Magic Margin Trading on Kashi with Magic Internet Money
Abracadabra.money has now been live for around 2 weeks, offering a simple way for people to use their interest bearing yield tokens as collateral for a loan. The aim of the team has always been around user experience, things in DeFi need to be simple. The opportunities of money legos are endless but in the end we need to build these various tools for an end user that has no idea how crypto works and just wants to trade an asset, or in the case of Abracadabra be able to get a loan.
In crypto, we have been seeing a huge push of people wanting to gamble their altcoins with leverage, this is one of the reasons why FTX managed to acquire so many users so quickly, Binance quickly followed.
Kashi could be the decentralized margin market, however the key problem currently is that it lacks liquidity. It lacks it because of the unique aspect of the lending/borrowing pools being siloed. This brings pros and cons. The biggest pro is that they allow for the isolation of risk. However, the biggest con is that there’s low liquidity and thus no possibility of proper leverage trading.
This is where a little magic from the Magic Internet Money (MIM) can help.
Abracadabra is using the Kashi engine for loans, so why not use Kashi for a really nice and perfectly functional decentralized leverage trading platform?
That’s exactly what we have been thinking.
So how would this all work under the hood?
Let’s separate this engine into two users to start, the Leveraged Trader and the Liquidity Provider
The Leveraged Trader
Let’s take an example where a user that holds ETH would like to go 3X long SUSHI.
What the user sees is a simple page. Think of it like a Sushiswap one click trade where all that is different is that it shows you a price chart, an option to choose the amount of leverage wanted, the visualization of the liquidation price, the positions you are currently in and finally a button to close them.
In the background of the trade the following happens:
- The protocol zaps ETH for SUSHI, these SUSHI do not actually hit the user’s wallet, instead are supplied to a Kashi market where the SUSHI are used as collateral to borrow a leveraged amount of MIM.
- The MIM then gets traded for SUSHI (via ETH)
- These SUSHI are supplied to Kashi to cover the borrowed MIM. This happens atomically.
User then sees a 3x long SUSHI position being open on the UI. In order to close the position the user sells the long position, receives his collateral + profits back.
Where are all these MIMs coming from for the leveraged loan?
The Liquidity Providers
The liquidity providers are where all the liquidity will come from that will make leveraged trading possible. Providing liquidity requires incentivisation. This magic system of incentives comes from many factors.
Since this engine will run on a lot of MIM tokens, we will need a lot of them. MIMs enter circulation via Abracadabra for a very low cost. All MIM are collateralized with interest bearing tokens (ibTKNS) at a low borrowing interest.
Having borrowed MIM from Abracadabra, our LP will simply deposit their MIMs into a yearn vault (yvMIM). The Yearn vault will take care of supplying MIM to the leveraged traders needs. Most yearn vaults have a strategy known as the General Lender. This strategy is capable of selecting between different lending pools to provide liquidity based on demand in these pools.
If the SUSHI pool has a lot of demand, the borrow apy will continue to increase, and the yearn vault will keep feeding that pool to farm this interest. This yield will go to the suppliers of the yvMIM vault.
(Keep in mind that yearn vaults are multi-strategic and can farm yield in other places like the curve MIM-3CRV pool that was just voted in.)
Note: the exact max leverage is still to be determined.
Another supplier to this yvMIM vault could be holders of xSUSHI because xSUSHI is a valid token used for borrowing MIM. A user that used xSUSHI to borrow MIM and supply it to yvMIM would gain the following benefits:
- The base
- interest on xSUSHI itself.
- The yield of yvMIM
- The trading fees paid by the Leveraged trader to swap.
- The Kashi fees paid by the leveraged trader to borrow from Kashi.
Incorporating CREAM’s IRON BANK
Iron Bank has a role to play here too. The yvMIM vault can supply to Iron Bank. And Iron Bank can lend MIM to Alpha Homora for leveraged farming on the MIM-ETH pool that will be a fundamental part of this and allow deep liquidity for the MIM-TKN via ETH swaps that will happen.
This way, the engine for leverage trading is possible, in a very simple manner with tech that exists and has been verified.
To study the whole mechanism again see the infographic below.
Do you believe this is something that makes sense and could get product market fit? Do you have further ideas of things that can be developed here? Do you have any major concerns?
Any feedback is greatly appreciated.
We all want to ape on decentralized exchanges rather than giving the altcoin leverage fees to FTX and Binance.