocol style) and not just to mitigate IL (even though this is a very good use case). This might have to be treated as two separated projects though.

3 Likes

yes that’s a fair point – the capital efficiency from using the LP position as collateral is probably more important as a generic money lego than specifically targeting the divergence in the LP pair

1 Like